Appeal from the Circuit Court of Du Page County. No. 04--CH--1779 Honorable Bonnie M. Wheaton, Judge, Presiding.
The opinion of the court was delivered by: Justice Zenoff
Plaintiff, Reliable Fire Equipment Co., appeals from an order of the circuit court of Du Page County entered on November 28, 2007, ruling that employment agreements entered into by the parties were unenforceable. Plaintiff also appeals from an order entered on June 12, 2008, directing a jury verdict in favor of defendants, Arnold Arredondo, Rene Garcia, and High Rise Security Systems, LLC (High Rise). We affirm.
Plaintiff, which has its principal place of business in Alsip, Illinois, sells and services portable fire extinguishers, fire suppression systems, fire alarm systems, and other related products. Its business is commercial, and it sells fire alarm systems primarily to electrical contractors and building owners. It does the majority of its business in the Chicago area, northwest Indiana, and southern Wisconsin. At the time of trial, plaintiff employed 100 people.
Plaintiff hired Arredondo in 1998 as a salesman of fire alarm systems. Arredondo's duties were primarily to call on electrical contractors and building owners and "to go out and find business, sales." A sales quote to a potential customer would not always or automatically result in a sale. When he was hired, Arredondo had no discussions with plaintiff about an employment agreement. However, a week or 10 days into his employment with plaintiff, he was presented with an employment agreement he was asked to sign. According to Arredondo, "[I]t was a requirement that I sign the non-compete."
Plaintiff hired Garcia as a systems technician in April 1992 but, approximately a year or so later, asked him to move into sales, a position Garcia accepted. As a salesman, Garcia proposed projects, sent out pricing to electrical contractors, and estimated projects. Garcia worked in sales for approximately five years before plaintiff presented him with an employment agreement to sign, which he did on November 21, 1997. Plaintiff's salesmen were compensated by earning commissions, which were various percentages of the gross profits on items or systems sold. The commissions were distributed quarterly, and salesmen took draws against commissions to tide them over between quarterly disbursements. If their draws exceeded the commissions, then the salesmen owed plaintiff the difference. At the time of the jury trial in 2008, both Arredondo's and Garcia's draws exceeded their commissions, although they were known as the top producers for plaintiff.
On August 17, 2004, Arredondo and Garcia signed an operating agreement for High Rise, which was formed on April 26, 2004, to be a major minority supplier of engineered fire alarm and related auxiliary systems throughout the Chicago metropolitan area. According to the organization papers for High Rise, filed with the Illinois Secretary of State on April 26, 2004, High Rise's management was vested in Arnold Arredondo, Rolando Arredondo, and Rene Garcia. Arnold Arredondo formulated a business plan for High Rise, which he used to obtain financing. High Rise would be plaintiff's competitor.
In August 2004, plaintiff's founder and chairman, Ernest Horvath, became concerned that Arnold Arredondo and Garcia were competing against plaintiff. Horvath testified that he asked Arredondo if he was going into the fire alarm business in competition with plaintiff and that Arredondo denied it. On September 1, 2004, Arredondo tendered his resignation from plaintiff, and he left its employment on September 15, 2004. Garcia remained employed with plaintiff until October 1, 2004, when he was fired for being suspected of competing against plaintiff. The record shows that High Rise generated substantial business as of September 22, 2004. Arredondo testified that he developed the business after he left plaintiff on September 15, and plaintiff took the position that Arredondo and Garcia must have diverted business from plaintiff to High Rise while they were still employed with plaintiff. Thus, the litigation began.
Ultimately, this case proceeded to a jury trial on plaintiff's second amended complaint, which was filed on April 7, 2006. The second amended complaint alleged generally that the employment agreements Arredondo and Garcia signed prohibited them from competing for a year in Illinois, Wisconsin, and Indiana after their termination of employment and that they solicited sales and customers while still employed by plaintiff, resulting in plaintiff's financial detriment. Count I alleged that Arredondo and Garcia breached a duty of fidelity and loyalty to plaintiff; count II alleged that Arredondo and Garcia engaged in a civil conspiracy to compete against plaintiff in violation of their employment agreements by soliciting plaintiff's customers, soliciting plaintiff's employees, and copying confidential information; count III alleged that Arredondo and Garcia breached their employment agreements; count IV alleged that Arredondo, Garcia, and High Rise tortiously interfered with plaintiff's prospective economic advantage when Arredondo and Garcia violated the employment agreements; count V alleged that High Rise tortiously interfered with plaintiff's employment agreements with Arredondo and Garcia; and count VI alleged that all three defendants were unjustly enriched when Arredondo and Garcia ceased devoting their full sales efforts on behalf of plaintiff.
