Non-Compete Agreement Trends in Missouri and Illinois
Is an Employer Required to Show that a Non-Compete Agreement Protects a “Legitimate Business Interest?”
Trends in Missouri and Illinois.
Employers often require that their employees sign an employment contract which includes a provision that the employee will not compete with the employer for some period of time after the employee leaves that position of employment. These so-called “non-compete agreements,” are most often incorporated into the employment contracts of sales and managerial staff, who have access to the employer’s customer lists and trade secrets. Such agreements are referred to under the law as “restrictive covenants,” and are generally disfavored by the courts as restricting commerce. However, non-compete agreements will be upheld by state courts if they are found to be “reasonable.” Healthcare Services of the Ozarks v. Copeland, 198 S.W.3d 604, 610 (Mo.banc. 2006).
When making a determination as to whether the agreement is reasonable, courts in both Illinois and Missouri look to whether the agreement is reasonably limited in time and space. In other words, courts consider the length of time that the employee has agreed not to compete, and the scope of the geographic region that the agreement encompasses. This is a fact-intensive inquiry, and the outcomes vary from one case to another. Court decisions analyzing what constitutes a reasonable geographic limitation vary widely, and may range from a radius of a few miles, up to a statewide limitation. Generally, in both Missouri and Illinois, restrictions of 2 years or less are considered reasonable. Courts less frequently uphold restrictions of more than 2 years, and restrictions of longer than 5 years are infrequently upheld.
However, when an employee challenges a non-compete agreement, a third consideration is frequently raised in the courts, over and above whether the agreement is reasonably limited in time and space. Employees often also argue that the agreement is not reasonably calculated to restrict a “legitimate business interest” held by the employer. That argument posits that because the agreement does not limit a legitimate business interest, the agreement therefore violates public policy. This is by far the most litigated issue in the context of non-compete agreements, and this basis is frequently used to invalidate such agreements. As discussed below, current cases suggest that Illinois and Missouri courts are following different trends in this regard.
In addition to being narrowly-tailored geographically and temporally, Missouri
courts hold that non-compete agreements are only enforceable to the extent they
protect a “legitimate business interest.”
Missouri courts have consistently applied the “legitimate-business-interest” test when evaluating the enforceability of a non-compete agreement. Under Missouri law, the party attempting to enforce a restrictive covenant must demonstrate that it is reasonably limited in time and territory, and also that the agreement is necessary to protect the employer’s “legitimate interests.” A.B. Chance Co. v. Schmidt, 719 S.W.2d 854, 857 (Mo.App.1986). Generally speaking, Missouri courts have identified two such “protectable interests,” customer contacts and trade secrets. AEE-EMF, Inc. v. Passmore, 906 S.W.2d 714 (Mo.App.W.D. 1995).
This approach was demonstrated by Missouri’s supreme court in Osage Glass, Inc. v. Donovan. In that case, a specialty automotive glass installer brought suit to enforce a non-compete agreement against its former operations manager. That manager had signed an employment contract with the plaintiff, which included the following agreement: “I will not, during the period of three years from … termination of my employment … engage in, directly or indirectly, any business which is in competition with that of Glass Specialty Company in the automotive glass installation business…” The employee subsequently accepted employment with the plaintiff’s competitor, W.M. Kryger d/b/a Installers Unlimited. Osage Glass, Inc. v. Donovan, 693 S.W.2d 71 (Mo.banc. 1985).
The former employer in Donovan sought a temporary and permanent injunction, enjoining the employee from competing directly with the company. The employer’s primary argument was that the employee, as operations manager, gained access to the employer’s customer lists, and dealt directly with the agents for various insurance companies who would refer business. (Id, at 72.) The employee was also trained in a particular methodology used for determining the amounts that would be bid for certain jobs. After reviewing the evidence, the Donovan trial court found that the employer’s “customer list” did not constitute a trade secret. That court reasoned that because the non-compete agreement did not protect a legitimate business interest, the agreement was unenforceable. Missouri’s Western District court of appeals upheld this determination, noting that no evidence had been presented that the employee – in his new position of employment – had used the Osage Glass customer lists secret bidding methods.
