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July 15, 2013Client Alert

Recent Case Prompts Employers To Reconsider The Consideration Provided For Restrictive Covenants

The enforceability of a restrictive covenant in an employment agreement depends upon key factors as well as the particular facts and circumstances in each case. One of the factors that courts examine to determine whether a restrictive covenant in an employment agreement is enforceable is whether the agreement is supported by adequate consideration. In other words, an employee must receive something of value in exchange for giving up rights and opportunities after the employee's employment, such as the rights to use the former employer’s confidential information or to solicit its customers and employees.

 

Illinois courts have held that the requirement that an employee receive adequate consideration for signing a restrictive covenant is satisfied when an employee signs such an agreement when the employee begins employment. Illinois courts also have held that continued employment for two years or more after signing a restrictive covenant can constitute sufficient consideration.

 

In Fifield v. Premier Dealer Services, Inc., No. 1-12-0327 (Ill. App. 1st Dist., 6/24/13), the First District Illinois Appellate Court recently held, however, that merely signing a restrictive covenant at the start of an employee’s employment does not provide sufficient consideration. The facts of Fifield are unusual.  After Premier acquired Fifield’s employer, as a condition of Fifield’s employment, Premier required Fifield to sign an Employee Confidentiality and Inventions Agreement, which included two-year nationwide non-solicitation and non-competition provisions.  Prior to signing the agreement, Fifield negotiated to add a provision stating that the non-solicitation and non-competition provisions would not apply if Premier terminated Fifield without cause during the first year of his employment.  Fifield accepted Premier’s offer of employment and signed the agreement with the additional provision.  He resigned from Premier a little more than three months later to work for a competitor.

 

Based upon these facts, the Court specifically rejected the argument that Fifield's employment was sufficient consideration because he signed the restrictive covenant when he commenced employment. Rather, the Court adopted the rule that "there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant."  The Court noted that the promise of continued employment might be "an illusory benefit where the employment is at-will" and thus not be sufficient consideration because the employment can end at any time.  As a result, the Court decided that only continued employment for two years or more will constitute adequate consideration.  Since Fifield resigned a little more than three months after he began working for Premier, the Court concluded that "period of time is far short of the two years required for adequate consideration under Illinois law."  The Court applied this rule despite the fact that Fifield chose to resign from Premier; the Court observed that “Illinois courts have also stated that the length of time required for adequate consideration is the same regardless of whether an employee is terminated or decides to resign on his own.”

 

The Fifield decision is a major departure from the standard that Illinois courts have adopted for satisfying the requirement that restrictive covenants in employment agreements be supported by adequate consideration. The implications of the Fifield case are significant; under its ruling, merely signing a restrictive covenant when beginning employment will not be adequate consideration. Such an agreement will be supported by adequate consideration if the employee remains employed for two or more years after signing the restrictive covenant. Under the Fifield Court’s reasoning, therefore, an employee could render the consideration inadequate and the restrictive covenant unenforceable merely by resigning prior to being employed for two years.

 

The Fifield case might well be appealed. Aside from monitoring the case, it also will be important to see whether other courts follow the Fifield decision or perhaps distinguish it on its unusual facts. At this point, based upon the Fifield ruling, employers should provide and clearly articulate some form of consideration in addition to employment or continued employment in a restrictive covenant governed by Illinois law to avoid the risk that a court will find the covenant unenforceable because the employee remained employed for fewer than two years.  Employers should consult their legal counsel to prepare well-drafted restrictive covenants and place them in the best position to enforce such agreements if the need arises, particularly in light of the Fifield Court’s ruling on the standard for sufficient consideration.

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