Predicting Whether a Post-Employment Restrictive Covenant Will Be Enforceable – An Art Not a Science
July 16, 2015
—By Litigation Partner Jason B. Hirsh, Levenfeld Pearlstein LLC
Under Illinois law, a post-employment restrictive covenant is not enforceable unless it is supported by a legitimate business interest. According to the Illinois Supreme Court, whether or not a restrictive covenant is supported by a legitimate business interest is determined by a consideration of the "totality of the circumstances." On July 14, 2015, in Instant Technology v. DeFazio, the Seventh Circuit Court of Appeals held that the "totality of the circumstances" does not require that the court consider "all" existing circumstances.
After the District Court ruled that the disputed restrictive covenant was not supported by a legitimate business interest, the Seventh Circuit was asked to decide whether the lower court had abused its discretion by not considering all circumstances. Addressing this point, the Seventh Circuit concluded that the "totality of the circumstances" certainly does not require discussion of each and every existing circumstance no matter how trivial or immaterial. The Seventh Circuit sarcastically stated that the District Court was not required to consider "the price of eggs in Guatemala." Instead, affirming the District Court, the Seventh Circuit concluded, the District Court properly limited "its discussion to those circumstances it deem[ed] material."
Of course, this conclusion does not address whether it would have been an abuse of discretion for the district court to have ignored an obviously material circumstance – like access to trade secrets. But, this issue was not in front of the Court because as the Seventh Circuit explained, the appellants had not identified any circumstance overlooked by the District Court that should have been considered. Had an obviously material circumstance been overlooked by the District Court, there may have been a different outcome.
As an aside, Judge Easterbrook also lamented that "making validity turn on 'the totality of the circumstances' – which can't be determined until litigation years after the events – makes it hard to predict which covenants are enforceable." And this may be the key takeaway. Because “totality of the circumstances" is a nebulous concept, predicting whether or not a restrictive covenant will be enforceable down the line is more art than science.