The Missouri supreme court reversed the appellate court in Donovan, and upheld the non-compete agreement as enforceable. Missouri’s highest court acknowledged that restrictive covenants restrict commerce and limit the employee’s freedom to pursue his or her trade. Therefore, such agreements are disfavored in the law, and should be carefully restricted. Nonetheless, that court noted that such agreements are enforced when they “serve a proper interest of the employer,” and also are “reasonably limited in time and space.” The Donovan court noted that the employee had made no challenge to the time (three years) and space (state of Missouri) restrictions, as being unreasonable. Rather, defendant argued that he was an artisan, and that the employer did not have a protectable interest in his skill. The employee also argued that bidding methodologies did not rise to the level of “trade secrets,” and that there was no protectable customer list which could not be obtained from standard directories listing insurance companies, body shops, etc.
In reaching its conclusion, the Donovan court agreed that the basic skills of a craftsman will not constitute a “legitimate business interest.” However, the court also noted that as an operations manager, the former employee was in a position to divert business from his old employer to his new one. The Donovan court explained that Missouri law does not require actual evidence that the employee has attempted to utilize customer lists or trade secrets. Nor is it necessary under Missouri law to show that actual damage has occurred. The Missouri supreme court concluded that the employer had a legitimate business interest in the customer lists, such that the restrictive covenant was enforceable. More recent Missouri cases have reiterated that in order to be enforceable, a restrictive covenant must be “no more restrictive than is necessary to protect the legitimate interests of the employer.” Healthcare Services of the Ozarks v. Copeland, 198 S.W.3d 604 (Mo.banc. 2006).
The Trend Under Illinois Law Suggests that there is no “Legitimate Business
A very recent Illinois appellate opinion considered whether Illinois law requires that a non-compete agreement relate to a “legitimate business interest,” and found that it does not. Sunbelt Rentals, Inc. v. Ehlers, (Ill.App.4th Dist., Sept. 23, 2009). In, Sunbelt, the defendant employee held a sales representative position with Sunbelt, a company engaged in the rental and sales of industrial equipment. In that capacity, the employee was responsible for developing and maintaining a customer base for the company, and was also responsible for other aspects of client relations.
The employee entered into a written employment agreement with his employer, Sunbelt Rentals (“Sunbelt”). That agreement provided, in part, that “[d]uring the term of this agreement and for a period of one ... year after the date of the expiration or termination of this agreement … you shall not directly or indirectly provide or solicit the provisions of products or services similar to those provided by [Sunbelt].” That provision limited this restriction to a certain geographic region.
In early January 2009, the employee accepted a position as a sales representative with Midwest Aerials & Equipment, Inc. (“Midwest”). Midwest was a company that sold aerial work platforms to industrial and construction customers. Soon after the employee took this position, Sunbelt forwarded a cease and desist letter to both the employee and Midwest, demanding that the employee discontinue working for Midwest, who Sunbelt considered a direct competitor. Shortly thereafter, a representative of Sunbelt observed the employee deliver Midwest industrial equipment to a Sunbelt client.
In February of 2009, Sunbelt filed suit against the employee and Midwest, seeking preliminary and permanent injunctive relief. Sunbelt also sought a temporary restraining order, asking the circuit court to enjoin defendants from competing with Sunbelt, in violation of the non-compete agreement. Following a hearing at which evidence was presented, the circuit court granted the injunction, and defendants appealed. On appeal, the employee and Midwest argued that Sunbelt had failed to prove that it had a “legitimate business interest” of sufficient magnitude to warrant the imposition of a preliminary injunction.
The Sunbelt appellate court observed that Illinois courts have traditionally evaluated the reasonableness of a restrictive covenant by looking to the “limitations as to time and territory” imposed by the agreement. Canfield v. Spear, 44 Ill.2d 49 (Ill. 1969); Cockerill v. Wilson, 51 Ill.2d 179 (Ill. 1972). However, during the past three decades, each of the Illinois five appellate courts has also reference a purported “legitimate-business-interest” test, when deciding restrictive covenant cases. (Sunbelt, at 4.) As discussed below, however, the Sunbelt court of appeals noted that this test appears to have been created out of whole cloth, and is not provided for under Illinois law.
