Restrictive Covenants in Illinois

Restrictive Covenants in Illinois

The case of Steam Sales Corporation (Steam) v. Brian Summers No. 2-10-0073
No. 09--CH--793 APPELLATE COURT OF ILLINOIS SECOND DISTRICT (October12, 2010), 2010 WL 3970375, contains an excellent discussion of the current state of the law as to restrictive covenants in Illinois.

Steam was in the business of providing boiler room equipment to industrial and commercial users in the Northern Illinois area since 1958. In 2007, Summers and Steam entered into a written employment agreement.  Steam was an exclusive manufacturer’s representative for numerous companies in the boiler manufacturing business.  This means that all the parts for these very expensive and complicated boiler systems had to be purchased through Steam.  This gave Steam a monopoly in its territory to install, repair, and service these boiler systems and gave Steam a big competitive advantage.

In illustration, Steam was the exclusive manufacturer’s agent for Johnson Boiler and made annual sales over $1,000,000 per year of Johnson Boiler equipment.  When the written contract between Steam and Johnson expired at the end of 2008, it was not renewed.

Summers quit Steam in January of 2009.  He started a competing company called BEC Equipment (BEC).  Johnson told Steam that it intended to enter into an exclusive agreement with BEC.  Industrial Steam, another company, left Steam and provided Summers with an office and advised Steam that it would no longer be allowed to sell its products and that Summers would be the new exclusive manufacturer’s representative.  Steam alleged that Summers had solicited and sold to other customers of Steam in addition to these two in violation of the restrictive covenant in the agreement with Summers. 

The restrictive covenant in question provided that for a two year period following termination, Summers could not solicit, offer to provide, provide, sell or offer to sell any services identical or similar to those Summers or Steam sold to in the two years before the end of the employment relationship.

The agreement provided for injunctive relief as well as damages at law. 

After an evidentiary hearing, the trial court entered a temporary restraining order and a preliminary injunction against Summers, enjoining Summers from “soliciting, offering to provide, providing, selling, or offering to sell any service or product identical to or similar to those which Steam Sales sells to any customer to whom Summers or Steam made any sales from January 23, 2007 to January 23, 2009.” 

On appeal, Summers raised various factual defenses, alleging that the employer had, in effect, breached the employment agreement.  The appellate court made quick work of Summers allegations of breach and agreed with the trial court, denying all of them. 

The opinion is interesting because it examines the current state of the law with regard to the enforceability of a restrictive covenant. 

This court agreed with Steam’s argument that the law of Illinois in this area is not controlled by the legitimate business interest test but rather by a two-prong reasonableness test as articulated in the Illinois Supreme Case, Jyoti Mohanty, M.D., et.al. v. St. John Heart Clinic, S.C., et. al. 866 N.E.2d 85 225 Ill.2d 52 (2006).

Under Mohanty, the restrictive covenant is weighed as to whether (1) it will be injurious to the public or cause undue hardship to the promisor, and (2) whether the restraint imposed is greater than is necessary to protect the promisee.

The reasonableness test seems to require a lower standard for employers to meet than the legitimate business interest test.

However, the court in this case said that Steam showed that it had a near permanent relationship with its customers, thereby creating a legitimate business interest.  These boilers are a big ticket item, and it takes a great deal of time and promotional money for a company like Steam to establish itself as a competitive company in the field.

The court then held that the time and territory limitations were not unreasonable—even though the territorial limitations covered half or Northern Illinois, four counties in Northwest Indiana, a portion of Southern Wisconsin, and a small area in Iowa.

As you may recall, Summers was not barred from the industry; he was barred from soliciting Steam’s customers for the two year period specified in his agreement.

Finally, the Court noted that Summers had the option of not signing the agreement or of asking that the agreement be modified.

The judgment of the trial court was affirmed, and the case gives a strong argument for employers to aggressively enforce their restrictive covenants, using both the legitimate business interest test and the reasonableness test.