Reliable Fire Equip. Co. v. Arredondo

• Decision Date: 26 March 2012
• Docket Number: Docket No. 111871
• Citation: Reliable Fire Equip. Co. v. Arredondo, 2011 IL 111871, Docket No. 111871 (Ill. Mar 26, 2012)
• Parties: RELIABLE FIRE EQUIPMENT COMPANY, Appellant, v. ARNOLD ARREDONDO et al., Appellees.
• Court: Illinois Supreme Court

2011 IL 111871

RELIABLE FIRE EQUIPMENT COMPANY, Appellant, v. ARNOLD ARREDONDO et al., Appellees.

Docket No. 111871

Illinois Official Reports Supreme Court

Filed December 1, 2011

Rehearing denied March 26, 2012

Held

(Note: This syllabus constitutes no part of the opinion of the court but has been prepared by the Reporter of Decisions for the convenience of the reader.)

The enforceability of employees' covenant not to compete should be judged by the three-prong test of reasonableness, of which the employer's legitimate business interest continues to be a part, and which looks to the totality of all of the circumstances, rather than focusing on named specific factors.

Decision Under Review

Appeal from the Appellate Court for the Second District; heard in that court on appeal from the Circuit Court of Du Page County, the Hon. Bonnie M. Wheaton, Judge, presiding.

Judgment

Judgments reversed; cause remanded.

Counsel on Appeal

Christopher P. Banaszak and Robert S. Driscoll, of Reinhart Boerner Van Deuren s.c., of Milwaukee, Wisconsin (Robert G. Black, of Naperville, of counsel), for appellant.

Tom P. Gregory, Jack C. Lai and Maria V. Vasos, of Gregory & Lai, of Barrington, for appellees.

Justices

JUSTICE FREEMAN delivered the judgment of the court, with opinion. Chief Justice Kilbride and Justices Thomas, Garman, Karmeier, Burke, and Theis concurred in the judgment and opinion.

OPINION

¶ 1 Plaintiff, Reliable Fire Equipment Company (Reliable), filed a complaint in the circuit court of Du Page County against defendants Arnold Arredondo, Rene Garcia, and High Rise Security Systems, LLC (High Rise). Reliable claimed, inter alia, a breach of a noncompetition restrictive covenant. At the close of a bench trial on this claim, the circuit court ruled that the covenant was unenforceable. A divided panel of the appellate court upheld the circuit court's order. 405 Ill. App. 3d 708. We allowed Reliable's petition for leave to appeal. Ill. S. Ct. R. 315 (eff. Feb. 26, 2010). We now reverse the judgment of the appellate court and the order of the circuit court, and remand the cause to the circuit court for further proceedings.

¶ 2 I. BACKGROUND

¶ 3 Founded in 1955, Reliable sells, installs, and services portable fire extinguishers and a variety of fire suppression and fire alarm systems. Reliable designs or engineers the systems to fit the needs of industrial, commercial, and retail businesses; hospitals and schools; and all manner of nonresidential buildings. Reliable has approximately 100 employees, including salespersons, installers, and service technicians. Reliable does the majority of its business in the Chicago metropolitan area, northern Indiana, and southern Wisconsin.

¶ 4 In April 1992, Reliable hired Garcia as a systems technician and, approximately one year later, offered Garcia a sales position, which he accepted. Sometime in 1997, Reliable required all employees to sign noncompetition restrictive covenants. In November 1997 Garcia signed his noncompetition agreement. In November 1998, Reliable hired Arredondo as a salesperson. Approximately one week later, Arredondo signed his noncompetition agreement. In their agreements, Arredondo and Garcia each promised, inter alia, not to compete with Reliable during their employment and for one year after their termination from employment in Illinois, Indiana, or Wisconsin. Arredondo and Garcia further promised not to solicit any sales or referrals from Reliable customers or referral sources, or to solicitReliable employees to leave their employment with Reliable.

¶ 5 High Rise's stated purpose was to supply engineered fire alarm and related auxiliary systems throughout the Chicago metropolitan area. In March 2004, Arredondo was seeking financing for High Rise. In April 2004, High Rise was formed as a limited liability corporation. High Rise's managers included Arredondo and Garcia. On August 17, 2004, they signed an operating agreement for High Rise.

¶ 6 In August 2004, Ernest Horvath, Reliable's founder and chairman of the board, became concerned that Arredondo and Garcia were planning to compete with Reliable. He asked them and another employee whether they were going to start their own business, and each denied it. On September 1, 2004, Arredondo resigned from Reliable effective September 15. On October 1, 2004, Reliable fired Garcia on suspicion of competition.

