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Illinois Federal Court Finds Only 15 Months’ Employment Sufficient Consideration For Non-Compete Agreement

Posted in Trade Secrets

In a ruling announced a few days ago, Chief Judge Ruben Castillo of the U.S. District Court for the Northern District of Illinois adjudicated the validity of a non-compete clause in an employment agreement where the employee had worked for only 15 months and then resigned and began competing. Notwithstanding the latest word from the Illinois Appellate Court — “Illinois courts have repeatedly held that there must be two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant” (Fifield, 993 N.E.2d 938 (2013)) — Judge Castillo declined to invalidate the covenant for lack of consideration. However, he did dismiss the breach of contract count, finding that the provision’s geographical and activity restrictions were excessive. Montel Aetnastak, Inc. v. Miessen, Case No. 13 C 3801 (N.D. Ill., Jan. 28, 2014) (Castillo, J.).

Summary of the case

Montel, a manufacturer of shelving and storage racks, employed Miessen as its Midwest Regional Sales Manager. In that capacity, she provided highly confidential services to a Montel customer. Her employment agreement contained a provision prohibiting her, for two years after termination of her employment, from engaging in any business substantially related to that of Montel in the United States and Canada. Upon resigning from Montel, Miessen went to work for Bradford, a competitor, and performed similar tasks for the same customer. Montel sued Miessen, Bradford and Bradford’s supplier, alleging common law and statutory violations. The court held that it had jurisdiction over Miessen, denied motions to dismiss several counts, but did dismiss the breach of contract claim and those common law counts pre-empted by the Illinois Trade Secrets Act.

The trade secrets

As a Montel employee, Miessen worked with its design and engineering team and with Montel’s department store customer to meet its specific requirements at one of its many facilities. Montel expected additional orders from the customer. Montel’s designs and pricing were closely guarded secrets. After resigning from Montel, Miessen went to work for Bradford. She became its direct point of contact with that same department store, assisting in reconfiguring Bradford’s products for the customer.

Lawsuit and rulings

Montel filed a seven-count complaint against Miessen, Bradford, and the manufacturer of the products sold by Bradford. Miessen moved to dismiss the complaint against her for lack of personal jurisdiction. All defendants contended that Montel failed to state justiciable claims. Judge Castillo held that Miessen was subject to the court’s jurisdiction. He dismissed some counts but not others.

Enforceability of the non-compete clause

a. Consideration. The defendants argued that, because Miessen worked for Montel for only 15 months, the non-compete covenant failed the Fifield test. Judge Castillo disagreed. He said that some older Illinois appellate court decisions hold that one year is a sufficient period of employment, and that Illinois law does not “provide a clear rule to apply in this instance.” He concluded that given the absence “of a clear direction from the Illinois Supreme Court,” he would employ the “fact-specific approach employed by some Illinois courts.” He held that “the length of her term of employment, along with her voluntary resignation, lead the Court to conclude that she was provided with a ‘substantial period’ of employment. Therefore, [she] was provided with adequate consideration to support the enforceability of the employment agreement.”

b. Geographic and activity restrictions. Judge Castillo found the covenant unenforceable because of “the almost limitless geographic scope of the clause” and the fact that it barred her from working for a competitor, “even if she was employed in a noncompetitive activity.” He noted that there was no severability clause and that the covenant’s deficiencies were such that “a significant modification would be necessary to make it comport with the law.” Accordingly, he declined the defendants’ invitation to “blue pencil” the provision by judicially rewriting it, stating that “extensive judicial reformation of unenforceable post-termination restrictive covenants may be counter to public policy.”

Takeaways

Judge Castillo’s opinion is the first reported judicial critique of Fifield’s “bright line” requirement of a minimum of two years of employment in order to provide adequate consideration for a non-compete covenant. Montel undoubtedly will be cited in litigation brought by Illinois employers endeavoring to enforce agreements against an employee who worked fewer than 24 months. Montel also may be cited by a former employee opposing extensive judicial modification of a covenant unenforceable as written because of virtually unlimited geographic and activity provisions. Of course, a federal judge’s interpretation of Illinois law is not binding in any other case. Only time will tell whether jurists confronted with similar issues find Judge Castillo’s reasoning persuasive.

Employers can enhance the likelihood that a non-compete agreement will be enforced by giving employees some tangible consideration for the covenant. Additionally, it should include reasonable duration, geographic, and activity restrictions. A severability clause also may be appropriate.