Defendants answered the second amended complaint and filed affirmative defenses alleging that Arredondo and Garcia discharged and satisfied their duties as employees of plaintiff; the employment agreements were void or voidable for lack of consideration; the employment agreements were signed under duress; plaintiff violated the employment agreements by failing to pay earned commissions; plaintiff breached Garcia's employment agreement by failing to pay a severance benefit; plaintiff had unclean hands; and the employment agreements were contracts of adhesion and therefore void or voidable.
Prior to the filing of the second amended complaint, defendants filed a first amended counterclaim for declaratory judgment on December 16, 2005, seeking a declaration that the restrictive covenants in the employment agreements were unenforceable on the grounds that they did not protect a legitimate business interest (plaintiff's customers) and imposed an undue hardship on plaintiff's employees and the general public. On November 27, 2007, the trial court commenced a trial without a jury to determine the enforceability of the restrictive covenants.
Defendants' evidence showed the following. Plaintiff sells fire alarm systems manufactured by other companies. Plaintiff is one of approximately 75 entities that compete for business in the Chicago area. Generally, electrical contractors solicit bids from plaintiff and its counterparts, and the electrical contractors are accessible to plaintiff and its competitors by consulting the Yellow Pages, the Internet, industry directories, and signs in front of construction projects. Another method of locating electrical contractors who would be potential customers is to contact the union halls. Plaintiff kept a list of electrical contractors on a computer, which was available to everyone in plaintiff's employ. The products sold by plaintiff are not unique but can be purchased through other suppliers, and the lowest price for such products usually determines who gets the job. Costs associated with submitting quotes are fairly standard in the industry and are not confidential.
Plaintiff presented testimony that long-term customer relationships with electrical contractors and business owners are essential to its business and that these relationships are developed and nurtured over time. Horvath testified that this relationship with his company, rather than strictly price, will determine plaintiff's success in getting a job and keeping the customer. For this reason, plaintiff invested time and money in marketing to its customer base. It does not share its internal costs with its competitors. While plaintiff's products are not necessarily unique, its ability to provide the services to support those products is unique in the industry.
For purposes of its ruling, the trial court found that plaintiff's customers were electrical contractors, that they were very well known to everyone in the industry through the Internet and publications, and that they did not restrict their bid solicitations to one supplier, so there was no near-permanent relationship between plaintiff and its customers. Second, the trial court found that plaintiff's pricing formula was a simple time and material computation and not confidential. Third, the court found that who plaintiff's customers were--electrical contractors or end users--was not clear, so the employment agreements were not understandable. Fourth, the court found that the employment agreements unlawfully restricted defendants from soliciting any of plaintiff's customers, not just those with whom the individual salesmen dealt. Fifth, the court found that the geographic restrictions were unreasonable, although it did not consider that dispositive "since I find that the other aspects of [the agreements] are unreasonable."*fn1
On June 10, 2008, following jury selection, trial on the issues unrelated to the employment agreements commenced. David Ambler, who was employed by plaintiff at the same time as Arredondo and Garcia, testified that he walked into Arredondo's office on an unspecified date and overheard Arredondo on the telephone ordering a credit card machine. This information reached Ernest Horvath, who testified that in August 2004 he confronted Arredondo, who denied he was planning to go into business to compete with plaintiff. Horvath also confronted Garcia with the rumor that Garcia had solicited another employee to work for High Rise. Because it was "pretty obvious what was happening," Horvath fired Garcia. Debra Horvath, president of plaintiff, testified that Garcia's productivity declined beginning in June 2004. Debra Horvath also noticed a decrease in fire alarm sales beginning in June 2004.
