Illinois Supreme Court Lets Ruling Stand Requiring Two Years of Employment to Support Restrictive Covenant

more+
less-

The enforceability of post-employment restrictive covenants in Illinois suffered a set back on October 14, 2013, when the Illinois Supreme Court refused to review an appellate decision that held that two years of employment was required to enforce a non-compete covenant of an at-will employee when the sole consideration for the covenant was the employment itself. In Fifield v. Premier Dealer Services, Inc., the First District Appellate Court held that an at-will employee’s restrictive covenants were not enforceable because his three months of employment before quitting was not adequate consideration. Rather remarkably, the Court rejected the employer’s contention that a restrictive covenant signed at the outset of an at will employment relationship (as opposed to during an on going employment relationship) need not be supported by additional consideration beyond the substantial consideration afforded by the offer of employment itself – i.e., employment, access to customers, access to confidential information, employee benefits, compensation.

In Fifield, Premier Dealership Services acquired a subsidiary of Great America Insurance Company, Eric Fifield’s employer. Premier offered Fifield employment on terms that included standard two-year post-employment non-competition and non-solicitation prohibitions. Fifield became an employee at-will of Premier and even negotiated a provision that the restrictive covenants would not apply if he were terminated without cause in his first year with Premier. Three months later, Fifield resigned and began to work for a competitor. On a motion for a declaratory judgment, the trial court threw out the restrictive covenants and held they were unenforceable due to a lack of adequate consideration.

In its June 24, 2013 opinion, the First District Appellate Court affirmed. Its ruling considered whether there was “adequate” consideration to enforce the agreement, a departure from traditional contract analyses which look only to the existence, not the adequacy, of consideration. The Appellate Court found no meaningful distinction between the fact that Fifield quit his employment as opposed to being terminated and found no difference between signing a restrictive covenant upon hiring rather than during the term of an existing relationship. Focusing on the adequacy of consideration, the court held that when an employee signs a restrictive covenant, the consideration offered by the employment itself is an “illusory benefit” if the employment is at will. While consideration is ordinarily to be determined at the time of contracting, the court held that continued employment would constitute consideration but only if that employment lasted two years or longer.

To say that the ruling is stunning is an understatement. It has commonly been understood that the “substantial continued employment” concept applied only when a covenant was extracted from an existing at-will employee as a condition of continued employment where no new consideration was exchanged. The First District Appellate Court now imposes that obligation when an at-will employee is initially hired. Employers that try to protect their customer relationships and business by entering into restrictive covenants with new or existing at-will employees need to wait two years before they can determine whether the employment constitutes sufficient consideration to support the post-employment restrictions. The “one-size fits all” approach to the court’s “adequacy” analysis does not even consider the breadth or limited nature of the restrictive covenants, such as whether they are pure non-compete provisions or more limited non-solicitation prohibitions.

Key Takeaways
The newfound emphasis on “adequacy” of consideration, largely a glossed-over topic in the past, means that employers will need to provide employees with something other than a job or continued employment if they hope to enforce post-employment restrictions against employees who resign or are terminated before two years are up. Employers should review existing contract templates to determine if consideration beyond employment can be recited for new agreements. Options available to employers include providing employees with agreements to take them out of the at-will context (i.e. give them a set term contract or limit the reasons for termination) or providing them with a tangible benefit, such as stock options, a bonus, severance pay or a raise at the time of contracting. Illinois employers must nevertheless be cautious about a trial or appellate court’s determination as to whether the proposed consideration will be deemed “adequate” to support a post-employment restraint. Indeed, Fifield may simply have opened the floodgates of uncertainty in the post-employment restrictive covenant arena by putting non-competition and non-solicitation agreements on a different footing from other contracts as it invites courts to ignore the traditional maxim that courts only inquire into the existence and not the adequacy of consideration. Care should be taken to make certain that adequate consideration is given at the time of contracting, although for now what is “adequate” continues to be unclear.

Topics:  At-Will Employment, Consideration, Contract Drafting, Non-Compete Agreements, Restrictive Covenants

Published In: General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »