Illinois Appellate Court Rules Employment of Less than Two Years Provides Inadequate Consideration for Noncompetition and Nonsolicitation Agreements
Labor & Employment Law Update 07/01/13 Jeffrey S. Piell
In Fifield v. Premier Dealer Services, Inc., the Illinois Appellate Court, First District, gave what it maintains is a clear-cut answer to the question of what constitutes adequate consideration for an enforceable noncompetition or nonsolicitation agreement: when employment is the consideration, "there must be at least two years or more of continued employment to constitute adequate consideration in support of the restrictive covenant. This rule is maintained even if the employee resigns on his own instead of being terminated."
In Fifield, the employee worked for an automotive insurance administrator that was sold to another company. Fifield was offered employment with the acquiring company and, as a condition of his new employment, was required to sign an "Employee Confidentiality and Inventions Agreement" which included a two-year, post-employment noncompetition and nonsolicitation provision. Fifield accepted employment and signed the agreement. He resigned three months later to work for a competitor. Fifield and his new employer then filed a complaint in the Circuit Court of Cook County for declaratory relief that the noncompetition and nonsolicitation provisions in the agreement were invalid and unenforceable. The circuit court sided with the employee and invalidated the restrictive covenants for lack of consideration. On June 24, 2013, the Illinois Appellate Court affirmed.
Before Fifield, Illinois courts have held that "substantial continued employment" can constitute sufficient consideration for an enforceable restrictive covenant. Those courts looked at the length of employment and a variety of other circumstances to determine the validity of the consideration, rather than set a rule or formula as to how much employment was enough consideration. Citing earlier precedent that "a promise of continued employment may be an illusory benefit when the employment is at-will," the Fifield court effectively eliminated the relevance of all other circumstances and set a mandatory, two-year employment rule. There is no word yet as to whether this decision will be appealed to the Illinois Supreme Court.
What it means:
Under the Fifield two-year rule, Illinois noncompetition and nonsolicitation agreements supported only by new employment or continued employment will become extremely difficult to enforce for short-term employees, even when the employees decide to terminate the relationship. Under Fifield, it appears employees can breach restrictive covenants with impunity, as long as they resign within two years of their start date.
This decision does not address the validity of restrictive covenants supported by other forms of consideration, such as salary increases, bonuses or other cash payments granted at the time of, and in exchange for, the employee's signature on a noncompetition or nonsolicitation agreement. Employers seeking to put in place enforceable agreements should explore providing monetary consideration. Other tangible employment benefits, including promotions or access to confidential information, also may be a valid consideration. Employers located in multiple states should explore adding a choice of law provision to their agreement and select a more favorable state law to govern their agreement.
Moreover, this decision does not appear to limit the validity or enforceability of confidentiality agreements, and employers would be wise to revisit such agreements, as well as the measures taken to protect their confidential information, as a means of restricting the movement of employees and their confidential information to the competition.
If you have questions regarding the impact of this case on your business, please contact Quarles & Brady Labor & Employment Partner Jeffrey Piell at [email protected] or 312-715-5216. In addition, Quarles & Brady's Trade Secrets and Unfair Competition Subgroup can assist you in analyzing whether restrictive covenants would benefit your business. Contact Jeffrey Piell or Subgroup Chair Nicole Druckrey at [email protected] or 414-277-5777 with any questions.