Restrictive Covenant Alert – Two-Year Employment ‘Rule’

by Reed Smith
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In a recent restrictive covenant case, the court’s apparent announcement of a two-year employment “rule,” which would apply whether (i) the employee resigned or was terminated, and/or (ii) the covenant was signed at the inception of employment or thereafter, signals at least two new bright lines in at-will employee restrictive covenant litigation in Cook County, and perhaps in the rest of Illinois. We note that the opinion did not concern restrictive covenants arising from the sale of a business, or with employees who are not at-will. If the decision becomes final, the case will serve as precedent for at-will employees (i) that simply being hired does not provide sufficient consideration to enforce a restrictive covenant, and (ii) the employee must remain employed for at least two years to provide sufficient consideration, regardless of whether the employee is terminated or resigns, where the only consideration at issue is the length of employment. These rules are different from those that apply in many other states.

In a non-final opinion issued June 24, the Illinois Appellate Court for the First District held that a restrictive covenant in an employment agreement, which covenant contained both non-compete and customer non-solicit terms, was unenforceable against a former at-will employee for failure of consideration where the employment lasted for less than two years. Fifield v. Premier Dealer Servs., Inc., No. 10 CH 9204, 2013 WL 3192931 (Ill. App. Ct. June 24, 2013). The court’s description of its finding as a “rule,” id. at * 5, is stronger precedent than prior decisions that required continued employment for a “substantial period of time” (which a few cases held was satisfied at the two-year threshold). At the time of this alert, no further appeal or motion to reconsider had been filed.

The employee, Fifield, entered into the two-year restrictive covenant when his employment with the Defendant, Premier Dealer Services, Inc., began. While his employment was at-will, he did negotiate at least one of the restrictive covenant terms (precluding enforcement if Premier terminated him within the first year). Fifield resigned less than four months later and went to work for a competitor. Fifield and the competitor filed a declaratory judgment action, and on their motion the trial court held that the restrictive covenant was unenforceable.

On appeal, the First District rejected Premier’s argument that Fifield’s hiring was sufficient consideration for the restrictive covenant, and held that whether the restrictive covenant is signed at the inception of employment, or thereafter (e.g., altering an existing employment relationship), the consideration analysis—looking to the length of continued employment—is the same. This holding clarifies an issue that had crept into many of these cases, where practitioners sought to distinguish between these circumstances. Because Fifield worked for less than two years, he was free to work for Premier’s competitor.

The appellate opinion does not describe any other arguments that Premier may have advanced on the consideration question (other than rejecting the argument that the one-year “for cause” term that Fifield negotiated for did not separately provide sufficient consideration), nor whether there were separate trade-secret arguments. On the question of what else can provide consideration to support an at-will employee’s restrictive covenant, at least one decision refused to consider whether access to confidential information (accepted in many states) would be sufficient. See Gallagher Basset Servs., Inc. v. Vacala, No. 2-11-1175, 2012 WL 6969297, at * 6 (Ill. App. Ct. Aug. 29, 2012) (a Second District case).

We would expect to see further development of the law in this area, including whether and to what measure confidential information, training, and special employment or compensation terms can provide consideration for an at-will employee restrictive covenant. We also would expect to see further development of “subterfuge” arguments directed at employees who are alleged to have purposefully accepted employment in order to gain access to confidential information or other employer practices, only to resign to work for a competitor (which, if true, may give rise to fiduciary duty, fraud and other claims).

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.

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