Arredondo testified that he became unhappy with working conditions in early 2004 and that he was negative in the draw, "deep in the hole." In December 2003, he had talked to people about seeking opportunities elsewhere. In March 2004, with the objective of becoming a major minority owner and supplier of fire alarm systems, he prepared a business plan in which he identified a customer base, by which he meant his own customer base in addition to plaintiff's. Arredondo testified that his quotes for jobs for plaintiff were $278,000 for August 2004 and $17,980 for September 2004. The September figure was so low because he tendered his resignation on September 1 and Ernest Horvath instructed him not to quote new jobs. Arredondo agreed that he signed the operating agreement for High Rise in August 2004. He also agreed that Horvath met with him in August 2004, but he denied that Horvath asked whether he was going into a competing business. Arredondo testified that he did not compete with plaintiff while he was still employed by plaintiff. He explained documents indicating otherwise by stating that the dates on those documents were incorrect, that a contractor soliciting High Rise's quote had asked that the quote be backdated, or that he asked a contractor to prepay an order. He denied that phone calls he made while employed by plaintiff to electrical contractors High Rise sold jobs to were related to those High Rise jobs. Arredondo received a letter from plaintiff dated September 30, 2004, in which plaintiff said it may pursue legal action against him, and at the end of 2004 he threw into the garbage a computer from which he had possibly transferred files.
Stephen Odenthal was a licensed private investigator and a forensic computer expert. On June 1, 2006, he made copies of four hard drives on computers belonging to Arredondo and Garcia. His analysis determined that information was wiped from Garcia's Gateway computer on October 27, 2004, and information on two of Arredondo's computers was wiped on February 7 and February 10, 2006. Because the purpose of the software used to wipe information from a hard drive is to eliminate or erase the information, Odenthal had no knowledge of what the wiped documents contained.
Garcia testified that he became unhappy working for plaintiff because the hourly employees were not supporting the commission salesmen, costing the salesmen their commissions when profits went down. He was fired on October 1, 2004. He signed the operating agreement for High Rise in order to have a backup plan in case he left plaintiff's employ. He continued to quote jobs for plaintiff until he left, and he was not quoting jobs for High Rise. On September 8, 2004, he contributed $23,764 to High Rise. Garcia said that he might have told another employee in September 2004 that High Rise had lined up $300,000 in business. High Rise did about $1 million in business its first year. Garcia testified that the computer he used to write High Rise's quotes was later stolen. Garcia denied that he ever worked for High Rise while he was working for plaintiff.
Victoria Cory was a senior vice president for Prime Group Realty Trust. She identified plaintiff's exhibit 42, a group of documents relating to a project at 330 N. Wabash Avenue in Chicago. According to the documents, Prime Group Realty Trust was a partner of 330 N. Wabash Avenue, LLC, and entered into a "services agreement" with High Rise for the installation of a stairwell door unlocking system. She had no personal knowledge of the transactions depicted in exhibit 42 or the document preparation, but she testified that, according to the exhibit, High Rise was awarded the job sometime between September 15, 2004, and October 22, 2004.
Daniel Fellores was a design engineer working for plaintiff when Arredondo and Garcia were there. He recalled a conversation with Garcia, though not the date, in which Garcia told him that he and Arredondo "were going to start their own business." Garcia told Fellores they wanted to hire him as head engineer at $20 per hour, and Fellores told Garcia he would think about it. Fellores told Ernest Horvath about the conversation.
Robert Pikula, plaintiff's sales manager, testified that, typically, it might take a salesman four to six weeks to quote a job, depending on its size. He stated that the 330 N. Wabash job would have taken "a couple weeks worth of leg work" before the quote would be ready to submit to the customer. To go from a quoted job, in which the price is given to the customer, to a booked job, in which the installation has begun, takes six to eight weeks. In looking at the jobs High Rise booked by September 22, 2004, Pikula testified that it would be "pretty difficult" to have quoted and booked the jobs between September 15 and September 22. According to Pikula, Arredondo was never told to stop quoting jobs for plaintiff. While Arredondo was employed by plaintiff, he did not submit a quote on behalf of plaintiff for the 330 N. Wabash project, and when Arredondo turned the paperwork for the 330 N. Wabash project over to Pikula before Arredondo left, there was no time for plaintiff to submit a quote. Arredondo never told Pikula that High Rise was quoting the job. Pikula recalled that Arredondo left the office after 5 p.m. on September 15, 2004, his last day. Pikula testified that plaintiff experienced a downturn in sales after Arredondo and Garcia left and that it was "very difficult to replace two people with the experience they had." Arredondo's booked orders for plaintiff in the month before he left were $800,000, and Garcia's booked orders as of the end of September 2004 were close to $1 million.
Tina Studzinski, plaintiff's controller, testified that she left work with Arredondo on September 15, 2004, his last day, at 5:15 p.m. She testified that when they left the company, Arredondo and Garcia each had a negative commission balance, which was not common among the salesmen. In August 2004 Arredondo submitted 14 quotes worth $278,369.75 on plaintiff's behalf, and Garcia submitted 5 quotes in September 2004 worth $51,304.
Curtis J. Reynolds was plaintiff's damages expert and last witness. He was an independent certified public accountant who concentrated his career in forensic accounting. He testified that he was asked to prepare a damages calculation for plaintiff "as a result of breach of fiduciary duty" by Arredondo and Garcia. He was commissioned to calculate plaintiff's gross profit loss at the time of Arredondo's and Garcia's departures or related to their "actions prior to their departure." He reviewed quotes and invoices issued by High Rise, financial statements for plaintiff, commission statements, deposition transcripts, pleadings, and "other accounting documents" at plaintiff's office. Reynolds calculated damages based on different categories. The first category was a gross profit loss on revenue shortfall for jobs listed as being in progress at High Rise as of September 22, 2004. That category resulted in a gross profit loss of $110,000 to $180,000, using two different gross profit ratios. One was the historical gross profit earned by plaintiff, and the second was the gross profit shown for the listing of jobs booked as of September 22, 2004, for High Rise. The profit margin Reynolds used for plaintiff was 17.28%. The profit margin he used for High Rise was 28.26%. The next category was the loss of gross profits on quotes that plaintiff "felt should have been issued on [its] behalf," which were High Rise's quotes as of September 22, 2004. That loss was $44,381. The next category was gross profit decline on actual sales in 2005. The decline was from 17% to 9.9%, in the amount of $189,642. The next category was plaintiff's loss of revenue in inspections, based on the premise that a loss of revenue in sales of fire alarm systems also resulted in a loss for inspections of those systems. That number was $52,380. The last category was commissions taken but not earned. The figure was approximately $24,000 for Arredondo and $1,874 for Garcia.
On cross-examination, Reynolds testified that he calculated plaintiff's gross profit loss on revenue shortfall using estimates of "sell" prices (what fire alarm systems would sell for) and estimates of costs. In Reynolds' calculation of gross profit decline on actual sales (of fire alarm systems), he included the year 2005, which was the year after Arredondo and Garcia left plaintiff's employ. In calculating gross profit loss on quotes High Rise made as of September 22, 2004, Reynolds acknowledged that plaintiff did not make those quotes (and so could not have lost those jobs), but stated that he included them because plaintiff felt that "at least a portion of them or the large portion of them should have been made on [its] behalf." Reynolds agreed that Arredondo was legally allowed to do business on behalf of High Rise after he departed plaintiff, and Reynolds further agreed that his analysis did not show whether the quotes High Rise made as of September 22, 2004, were actually made before Arredondo left plaintiff's employ on September 15, 2004. Reynolds also acknowledged that, in calculating plaintiff's gross profit loss on the quotes made by High Rise as of September 22, 2004, he included quotes for minority jobs, although he had no understanding of whether plaintiff would have qualified for those jobs.
Defendants moved for a directed verdict based upon the above evidence. The trial court found that plaintiff presented a "dearth" of evidence that defendants competed with plaintiff between April 2004 (when High Rise was organized) and September 14, 2004 (the day before Arredondo's departure from plaintiff). The court further found that Reynolds' testimony was "based on impermissible estimates, speculation," and was "mixed in with all kinds of evidence that does not set out anything with regard to the dates these activities were performed." Based upon its findings, the court granted the motion for directed verdict.
Plaintiff filed a timely appeal.
The Directed Verdict Plaintiff first contends that the trial court impermissibly directed the verdict in defendants' favor by weighing the credibility of the witnesses, which was the jury's function. In directing a verdict in a jury case, the trial court determines as a matter of law that there are no evidentiary facts out of which the jury may construe the necessary fact essential to recovery. Sullivan v. Edward Hospital, 209 Ill. 2d 100, 112 (2004). The motion should be granted where all of the evidence, viewed most favorably to the opposing party, so overwhelmingly favors the moving party that no contrary verdict based on the evidence could ever stand. Townsend v. Fassbinder, 372 Ill. App. 3d 890, 898 (2007). Despite defendants' suggestions to the contrary, our review is de novo. Sullivan, 209 Ill. 2d at 112; Townsend, 372 Ill. App. 3d at 898.
