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Illinois Appellate Court Rules That Employment For Less Than Two Years Is Inadequate Consideration For Enforcement Of Non-Compete And Non-Solicitation Covenants

Posted in Non-Compete Enforceability, Practice & Procedure, Restrictive Covenants

Overview.  Non-compete and non-solicitation covenants in an employment agreement are not enforceable unless the restrictions are supported by adequate consideration.  Illinois courts have held that there “must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant.”  No reported decisions from other states are in accord.

The covenants and the lawsuit.  Premier acquired Fifield’s prior employer and insisted that he sign an employment agreement.  He did so on October 30, 2010 and went to work for Premier two days later.  Its standard agreement contained nationwide two-year non-compete and non-solicitation covenants with respect to anyone with whom Premier had a business relationship during the 12 months immediately prior to termination.  Before signing, however, Fifield negotiated an amendment to the effect that the covenants would not apply if he was terminated without cause in his first year of employment.  Four months after he began working for Premier, he resigned and joined a competitor.  He and his new employer filed a complaint in the Circuit Court of Cook County, Illinois, seeking a declaratory judgment that the covenants were unenforceable for lack of consideration.  In a counterclaim, Premier asked for an injunction enforcing the covenants. 

Trial court grants requested declaratory relief.  Premier maintained that, since the agreement was signed before Fifield came to work, the consideration was employment itself.  Further, Premier argued that Illinois court decisions invalidating restrictive covenants in the absence of employment for a substantial period of time were intended to protect employees against deprivation of their livelihood if they are hired and then precipitously fired, but this couldn’t happen to Fifield because he was protected if he was discharged without cause within one year.  Rejecting Premier’s contentions, the trial court granted the declaratory judgment sought by Fifield and his new employer.

The Appellate Court’s analysis.  The court of appeals affirmed.  It held that in Illinois, “[P]ost-employment restrictive covenants are carefully scrutinized . . . because they operate as partial” restraints on trade.  Absent other consideration, there must be continuous employment for at least two years.  The court deemed irrelevant the facts that (a) Fifield’s employment started after he signed the employment agreement, (b) he resigned rather than being discharged, and (c) he was protected for one year which is only one-half of the requisite two-year mandatory protection.

What Fifield teaches.  The traditional rule in a breach of contract case is that the law does not inquire into the adequacy of consideration, only its existence.  In the context of postemployment restrictive covenants, however, Illinois appellate courts hold that less than two years of employment is insufficient consideration; the Illinois Supreme Court has not yet opined.  Under Fifield, assuming no consideration — other than employment — for such restrictions, employers who want to enforce the covenants may have to retain employees for at least two years.  Indeed, an employee apparently could nullify the restrictions unilaterally simply by resigning earlier than the second anniversary of the agreement.  To avoid these results, employers should consider whether the unique facts of this case requires the tender of something else of value besides just the offer of new or continued employment as consideration for the covenants.  Please also see Ken Vanko’s amusing “dissenting” opinion on the Fifield decision.