In a decision handed down June 24, 2013, the Illinois Appellate Court, First District, found a restrictive covenant unenforceable due to lack of adequate consideration. Although this is not the first time an Illinois court has held that there must be at least two years of continued employment to constitute adequate consideration to support a restrictive covenant, the ruling in this case was remarkable because:
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The employee signed the restrictive covenant at the time he commenced employment. Yet the court rejected the employer's argument that the offer of employment was itself adequate consideration;
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The restrictive covenant was the product of negotiations between the employee and employer, and included a proviso that the nonsolicitation and noncompetition provisions would not apply if the employee was terminated without cause during the first year of his employment. Yet the court found this protection was insufficient consideration; and
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The employee voluntarily resigned after three months' employment; however the court relied on prior decisions holding that an employee's voluntary resignation, as opposed to 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 will not enforce the restrictive covenant until at least two years' 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. Some alternative approaches may be:
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offer something (other than employment) of value, such as a cash bonus or stock award, in exchange for the restrictive covenant;
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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 the employer with less protection.); or
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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.
If you wish to learn more about this decision or to discuss how it may impact you, please contact the author Steven L. Brenneman, sbrenneman@fordharrison.com, 312-960-6111, or the FordHarrison attorney with whom you usually work.