Illinois Appellate Court Declines to Establish Per Se Standard of Reasonableness for the Temporal Scope of Employment-Based Noncompetition and Non-Solicitation Agreements.

On December 11, 2018, the Illinois Appellate Court, Third District, declined to establish a per se standard of reasonableness for the temporal scope of employment-based restrictive covenants, indicating that reasonableness must be determined based upon the totality of the facts and circumstances of each individual case. Pam’s Academy of Dance/Forte Arts Center v. Marik, 2018 IL App (3d) 170803 (12/11/2018). In this case, the plaintiff alleged two counts of breach of an employment contract and a third count for breach of the Illinois Trade Secrets Act. The plaintiff alleged that the defendant, a former employee, breached their employment non-disclosure and restrictive covenant agreement by opening a dance studio within 25 miles of the plaintiff’s studio and soliciting students and teachers through an improperly-obtained customer list.

The employment agreement contains three post-termination restrictive covenants: (1) that employee will not engage in any similar business within a 25-mile radius of the dance academy for a period of not less than five (5) years from the date of termination of employment; (2) that employee will not solicit or do business with any of the teachers, students and/or parents of the dance academy for a period of not less than three (3) years from the date of termination of employment; and (3) that employee will not solicit any customer, client, student, parent, or employee for the purpose of providing similar services or products. The defendant filed a motion to dismiss all of the plaintiff’s claims, arguing that the plaintiff’s claims were legally defective because: (1) the restrictive provisions of the employment agreement were invalid and unenforceable as a matter of law; and (2) there was no allegation of a plausible factual basis that the defendant misappropriated a customer list. After the court denied the motion to dismiss (but struck the third restrictive covenant as over-broad), the court, on the defendant’s motion, certified two questions for interlocutory review by the appellate court: (1) Do employment-based restrictive covenants with time periods lasting “not less than” five and “not less than” three years contain an enforceable and reasonable temporal scope; and (2) in the context of employment-based restrictive covenants, do restrictions lasting “not less than” five and “not less than” three years mean five and three years respectively? The appellate court answered the second question first, ruling that employment-based restrictive covenants lasting “not less than” five and “not less than” three years mean five and three years (and not a day less) respectively. The appellate court declined to answer the first question, stating that in this case, the court is unable to determine whether employment-based restrictive covenants lasting three and five years, respectively, are reasonable in their temporal scope. The determination of reasonableness depends on the totality of the particular facts and circumstances of each case. Thus, a blanket bright-line standard is not appropriate. The parties must be given a full opportunity to develop the record.

The appellate court also reiterated the governing legal standard under Illinois law to determine the validity and enforceability of employment-based restrictive covenants, established by the Illinois Supreme Court in its decision in Reliable Fire Equipment Co. v. Arredondo. “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….[T]he extent of the employer’s legitimate business interest may be limited by type of activity, geographical area, and time.”