by Steven L. Brenneman
In a decision handed down June 24, the Illinois Appellate Court, First District, found a restrictive covenant unenforceable because of a lack of adequate consideration (something given in return for the employee’s agreement not to compete). The court ruled there must be at least two years of continued employment to constitute adequate consideration to support a restrictive covenant. Although this isn’t the first time an Illinois court has ruled that two years of employment are necessary, the ruling in this case is remarkable because of the following:
- The employee signed the restrictive covenant at the time he commenced employment, yet the court rejected the employer’s argument that the employment offer itself was adequate consideration.
- The restrictive covenant was the product of negotiations between the employee and the employer and included a proviso that the nonsolicitation and noncompete provisions wouldn’t apply if the employee was terminated without cause during the first year of his employment. Yet the court found this protection was insufficient consideration.
- The employee voluntarily resigned after three months’ employment, but the court relied on previous decisions holding that an employee’s voluntary resignation, as opposed to an involuntary termination, makes no difference to the consideration analysis.
This important decision, Fifield v. Premier Dealer Services, Inc., brings into sharp focus the hurdles an Illinois employer will face when attempting to enforce a restrictive covenant. The decision illustrates that if the only consideration provided by the employer is employment (either a new job offer or continued employment), then Illinois courts won’t enforce the restrictive covenant until at least two years of continuous employment have transpired.
Illinois employers are well-advised to confer with employment counsel when drafting and implementing restrictive covenant agreements with employees to ensure that adequate consideration is provided. Here are some alternative approaches:
- Offer something of value (other than employment), such as a cash bonus or stock award, in exchange for the restrictive covenant.
- Consider offering to make the restrictive covenant inoperable if the employee is terminated without cause during the first two years after the agreement is signed. (Of course, this approach would leave you with less protection.)
- Consider offering to enter into a fresh restrictive covenant (in exchange for cash or some other valuable consideration) at the time an employee separates from employment.
We will provide more detailed coverage of this ruling in an upcoming issue of Illinois Employment Law Letter.
Steven L. Brenneman is an editor of Illinois Employment Law Letter and a partner with Ford & Harrison LLP in Chicago. If you wish to learn more about this decision or discuss how it may affect you, please contact him at 312-960-6111 or firstname.lastname@example.org or contact the Ford & Harrison attorney with whom you normally work.