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Client Alert: Illinois Court Rules Employment For Less Than Two Years Constitutes Inadequate Consideration

For Non-Competition and Non-Solicitation Agreements

Actions to Consider

  1. Reevaluate existing employment agreements, as well as compensation arrangements and employee acknowledgements of consideration for restrictive covenants.
  2. Evaluate employees’ restrictive covenants other than non-competition and non-solicitation covenants, and related company practices.
  3. Consider the use of compensation and severance deferral arrangements to satisfy the adequate consideration standard or to provide some measure of security against potential unenforceablility of the restrictive covenants.
  4. Consider the possible impact of Fifield on pending and new acquisitions and related employee hiring and retention.
  5. Consider that the analysis of adequate consideration under Fifield might also be used to measure the adequacy of monetary consideration for restrictive covenants. 
Summary

The Illinois Appellate Court in Fifield v. Premier Dealer Services, Inc. recently gave what it maintains is a definitive answer to the question of what constitutes the minimum adequate consideration for non-competition, non-solicitation and similar restrictive covenants: when at-will employment is the only consideration, “there must be at least two years or more of continued employment to constitute adequate consideration [***] even if the employee resigns on his own instead of being terminated” (emphasis added).

Legal Background - Before Fifield

One of the factors that Illinois courts examine to determine if a restrictive covenant is enforceable is whether the agreement is supported by “adequate consideration.”  In other words, courts consider whether an employee received something of value in exchange for giving up post-employment rights and opportunities by agreeing to the restrictive covenants.

Prior to Fifield, there was no clear standard under Illinois law as to how long employment had to continue to be adequate consideration for restrictive covenants—Illinois courts generally held that “substantial continued employment” could constitute sufficient consideration for an enforceable restrictive covenant.  Those courts generally evaluated adequacy by considering the length of employment and a variety of other circumstances, rather than employing a bright-line minimum duration.

Illinois courts previously applied this so-called continued employment doctrine to agreements entered into between employers and employees after the employment relationship had begun.  Prior to Fifield, Illinois state courts tended not to apply the continued employment doctrine to agreements entered into before or at the start of the employment relationship.

Facts of Fifield

Eric Fifield worked for a company that was acquired, and he was offered employment with the acquiring company. As a condition of his new employment,  Fifield was required to sign an “Employee Confidentiality and Inventions Agreement.”  This Agreement included a two-year, post-employment non-competition and non-solicitation provision.  Fifield resigned three months after the transaction to work for a competitor.  In litigation brought to determine the enforceability of the restrictive covenants, the court sided with Fifield and invalidated the restrictive covenants for lack of consideration.  The former employer appealed that decision and lost.

Impact of Fifield

Fifield changes the legal landscape in Illinois with respect to restrictive covenants in at least two important respects.

  1. Fifield declares that there “must be at least two years or more of continued employment” for such employment, by itself, to constitute adequate consideration.
  2. Fifield holds that its new two-year standard applies regardless of whether the restrictive covenant is entered into before or after the employment begins.
Conclusion

It is possible that Fifield will be appealed to (and overruled by) the Illinois Supreme Court and/or distinguished by other Illinois appellate courts.  Fifield 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 Fifield are significant—under the ruling, merely signing a restrictive covenant when beginning at-will employment will not be adequate consideration.  Such an agreement will be supported by adequate consideration only if the employee remains employed for two or more years after signing the restrictive covenant.  Under Fifield’s reasoning, an employee could resign prior to the second anniversary of hire and render the restrictive covenant unenforceable.

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