The first reference to the “legitimate-business-interest” test in Illinois, appears to have occurred in 1975. At that time, an Illinois court of appeals decided the case of Nationwide Advertising Service, Inc. v. Kolar, 28 Ill.App.3d 671 (Ill.App.1st 1975). In Kolar, the plaintiff – an advertising company – sought to enjoin its former employee and his new employer from soliciting business from the plaintiff’s customers. On appeal, Illinois’ First-District court of appeals discussed an employer’s interests, and whether they may be protected through contract:
Our review of the cases relied on by plaintiff established that an employer's business interest in customers is not always subject to protection through enforcement of an employee's covenant not to compete. Such interest is deemed proprietary and protectable only if certain factors are shown. A covenant not to compete will be enforced if the employee acquired confidential information through his employment and subsequently attempted to use it for his own benefit. An employer's interest in its customers also is deemed proprietary if, by the nature of the business, the customer relationship is near-permanent and but for his association with plaintiff, defendant would never have had contact with the clients in question. Conversely, a protectable interest in customers is not recognized where the customer list is not secret, or where the customer relationship is short-term and no specialized knowledge or trade secrets are involved. Under these circumstances the restrictive covenant is deemed an attempt to prevent competition per se and will not be enforced.
Kolar, 28 Ill.App.3d at 672 (citing (Cockerill v. Wilson (1972), 51 Ill.2d 179, 281 N.E.2d 648; Canfield v. Spear (1969), 44 Ill.2d 49, 254 N.E.2d 433.))
The appellate court in Sunbelt discussed how subsequent appellate courts had cited to the Kolar decision, and had thus created a de-facto “legitimate-business-interest” test. However, the Illinois supreme court has never embraced the legitimate business interest in the context of restrictive covenants. (Sunbelt, 2009 WL 3052369 at *5 – 9.) Furthermore, the most recent Illinois supreme court cases discussing restrictive covenants do not mention such a test. The Sunbelt court traced the origins of the restrictive covenant doctrine from the earliest Illinois Supreme Court case (Hursen v. Gavin, 162 Ill. 377 (1896).), to the most recent, (Mohanty v. St. John Heart Clinic, 225 Ill.2d 52 (Ill. 2006). That court observed that in none of these cases did Illinois’ highest court rely upon, or even mention, the so-called “legitimate business-interest” test.
In the Illinois supreme court’s most recent case on this issue, a group of physicians filed a declaratory judgment action against their employer, alleging that the restrictive covenants in their employment contracts were void as against public policy and unenforceable. Mohanty v. St. John Heart Clinic, 225 Ill.2d 52 (Ill. 2006). Upholding the enforceability of the relevant provisions, the Mohanty court noted:
[T]his court has a long tradition of upholding covenants not to compete in employment contracts involving the performance of professional services when the limitation as to time and territory are not unreasonable …” The court later determined that the parties’ evidence to determine whether the limitations set as to time (three years) and territory (a five mile radius) were not unreasonable).
Mohanty, at 100.
Ultimately, the Sunbelt court rejected the notion that Illinois courts must apply the legitimate-business-interest test. That decision was based upon the fact that the Illinois supreme court had never embraced the test, and that the test’s application is inconsistent with the Illinois supreme court’s analysis of the issues in restrictive covenant cases. The Sunbelt court also recognized that other judges and courts had questioned the validity of the test. Sunbelt, 2009 WL at 7, citing Brown & Brown, v. Mudron, 379 Ill.App.3d 724, 731, SKF USA v. Bjerkness, No. 08 C 4709, slip op. at 24 n. 7 (N.D. Ill. 2009).
Under both Missouri and Illinois law, an employer must narrowly-tailor any non-compete agreement so that it will withstand scrutiny by a court. In either state, the agreement must be limited in both temporal and geographic scope. It is difficult to provide uniform guidelines regarding which limitations will be considered reasonable, because when they are challenged, these agreements are analyzed by courts on a case-by-case basis. However, agreements restricting the employee’s activities for two years or less are more frequently upheld. The geographic region within which the employee is prohibited from working should be tailored to suit the nature of the work, and an employer should be prepared to provide specific evidence, such as the location of the employer’s offices vis-à-vis the competitor’s offices, and the size of the employer’s client or customer base.
In Missouri, an employer must overcome one additional hurdle in order to prove that a non-compete agreement is enforceable. A Missouri employer must demonstrate that the agreement restricts a “legitimate business interest.” Missouri courts have recognized that an employer has a legitimate business interest in customer lists and trade secrets. A review of the most recent law emanating from Missouri’s supreme court shows that the application of this legitimate business interest test is well-settled.
However, unlike Missouri, Illinois law is less settled regarding whether courts will apply the legitimate-business-interest test. Based upon the reasoning of the appellate court in the Sunbelt Rentals case, it appears that the current trend is away from applying the test. If this approach is consistently followed by Illinois’ other appellate districts, employers’ rights will be provided a great deal of protection.