Tag Archives: Non-compete clause

Enforcing Restrictive Covenants – the Impact of Fifield v. Premier Dealer Services, Inc.

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.

Illinois Supreme Court Decision Gives Employers More Leeway In Demonstrating Enforceability of Non-Compete Agreements

Contributed by Jeff Glass

On December 1, 2011, the Illinois Supreme Court issued a much-anticipated decision that broadened the factors that a court may consider when deciding whether to enforce a non-competition agreement. Reliable Fire Equipment Co. v. Arredondo, et al. (No. 111871) (Dec. 1, 2011). 

Prior to Reliable, a split had developed among the districts of the Illinois Appellate Court as to the “legitimate business interest” test.  It had been long-held in Illinois that, in order to enforce a non-compete contract, an employer must establish a “legitimate business interest” in the form of confidential information or “near-permanent” customer relationships.  The rationale was that this threshold test protected against such contracts being used to merely restrain lawful competition.  Despite that worthy goal, it was a problem for companies who could not show either of these particular interests, but still had good reasons for wanting to enforce the contracts.  Moreover, it was viewed by some as unfair, because it let some employees breach contracts that they voluntarily signed. Due in part to these concerns, the Appellate Court for the Fourth District in 2009 questioned whether a legitimate interest needed to be shown at all (Sunbelt Rentals, Inc. v. Ehlers, 394 Ill.App.3d 421 (2009)).  

Reliable was decided against this backdrop. Reliable sold fire extinguishers and alarms.  It sued two sales agents who signed non-compete contracts and then joined a startup firm.  The trial court declined to enforce the contracts on the grounds that Reliable failed to prove a “legitimate business interest” in the form of confidential information or “near-permanent” customer relationships.  The Appellate Court for the Second District affirmed, in the process rejecting the Fourth District’s opinion in Sunbelt Rentals.

Due to the split among the circuits, the Illinois Supreme Court took the case. It ruled that the legitimate business interest test still applies, but that the test should be expanded to encompass “the totality of the facts and circumstances of the individual case.” Accordingly, it reversed the appellate court’s decision, which limited its analysis to the near-permanence of customer relationships and the employee’s acquisition of confidential information. 

Reliable was a welcome development for me. The case will allow employer’s counsel to draw on a wider range of factors when arguing why non-compete agreements should be enforced. Moreover, a relative weakness in the areas of confidential information and/or near permanent customer relationships is no longer an automatic “deal-breaker” in a case to enforce the contract.  In fact, since Reliable has been decided, my firm has relied on Reliable to obtain a TRO for one client, and also to defeat a motion to dismiss in another non-compete case. Reliable also underscores the importance of reviewing existing employment contracts to make sure they are drafted in a way that will maximize the likelihood of their being enforced in light of the new, employer-friendly standard announced in Reliable.