After the trial court ruled the employment agreements to be unenforceable in their entirety, plaintiff proceeded on the remaining issues in the jury trial. Those issues were Arredondo's and Garcia's breach of the duty of loyalty (count I); tortious interference with prospective economic advantage (count IV); and unjust enrichment (count VI).*fn2 Proof on the elements of each count depended on the same evidence relating to Arredondo's and Garcia's conduct while employed by plaintiff, specifically between April 2004 and October 1, 2004, and Reynolds' testimony concerning damages. Plaintiff maintains that it presented "voluminous" evidence to support its claims and that the trial court ignored the "volumes" of evidence.
We disagree that the trial court improperly weighed the evidence. Rather, the trial court, especially with respect to the damages evidence, found that there was a total lack of competent evidence. Even granting plaintiff all the reasonable inferences from the evidence relating to Arredondo's and Garcia's activities, those inferences do not rise above the level of suspicion and speculation. On an unspecified date, Ambler overheard Arredondo on the telephone ordering a credit card machine. When asked if he intended to go into a competing business, Arredondo was untruthful about his intentions. Debra Horvath noticed a decrease in fire alarm sales in June 2004. Garcia spoke to Fellores at some unspecified time and said he and Arredondo "were going to start" their own business and wanted him to come to work for them. Arredondo explained why dates before September 15, 2004, appeared on some of High Rise's documents, and plaintiff did not impeach his testimony. Testimony about computers thrown in the trash and stolen and hard drives wiped was never linked to anything. Pikula surmised that the quotes made by High Rise as of September 22, 2004, must have been generated before Arredondo left plaintiff's employ, but, as the trial court pointed out, not one of plaintiff's customers testified that it was solicited while Arredondo and Garcia were employed by plaintiff. Cory, called to testify to the 330 N. Wabash project, had no knowledge of anything contained in the documents plaintiff introduced into evidence. Arredondo's and Garcia's declining performance was not linked to work on behalf of High Rise except by innuendo, and they both testified to the deteriorating working conditions they experienced with plaintiff. A jury cannot base its verdict on guess, speculation, or conjecture, but only on sound and substantial facts. Yoder v. Ferguson, 381 Ill. App. 3d 353, 372 (2008).
Even if we were to agree with plaintiff that its liability evidence was enough to go to the jury, its evidence of damages was based on incompetent calculations. Lost profits may be recovered when there are any criteria by which they can be estimated with reasonable certainty. Apa v. National Bank of Commerce, 374 Ill. App. 3d 1082, 1085 (2007). Here, Reynolds constructed five categories and calculated plaintiff's losses for each category. The first category was gross profit loss for revenue shortfall for the jobs listed in progress for High Rise as of September 22, 2004. Reynolds' calculations were based on estimates of sell prices and estimates of costs. He did not testify upon what those estimates were based. The next category was loss of gross profits on quotes plaintiff felt "should have been issued" on its behalf, which were made by High Rise as of September 22, 2004. First, quotes are not sales, and plaintiff offered no evidence either that it could have quoted those jobs or that it would have been awarded those jobs. Reynolds' own documents showed that plaintiff could not have been awarded the jobs that were marked "minority business enterprise." The next category was gross profit decline on actual sales in 2005. The relevant time period for calculating plaintiff's damages was between April 2004, when Arredondo organized High Rise, and October 1, 2004, when Garcia was fired. Lost profits in 2005 were not material. The next category was lost gross profits on inspections. The evidence showed that sales of fire alarm systems were usually accompanied by sales of servicing those systems. Reynolds did not establish the actual losses on sales, so his calculation of losses on the inspections was wanting also. The last category was commissions taken but not earned. Reynolds admitted that his analysis did not show whether the quotes High Rise made as of September 22, 2004, were done before or after Arredondo left plaintiff's employ, so his testimony that Arredondo and Garcia did not earn their commissions while working for plaintiff was speculative.
Plaintiff relies on E.J. McKernan Co. v. Gregory, 252 Ill. App. 3d 514 (1993), where this court held that an expert should have been allowed to testify to loss of projected sales based upon past sales. McKernan, 252 Ill. App. 3d at 540. McKernan is inapplicable here because Reynolds did not calculate either lost sales or previous sales. Instead, he used purported lost quotes. McKernan required that a plaintiff present competent proof of lost profits from which a reasonable basis of computation can be derived. McKernan, 252 Ill. App. 3d at 540-41. Plaintiff in this case failed to present such proof. Accordingly, the trial court did not err in directing a verdict in favor of defendants.
