Illinois Court of Appeals: Non-Competes Unenforceable Without at least Two Years of Continued Employment
In Fifield v. Premier Dealer Services, Inc., the Illinois Court of Appeals covering Chicago held that as a matter of law, an at-will employee must remain employed for at least two years to receive consideration sufficient to support a restrictive covenant. Consideration remains a hot-button issue because certain courts have determined that a promise of continued at-will employment is an illusory benefit. The bright-line rule in Fifield demonstrates the importance of knowing the law of the particular state that will govern enforcement of a restrictive covenant.
Fifield began his employment with the defendant on November 1, 2009. As a condition of his employment, Fifield signed an employment agreement that contained a two-year nonsolicitation and noncompetition covenant. Fifield also negotiated a provision voiding the restrictive covenant if Fifield was terminated without cause during the first year of his employment (the "first-year provision"). On February 12, 2010, slightly more than three months after his employment began, Fifield resigned from his position with defendant and soon after began working for a competitor.
Fifield and his new employer filed suit in Cook County, Illinois seeking a declaration that that the restrictive covenant was unenforceable for lack of consideration. The trial court ruled in favor of Fifield and the Court of Appeals upheld the ruling. The Illinois Supreme Court declined to hear the appeal from that decision.
Under Illinois law, and the law of most states, in order for a restrictive covenant to be enforceable it must be reasonable, ancillary to a valid contract, and supported by adequate consideration. Prior to Fifield, under Illinois law, continued employment for a "substantial period of time beyond the threat of discharge" was sufficient consideration, but "substantial period" was not defined. After Fifield, at least in Cook County, Illinois (the First Appellate Division), the bright-line minimum is two years of continued employment.
In reaching its holding, the Court of Appeals rejected the former employer's argument that, because Fifield signed the agreement before beginning his employment, the employment itself was sufficient consideration for the agreement. According to the court, no distinction is permitted between new hires and existing employees. The court further held that the two-year standard applies even if the employee resigns on his own instead of being terminated. Finally, the court determined that the first-year provision in Fifield's agreement did not affect the application of the two-year rule, meaning the two-year minimum cannot be shortened by agreement.
The Fifield decision applies only to the question of whether continued employment is sufficient consideration. It does not preclude other forms of consideration, such as payment of a bonus or some other valuable exchange. Such options should always be considered, particularly in Illinois. Moreover, the ruling is limited to Illinois. Many other states, including Kansas and Missouri, hold that continued employment for any length of time does constitute sufficient consideration to support enforcement of a restrictive covenant.
This article was featured in the April issue of Stinson Leonard Street's Business Torts Update, which focuses on recent developments affecting litigation of securities law, whistleblower, trade secret and non-compete claims.