Contributed by Julie A. Proscia
An employer’s ability to enforce post-employment restrictive covenants (for example, a restriction on a former employee’s ability to compete against the employer after the employee’s employment ends) has been and continues to be a much litigated topic. The incessant litigation has, however, resulted in the creation of a few “standards” that employers should be aware of in drafting and enforcing restrictive covenants. An Illinois Appellate Court’s decision in Fifield v. Premier Dealer Services, Inc. serves as a reminder of the developing standards and drives home the point that “continued employment” can be adequate consideration for a restrictive covenant, but that employment better last at least two years!
Fifield involves a plaintiff who was employed by Great American Insurance Company (“Great American”) and was assigned to work exclusively for a Great American subsidiary. The subsidiary was sold to the defendant, Premier Dealer Services, Inc. (“Premier”), and Great American informed the plaintiff that his employment would end on October 31, 2009. However, in late October, Premier offered the plaintiff a position contingent on his agreeing to an “Employee Confidentiality and Inventions Agreement” (“agreement”) that included a two-year post-employment non-solicitation and non-compete restriction. The plaintiff was able to negotiate a provision into the agreement that stated the non-solicitation and non-compete would not apply if the plaintiff was terminated without cause during the first year of his agreement.
The plaintiff started working for Premier on November 1, 2009, and resigned three months later on February 1, 2010. He then went to work for a competitor and filed a declaratory judgment action seeking to have a court find that certain provisions, including the non-solicitation and non-competition provisions, are unenforceable for lack of consideration (i.e. the plaintiff is not getting “enough” in exchange for his agreement to not compete or solicit). The trial court found in favor of the plaintiff on the non-solicitation and non-competition issue, and Premier appealed. The Illinois Appellate Court adopted the trial court’s reasoning and affirmed the trial court’s decision.
Both Premier and the plaintiff made a number of arguments in support of their respective positions. Premier’s primary argument was that the plaintiff was not employed at the time he signed the agreement, and, therefore, his “new employment” was adequate consideration. This argument, however, was rejected by the court because the transition from Great American to Premier was essentially seamless (this was a significant blow to Premier’s case). The Appellate Court also rejected Premier’s argument that the “one-year termination without cause” provision was adequate consideration.
The Appellate Court agreed with the plaintiff that he really never stopped working, so the purported “new employment” alone could not be adequate consideration. The court recognized that Illinois courts’ have repeatedly held two years of employment to be adequate consideration to support a post-employment restrictive covenant. The plaintiff was only employed for approximately three months. The fact that the plaintiff resigned on his own accord had no impact on the conclusion that two years of continued employment is the “standard” for adequate consideration in post-employment restrictive covenant situations.
In light of this “standard,” if a non-compete or non-solicit is critical to your business, you might consider offering “consideration” other than non-guaranteed, continuing employment for a current employee. If guaranteed employment is not an option (such as through an employment agreement), cash or a bonus program can always be considered.