The Enforceability of the Restrictive Covenants
Plaintiff's second argument is that the trial court's decision not to enforce the restrictive covenants in the employment agreements was against the manifest weight of the evidence. Arredondo and Garcia signed employment agreements that contained identical restrictive covenants. Section 5.1 of the agreements protected plaintiff's confidential property and information, and section 5.2 provided:
"Non-competition and non-solicitation: During the term of Employee's employment hereunder and for a period of one (1) year after the date of his/her termination of employment for any reason, Employee will not, individually or on behalf of any proprietorship, partnership, corporation or any other person or entity:
(a) Engage in any sales, sales support or sales supervisory capacity in any business in the states of Illinois, Indiana or Wisconsin which sells fire extinguishers, fire hoses, fire suppression systems, fire alarms, security systems, or other products which have been sold by the Corporation while Employee has been employed with the Corporation, to or for any person or entity who or which was a customer of the Company as of the date of Employee's termination (or within twelve (12) months prior to such termination date), or obtain or acquire any interest (whether as debt or equity), or provide services (whether as an employee, consultant or otherwise), in or to any such business.
(b) Solicit (or assist others in soliciting) sales from any person or entity who or which was a customer of the Corporation as of the date of Employee's termination (or within twelve (12) months prior to such termination date).
(c) Solicit (or assist others in soliciting), referrals from any person or entity who or which referred business to the Corporation as of the date of Employee's termination (or within twelve (12) months prior to such termination date).
(d) Solicit (or assist others in soliciting), interfere with or cause any employee of the Corporation to leave his or her employment with the Corporation or to breach any agreement with or duty to the Corporation."
In Arredondo's and Garcia's declaratory judgment counterclaim, they alleged that plaintiff did not have a protectable interest in its customers and that section 5.2 of the agreements was unreasonable because it restricted them from competing against plaintiff in three states. In this appeal, plaintiff contends that the evidence showed that it has protectable interests in its customers and pricing information and its near-permanent customer relationships. Plaintiff concedes that the activity restrictions in section 5.2 of the agreements can be modified and the scope of the restrictions would remain reasonable.
The Test to be Applied in Determining the Reasonableness of the Restrictive Covenants
This court first espoused what is known as the legitimate-business-interest test in Capsonic Group v. Swick, 181 Ill. App. 3d 988, 993 (1989):
"There are two general situations in which a legitimate business interest will exist: (1) where the customer relationships are near permanent 'and, but for his association with [plaintiff], [defendant] would not have had contact with the customers'; and (2) where the former employee acquired trade secrets or other confidential information through his employment and subsequently tried to use it for his own benefit. [Citation.]"
In Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill. App. 3d 131 (1997), this court again embraced the test, and in Dam, Snell & Taveirne, Ltd. v. Verchota, 324 Ill. App. 3d 146 (2001), this court again applied the legitimate-business-interest test to determine the validity of restrictive covenants in employment agreements, utilizing it in a professional services case:
"A postemployment restrictive covenant will be enforced only if reasonable, and that determination is a question of law. [Citation.] Covenants not to compete are, in effect, restraints on trade and will be carefully scrutinized to ensure that their intended effect is not the preclusion of competition per se. [Citation.] In determining the enforceability of a restrictive covenant in an employment setting, the test applied by Illinois courts is whether the terms of the agreement are reasonable and necessary to protect a legitimate business interest of the employer. [Citation.] There are two general situations in which a legitimate business interest will exist: (1) where the customer relationships are near permanent and, but for his association with the employer, the former employee would not have had contact with the customers; and (2) where the former employee acquired trade secrets or other confidential information through his employment and subsequently tried to use it for his own benefit. [Citation.]" Dam, Snell & Taveirne, 324 Ill. App. 3d at 151-52.
In 2003, this court once again applied the legitimate-business-interest test to affirm the trial court's grant of a preliminary injunction enjoining the defendant from soliciting, selling to, or servicing customers the defendant serviced while he was employed by the plaintiff. Hanchett Paper Co. v. Melchiorre, 341 Ill. App. 3d 345 (2003). We followed Hanchett in The Agency, Inc. v. Grove, 362
Ill. App. 3d 206, 214 (2005).
