Attorneys and courts pondering which standard of review an Illinois appellate court should apply to restrictive covenant decisions may have received an early holiday gift this past year from the 2nd District appellate court. The court’s decision in The Agency, Inc. v. Grove, 362 Ill.App.3d 206, 839 N.E.2d 606, 298 Ill.Dec. 283 (2d Dist. 2005), released for publication on December 23, 2005, (two short days before Christmas and the beginning of Hanukkah) attempts to reconcile the previous conflicting decisions regarding the standard of review for such determinations. In so doing, the Agency court set forth a bifurcated standard of review without precedent in Illinois.
Under Illinois law, courts will not enforce a restrictive covenant unless the terms of the agreement are (1) reasonable and (2) necessary to protect a legitimate business interest of the employer. Hanchett Paper Co. v. Melchiorre, 341 Ill.App.3d 345, 351, 792 N.E.2d 395, 275 Ill.Dec. 164 (2d Dist. 2003). Thus, when seeking to enforce a restrictive covenant, an employer must identify a legitimate business interest to support that covenant. Because, as in The Agency, the existence of a legitimate business interest often is an issue in dispute, a key issue in Illinois is the appropriate standard of review for a court’s assessment of whether a legitimate business interest of this nature exists.
Injunctive relief sought in the lower court
In The Agency, a former employee of a temporary staffing agency resigned and took a job with a competing staffing agency. The original agency filed suit, seeking to enforce both a covenant not to compete and a confidentiality agreement signed by the employee. The trial court denied the former employer’s request for preliminary injunctive relief. On appeal, the Agency court considered which standard of review to employ in reviewing the trial court’s decision on the confidentiality covenant. [The court did not consider the covenant not to compete because the covenant had already expired by its own terms by the time the case reached the appellate court.] Ultimately, the 2nd District court reversed the trial court, which had held that the confidentiality agreement was unenforceable because the client information at issue was not protectable confidential information. Based on the evidence presented at the preliminary injunction hearing, the appellate court found that the client information provided a sufficient competitive advantage to plaintiff to be considered confidential. The Agency, 362 Ill.App.3d at 218, 839 N.E.2d at 616.
Which standard of review to apply?
Initially, the Agency court struggled with the standard of review to apply to the determination of the restrictive covenant’s enforceability, noting that previous Illinois decisions demonstrate some “mystery surrounding the standard of review” that Illinois courts apply to that issue. Id., 362 Ill.App.3d at 214, 839 N.E.2d at 614.
The difficulty in divining the appropriate standard of review is understandable: a restrictive covenant is a contract, and so its interpretation would normally be a question of law. Chicago Park District v. ILRB, 354 Ill.App.3d 595, 562, 820 N.E.2d 61, 70, 289 Ill.Dec. 553 (1st Dist. 2004); Rubin v. Laser, 301 Ill.App.3d 60, 68, 703 N.E.2d 453, 459, 234 Ill.Dec. 592 (1st Dist. 1998). Thus, a court will generally review contract interpretation under the de novo standard of review applied to questions of law. Chicago Park District, 354 Ill.App.3d at 562, 820 N.E.2d at 70. But because reasonableness is such an integral part of the enforceability analysis for a restrictive covenant, factual reasonableness issues are also relevant, thus lessening the extent to which the interpretation of the covenant is strictly a matter of law. Simply put, both legal and factual considerations apply.
As The Agency decision noted, Illinois appellate court cases acknowledge the tension between factual and legal considerations in such cases and often confusingly state that the enforceability of a restrictive covenant is a question of law dependent on the particular facts of each case. See, e.g., LSBZ, Inc. v. Brokis, 237 Ill.App.3d 415, 425, 603 N.E.2d 1240, 177 Ill.Dec. 866 (2d Dist. 1992); Arpac Corp. v. Murray, 226 Ill.App.3d 65, 75, 589 N.E.2d 640, 168 Ill.Dec. 240 (1st Dist. 1992). But these cases are “peculiarly silent” as to how an appellate court should review these issues of law and fact, and the court noted that its research revealed only one published decision from Illinois that sets forth a standard of review. The Agency, 362 Ill. App. 3d at 215, 839 N.E.2d at 614.
The one Illinois appellate court case stating a standard of review, Hamer Holding Group, Inc. v. Elmore, 244 Ill.App.3d 1069, 1080, 613 N.E.2d 1190, 184 Ill.Dec. 598 (1st Dist. 1993), held that, because the reasonableness of the restraint is a question of law, the court must review the trial court’s reasonableness determination de novo. This is where the difficulty arises, however, as noted by The Agency:
if…a trial court’s determination of enforceability entails the resolution of disputed factual matter as well as legal issues, then de novo review can not be the only standard applied. “In Illinois, a judge’s or jury’s findings of fact in a civil case are generally accorded manifest-weight review,” but “a judge’s rulings of law in a civil or criminal case are reviewed under the non-deferential de novo standard.” The Agency, 362 Ill.App.3d at 215, 839 N.E.2d at 614 [citations omitted].
With these overlapping legal and factual and considerations in mind, the Agency court turned to its consideration of the appropriate standard of review to apply.
The court adopts a new standard of review
To harmonize these conflicting standards of review, the Agency court suggested that the enforceability of a restrictive covenant is best viewed as presenting separate questions of law and fact in the same way that a motion to suppress under Illinois law does so. Id. With a motion to suppress, an appellate court upholds the trial court’s findings of historical fact unless those findings are against the manifest weight of the evidence. See id. The appellate court, however, remains free to assess the facts in light of the issues presented and may draw its own conclusions in deciding what relief to grant. See id. Accordingly, the appellate court reviews de novo the ultimate question of whether it should suppress the evidence. See id.
The Agency adopts a similar dual standard of review for restrictive covenant cases: where the existence of a legitimate business interest turns on an issue of disputed fact, a court will review that issue under the manifest-weight standard, but the question of whether a covenant is enforceable under the facts is a legal question subject to de novo review. The Agency, 362 Ill.App.3d at 215, 839 N.E.2d at 615.
This bifurcated standard of review suggested by The Agency is not completely unprecedented. In fact, The Agency notes that courts in other jurisdictions have adopted a similar two-tiered approach to restrictive covenants. See, e.g., Turner v. Caplan, 268 Va. 122, 125, 596 S.E.2d 525, 527 (VA. 2004); Mutual Svc. Cas. Ins. Co. v. Brass, 2001 Wis Ct. App. 92, 242 Wis. 2d 733, 737, 625 N.W.2d 648, 651 (Wis. App. 2001).
The modified standard of review in practice
So how would this bifurcated standard of review arise in practice? For example, consider a case alleging the violation of a covenant not to compete by a departing employee in which the employer alleges that the employee has misappropriated confidential customer information. Under the right circumstances, customer information can be deemed a legitimate protectable interest. In determining whether the information is truly confidential, a court would evaluate whether the employer took affirmative steps to protect that information, such as by protecting it with passwords or locked cabinets. Under The Agency, a reviewing court would utilize the manifest-weight standard in assessing the factual question of whether the employer adequately safeguarded the relevant information such that it was truly confidential. Conversely, the court would consider the legal issue of whether the terms of the covenant not to compete were reasonable under Illinois law under the de novo standard of review.
Although it is too early to predict how broadly the bifurcated standard of review set forth by The Agency decision will affect future decisions, the framework does appear to provide a workable means for a court’s consideration of the overlapping legal and factual issues at play in a restrictive covenant case. The bifurcated standard of review acknowledges that factual and legal issues coexist in such cases, and respects a court’s need to analyze each under the appropriate standard of review for each.
