With Fifield, Illinois now poses onerous consideration rules – what this means for your noncompetes

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Two years is a long time for an employee to stay in one place.  According to the US Department of Labor’s Bureau of Labor Statistics, over one quarter of all US jobs have tenures of less than two years. 

 

Yet, in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327 (2013), the Illinois Appellate Court has just held a nonsolicitation and noncompetition covenant unenforceable for lack of consideration because the employee’s job with his employer did not last two years after he signed the covenant, even though he had received a new job in exchange for the covenant, and even though he was the one who quit.  
 

While other states require some minimum employment term under certain circumstances, the blanket two-year requirement in Illinois now poses one of the most onerous consideration rules in the US. 

 

In Fifield, the employee was fired by his old employer and hired by the company that acquired the old employer.  The employee signed a restrictive covenant with the acquiring company and subsequently began working for it, but quit after three months to work for a competitor.  When litigation ensued, the acquiring company argued it had given the employee new employment which constituted adequate consideration to enforce the covenant, but the court still treated the covenant as a postemployment agreement that requires separate consideration.  In fact, the decision explicitly agrees with a federal court opinion asserting that there is no “distinction between pre and post-hire covenants.” 

 

In light of this decision, it is necessary to think pragmatically:

 

1.    Avoid Illinois law where possible.  In drafting restrictive covenants, employers should avoid Illinois choice of law and choice of venue provisions.  Illinois courts may not give effect to such extra-jurisdictional provisions if the chosen state law is “repugnant” to Illinois law or Illinois has a greater interest in the matter than the chosen state, but if there is a plausible nexus, employers should attempt to apply that other state’s law.

 

2.    Employers may still require a covenant . . .  There is nothing prohibiting an employer from firing or refusing to hire an employee that refuses to sign a restrictive covenant.  O’Regan v. Arbitration Forums, Inc., 121 F.3d 1060, 1064 (7th Cir. 1997); Lambert v. City of Lake Forest, 186 Ill. App. 3d 937 (1989).  Employers wishing to require a restrictive covenant can thus communicate the requirement as follows: 

 

“You must execute this agreement to [be hired or continue] employment with the company.  In consideration for the restrictions of this agreement, the company will give you [specific consideration].”

 

3.    . . . but employers must give additional consideration.  Illinois courts have suggested that compensation other than employment, such as a bonus or salary increase or a promotion, may constitute adequate consideration but have offered little insight on how much additional compensation is adequate.  Employers should assume that real value, and more than a de minimis amount, is necessary.  Curtis 1000, Inc. v. Suess, 24 F.3d 941, 947 (7th Cir. 1994).  Here are a few suggestions for additional consideration, which should be explicitly tied to the restrictive covenant:

  • bonus at the time of hire
  • stock options under First Health Group Corp. v. Natl. Prescription Administrators, Inc., 155 F. Supp. 2d 194 (M.D. Pa. 2001) (holding stock options to be sufficient consideration under Illinois law)
  • severance package or
  • salary increase and/or a promotion or enhancement of responsibilities for current employees.

4.    Understand stock deals vs. asset deals.  When dealing with a transaction, purchasers in a stock deal are unlikely to face the issues in Fifield because such  purchasers step into the shoes of the target as the employer and the employment relationship effectively remains status quo.  Purchasers in an asset deal, however, need to hire any employees of the target whom they wish to retain.  After Fifield, any job they offer is insufficient consideration if the employee leaves before two years, so the purchaser should offer something additional.

 

Some of these measures are unpalatable.  That, of course, is precisely why Fifield is noteworthy and may not stand if the Illinois Supreme Court grants review. 

In the meantime, however, it is necessary to take steps to save the restrictive covenants of those employees who fall into that quartile of Americans unlikely to stick around for two years.

Topics:  DOL, Employee Retention, Hiring & Firing, 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.

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