In the original briefing, both parties in this case accepted the legitimate-business-interest test (which was also employed by other districts of the appellate court) as the appropriate test to be applied to the restrictive covenants in the instant case. On September 23, 2009, the Fourth District, which had explicated the legitimate-business-interest test in Springfield Rare Coin Galleries, Inc. v. Mileham, 250 Ill. App. 3d 922 (1993), rejected it in Sunbelt Rentals, Inc. v. Ehlers, 394 Ill. App. 3d 421 (2009), on the grounds that our supreme court has never "embraced" the legitimate-business-interest test and that the test is "inconsistent" with recent supreme court decisions. Sunbelt, 394 Ill. App. 3d at 428. The Fourth District concluded that our supreme court has approved only a time-and-territory analysis to determine the reasonableness of restrictive covenants in employment agreements.
While this court is not bound to blindly follow its own precedents, nor are we bound by decisions of other districts of the appellate court (Schramer v. Tiger Athletic Ass'n, 351 Ill. App. 3d 1016, 1020 (2004)), we are bound to follow decisions of the Illinois Supreme Court. In re Clifton R., 368 Ill. App. 3d 438, 440 (2006). If the legitimate-business-interest test we used in Capsonic, Lawrence & Allen, Dam, Snell & Taveirne, Hanchett, and Grove is contrary to the dictates of our supreme court, then we must abandon that rule. For this reason, we ordered the parties in this case to file supplemental briefs discussing the impact of the Sunbelt decision. After considering the supplemental briefs, the oral argument, the special concurrence, and the dissent, we hold that the legitimate-business-interest test is viable.
The Sunbelt Decision Ehlers was a sales representative for Sunbelt and was subject to a written employment agreement that contained restrictive covenants providing that Ehlers would not, for a period of one year after the date of the expiration or termination of his employment, compete with Sunbelt within a 50-mile radius of any of Sunbelt's stores. Sunbelt, 394 Ill. App. 3d at 423-24. Within that 12-month time, Ehlers went to work for one of Sunbelt's competitors and was seen delivering merchandise to a Sunbelt client on behalf of his new employer. Sunbelt, 394 Ill. App. 3d at 424.
Sunbelt sued Ehlers and the new employer and sought injunctive relief. Sunbelt, 394 Ill. App. 3d at 425. The trial court found that the time-and-territory terms of the restrictive covenants were reasonable and refused to apply the legitimate-business-interest test on the basis that the time-and-territory test used by our supreme court in Mohanty v. St. John Heart Clinic, S.C., 225 Ill. 2d 52 (2006), encompassed the legitimate-business-interest test. Sunbelt, 394 Ill. App. 3d at 425. The appellate court reviewed certain supreme court decisions dealing with restrictive covenants (but notably not others, discussed below) and concluded from its selective review that courts, when presented with the issue of whether a restrictive covenant should be enforced, should evaluate only the time-and-territory restrictions and need not engage in the additional discussion regarding application of the legitimate-business-interest test "because that test constitutes nothing more than a judicial gloss incorrectly applied to this area of law by the appellate court." Sunbelt, 394 Ill. App. 3d at 431.
In its supplemental brief, plaintiff urges us to follow Sunbelt. It asks that we evaluate only the time-and-territory restrictions contained in Arredondo's and Garcia's restrictive covenants, which, it contends, meet the reasonableness requirement under Sunbelt, or remand this matter for the trial court to make a determination of reasonableness under Sunbelt. If we do not remand for a hearing under Sunbelt, then plaintiff urges that the proper analysis to be applied is to review the reasonableness of the time-and-territory restrictions under three criteria outlined in Mohanty, those being (1) whether enforcement of the restrictive covenants will cause undue hardship to Arredondo or Garcia; (2) whether their enforcement will injure the public; and (3) whether the restrictions are greater than necessary to protect plaintiff. Defendants ask us to reject Sunbelt because it defies decades of established precedent and applies only to medical employment contracts, such as the one considered in Mohanty.
We disagree with Sunbelt because, contrary to the historical evolution of the law of restrictive covenants, it disallows inquiry into whether the employer has an interest other than suppression of ordinary competition. As we discuss below, the Sunbelt approach, and the approach taken by the dissent, lead to a public policy favoring restraint of trade. Ultimately, we conclude that the legitimate-business-interest test grew out of the centuries-old Anglo-American policy against restraint of trade and that there is no reason to abandon it, although we later discuss its possible contours. Moreover, our research reveals that our supreme court has recognized that a distinct element of the analysis in determining the enforceability of a restrictive covenant is whether the restraint protects a legitimate interest of the promisee. Thus, we come to the conclusion that the legitimate-business-interest test is consistent with principles embraced by our supreme court.