¶ 7 In December 2004, Reliable filed its original, multiple-count complaint against defendants. In count III of its second amended complaint, Reliable alleged as follows. The company had entered into valid and enforceable employment agreements with Arredondo and Garcia. In violation of the restrictive covenants contained therein, Arredondo and Garcia engaged in sales activities and provided services to Reliable customers, and solicited referrals from Reliable's referral sources. Also, Arredondo and Garcia solicited several named Reliable employees to leave their employment with Reliable. As a result of their breach of contract, Reliable alleged damages in excess of $400,000.

¶ 8 Defendants filed a first amended counterclaim that sought, inter alia, a declaration that the restrictive covenants were unenforceable. In November 2007, the circuit court held a bench trial on defendants' declaratory judgment action. At the close of the evidence, the court ruled that the restrictive covenants were unenforceable. The court concluded that Reliable failed to prove the existence of a legitimate business interest that justified enforcement of the covenants.¹

¶ 9 A sharply divided panel of the appellate court affirmed. 405 Ill. App. 3d 708. The lead opinion upheld the circuit court's conclusion that Reliable did not have a legitimate business interest that justified the enforcement of the restrictive covenants. 405 Ill. App. 3d at 743-48. The special concurrence agreed that the circuit court's conclusion should be upheld, but disagreed with the reasoning of the lead opinion. 405 Ill. App. 3d at 748 (Hudson, J., specially concurring). The dissent agreed with the reasoning of the special concurrence and, based thereon, would reverse and remand for further proceedings. 405 Ill. App. 3d at 753, 759 (O'Malley, J., dissenting). Reliable now appeals.

¶ 10 II. ANALYSIS

¶ 11 A. Standard of Review

¶ 12 Initially, Reliable observes that Illinois courts have described different standards ofreview in restrictive covenant cases. It is traditionally stated that the enforceability of a restrictive covenant is a question of law, the determination of which is reviewed de novo (Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52, 63 (2006)), based on the facts in each particular case. See Tarr v. Stearman, 264 Ill. 110, 118-19 (1914); Lanzit v. J.W. Sefton Manufacturing Co., 184 Ill. 326, 330 (1900). In the case at bar, the circuit court held a bench trial to determine the enforceability of the postemployment restrictive covenant. Generally, the standard of review in a bench trial is whether the order or judgment is against the manifest weight of the evidence. Eychaner v. Gross, 202 Ill. 2d 228, 251 (2002); Kalata v. Anheuser-Busch Cos., 144 Ill. 2d 425, 433 (1991).

¶ 13 However, the case at bar calls for only one standard of review. The issue presented for review is not whether the circuit court's order is supported by sufficient evidence, thereby necessitating the manifest weight of the evidence standard with its attendant deference. See Schulenburg v. Signatrol, Inc., 37 Ill. 2d 352, 356 (1967). Rather, the issue here is whether the circuit court applied the correct legal test to the evidence presented. This is a question of law which is reviewed de novo. In re A.H., 207 Ill. 2d 590, 593 (2003).

¶ 14 B. The Three Basic Components of Reasonableness

¶ 15 Two panels of our appellate court have questioned whether Illinois recognizes the legitimate business interest of the promisee as a requirement of an enforceable restrictive covenant. We now take the opportunity to correct this misconception.

¶ 16 This court long ago explained that a contract in total and general restraint of trade was "undoubtedly" void because it "necessarily" injures the public at large and the individual promisor. Such a contract deprives the public of the industry of the promisor, and deprives the promisor of the opportunity to pursue an occupation and thereby support his or her family. Hursen v. Gavin, 162 Ill. 377, 379-80 (1896). However, it is equally established that a restrictive covenant will be upheld if it contains a reasonable restraint and the agreement is supported by consideration. Storer v. Brock, 351 Ill. 643, 647 (1933) (collecting cases); accord 6 Richard A. Lord, Williston on Contracts § 13:1, at 7-11 (4th ed. 2009); Restatement (Second) of Contracts § 186 & cmt. a (1981).

¶ 17 "The modern, prevailing common-law standard of reasonableness for employee agreements not to compete applies a three-pronged test." BDO Seidman v. Hirshberg, 712 N.E.2d 1220, 1223 (N.Y. 1999). A restrictive covenant, assuming it is ancillary to a valid employment relationship, is reasonable only if the covenant: (1) is no greater than is required for the protection of a legitimate business interest of the employer-promisee; (2) does not impose undue hardship on the employee-promisor, and (3) is not injurious to the public. Id.; Restatement (Second) of Contracts § 187 cmt. b, § 188(1) & cmts. a, b, c (1981).² Further, the extent of the employer's legitimate business interest may be limited by type of activity, geographical area, and time. Restatement (Second) of Contracts § 188 cmt. d (1981). Thiscourt long ago established the three-dimensional rule of reason in Illinois and has repeatedly acknowledged the requirement of the promisee's legitimate business interest down to the present day.

¶ 18 In Hursen v. Gavin, 162 Ill. 377 (1896), after reciting the general principle that contracts in total and general restraint of trade are void as against public policy, this court stated:

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