The Illinois Appellate court very recently clarified a budding dispute among practitioners regarding what type of consideration is necessary to enforce a non-compete or non-solicitation agreement. In Fifield v. Premier Dealer Services, Inc., in which our firm represented the employee and his new employer, the First District Illinois Appellate Court set forth this bright line rule — if the only consideration for a restrictive covenant is employment, then an employee has to work at least two years after signing the agreement before the non-compete or non-solicitation agreement can be enforced. This is true even if the restriction meets all other requirements (e.g., legitimate interest, reasonable scope).
This rule applies whether or not the agreement is signed at the beginning of employment or during, whether the employee quits or is fired. It simply doesn’t matter. Unless the employee has worked two years, the company will not be able to enforce that agreement unless some other adequate consideration is given for the restrictive covenant.
What does this mean to you? It means that if you hire a new employee and require her to sign a non-compete and that employee leaves a year after being hired, you will not be able to enforce that non-compete agreement no matter what. Indeed, based on the Fifield case, if the employee works one year and eleven months and then leaves, the agreement would still not be enforceable.
The same rule would apply if you ask an employee to sign a non-compete during his or her employment. After that agreement is signed, the employee has to work an additional two years for the agreement to be enforceable, provided that the only consideration for the agreement is employment.
And that is the loophole that the court has left employers: providing some other consideration besides employment. For example, if a company gives a real (not an illusory or nominal) signing bonus, the employer would have a fairly good argument that it has provided adequate consideration to enforce the agreement. Perhaps a promotion would work as well, although that is more problematic since a promotion is still basically employment. After promoting its employee, nothing prevents the company from then firing the employee, if employment is at will. If, on the other hand, the employee was hired for a particular amount of time (at least two years) during which he or she could not be fired without cause, that could itself be sufficient consideration since it would arguably constitute two years of employment even if the employee quit early.
Another, albeit untested possibility would be to draft the restrictive covenant in such a way that the post-employment restriction would be equal to the length of time that the employee actually works. So if the employee leaves after one year, then she or he is restricted for one year. To be enforceable, the restriction would likely have to have some maximum period of time. Probably two to three years at the most.
As you can see, this new ruling has significant implications. At the very least, every company should carefully review its non-compete and non-solicitation agreements to see if they are supported by adequate consideration. If they don’t, then you should discuss with your attorneys how best to rectify the situation. You certainly do not want your former employees going to competitors singing, “I can’t get no consideration.”