Restrictive Covenants in General
We will first examine common-law principles relating to restrictive covenants, and then we will examine applicable Illinois Supreme Court cases in light of those principles. For purposes of clarity and to provide background, it is useful first to outline those principles as set forth in legal treatises.
"One of the oldest and best established of the policies developed by courts is that against restraint of trade." E. Farnsworth, Contracts §5.3, at 19 (3d ed. 2004). A promise is in restraint of trade if its performance would limit competition in any business or restrict the promisor in the exercise of a gainful occupation, and a promise that is unreasonably in restraint of trade is unenforceable. Restatement (Second) of Contracts §186 (1981).
In order for a promise to refrain from competition to be reasonable, the promisee must have an interest worthy of protection that may be balanced against the hardship on the promisor and the likely injury to the public. Restatement (Second) of Contracts §187, Comment b, at 39 (1981). Therefore, the restraint must be subsidiary, or ancillary, to an otherwise valid transaction or relationship or the restraint is unreasonable. Restatement (Second) of Contracts §187, Comment b, at 39 (1981). Examples of promises that are ancillary to a valid transaction or relationship are a promise by the seller of a business not to compete with the buyer in such a way as to injure the value of the business sold; a promise by an employee not to compete with his employer; and a promise by a partner not to compete with the partnership. Restatement (Second) of Contracts §§188(2)(a), (b), (c) (1981). For instance, in the sale of a business and its good will, a buyer's interest in what he has purchased cannot be realized unless the seller promises not to act so unreasonably as to diminish the value of what he has sold; in the case of a postemployment restraint, the restraint is justified on the ground that the employer has a legitimate interest in restraining the employee from appropriating trade secrets and customer relationships to which he had access in the course of his employment. Restatement (Second) of Contracts §188, Comment b, at 42 (1981).
Even if the restraint is no greater than necessary to protect the promisee's interest, that interest may be outweighed by the harm to the promisor and the likely injury to the public. Restatement (Second) of Contracts §188, Comment c, at 43 (1981).
The extent to which the restraint is needed to protect the promisee's interest is a critical factor in determining the reasonableness of the restraint. Restatement (Second) of Contracts §188, Comment d, at 43 (1981). The extent may be limited in three ways: (1) by type of activity; (2) by geographical area; and (3) by time. Restatement (Second) of Contracts §188, Comment d, at 43 (1981). Thus, to be valid, a restraint must be ancillary, it must protect some legitimate interest of the promisee, its scope must be reasonable in light of that interest, and it must not cause unreasonable hardship to the promisor or to the public. E. Farnsworth, Contracts §5.3, at 28 (3d ed. 2004).
From the above, we glean that where the restraint is not necessary to protect a legitimate interest of the promisee, the inquiry will not reach whether the extent of the restraint is unreasonable. By the same logic, where the interest of the promisee is not in doubt or question, the inquiry may focus only on the extent of the restraint (or on the balance of hardships).
In Linn v. Sigsbee, 67 Ill. 75 (1873), our supreme court first
considered the reasonableness of a restrictive covenant.*fn3
In Linn, both parties were practicing physicians. Linn, 67
Ill. at 77. Linn sold his house and lot to Sigsbee, and included in
the sale was his medical practice. Linn, 67 Ill. at 77-78. The
contract provided that Linn agreed not to establish a medical practice
within the township
of Chili or within six miles of the subject residence. Linn, 67 Ill.
at 78. Sigsbee then sued Linn for breach of the restrictive covenant,
and a jury found in Sigsbee's favor. Linn, 67 Ill. at 79. Linn
appealed, arguing that the restraint imposed was unreasonable and that
there was no valuable consideration. Linn, 67 Ill. at 80. The court
"The rule is well settled that any partial restraint of trade, or an agreement not to transact business at specified places, or with particular persons, or beyond a limited distance, or not to practice medicine within reasonable bounds, if there be some legal consideration for the restraint, will not invalidate the agreement. If there is a reasonable limitation only, and a consideration capable of supporting the agreement, it will be upheld. Courts will not ...