Nov
25

New Illinois Appellate Court Decision Affects Enforceability of Non-Competes

When employers craft non-compete agreements for new hires and current employees alike, they are likely aware of the factors courts traditionally consider when analyzing their enforceability.  These factors include the length of the non-competition and non-solicitation, and the geographic restrictions.  But now, with the recent First District Illinois Appellate Court decision in Fifield and Enterprise Finance Group, Inc. v. Premier Dealer Services, Inc., 2013 IL App. (1st) 120327, employers must be cognizant of whether the non-compete agreement will be enforceable for a different reason.  The Appellate Court in Fifield invalidated a non-compete agreement on the basis that the employee had worked for the employer for less than two continuous years. The court in Fifield also disregarded any the distinction between consideration for new hire non-compete agreements and existing employee non-compete agreements.

In Fifield, Premier Dealer Services offered employment to Eric Fifield, contingent on Fifield signing an “Employee Confidentiality and Inventions Agreements” in which he agreed not to solicit business or seek employment with Premier’s competitors for a period of two years following the end of his employment.  Fifield, 2013 IL App. at ¶3.  This restriction was to be effective regardless of whether Fifield resigned or was terminated.  Id.  Fifield resigned from Premier after three months, and shortly thereafter began working for Enterprise Finance Group.  Id. at ¶4.  Enterprise brought a declaratory judgment action against Premier to declare that the agreement Fifield signed invalid and unenforceable.  Id. at ¶5.  Premier filed a counterclaim seeking to enforce the agreement.  Id.  The trial court found the non-competition provisions of the agreement were invalid as a matter of law for lack of adequate consideration.  Id. at ¶6.  Premier appealed, and the First District Appellate Court affirmed the trial court’s decision.  Id.

The Appellate Court explained that an offer of employment is not adequate consideration for a non-compete agreement.  An employee must have continued employment for two years or more for a restrictive covenant to be deemed enforceable without additional consideration.  Fifield, 2013 IL App. at ¶14. Here, Fifield worked for slightly more than 3 months before he resigned.  The Appellate Court stated that conditioning an offer of employment or continued employment on signing a non-competition or non-solicitation agreement is illusory consideration and was an unenforceable agreement.  Id. at ¶19.

According to the Appellate Court had Fifield worked for Premier for at least two years, the non-compete agreement would have been enforceable.  However, in reality an employer cannot rely on every new hire staying with the employer for two or more years for any number of reasons.  Fifield places employers on notice that Courts will closely scrutinize whether there is adequate consideration for non-competition and non-solicitation agreements.  Mere promise of employment will not reliably suffice.

Illinois is unique in that the courts look at consideration for restrictive covenants in employment agreements, while other states do not.  In light of Fifield, employers located in the First District of Illinois, which encompasses the Chicago area, will have to be more deliberate and creative in their consideration.  Multi-state employers with employees in Illinois may consider revising their non-compete agreements to include choice of law provisions for any disputes regarding the employment agreement be tried under the provisions of a different state’s law to avoid the evaluation of consideration.

Some options for employers solely within Illinois may include a variety of monetary incentives to signing the non-competition agreement for additional consideration beyond the promise of employment and/or continued employment.  This could be in the form of an immediate signing bonus or a year-end bonus or a combination of the two split between the time of signing the non-compete and the end of the year. A publicly traded company could give an employee stock options.  The stock options could be purchased and given to the employee at the time of the signing, or purchased at the time of signing by the employer but held for certain amount of time before they vest to the employee while accumulating earnings and dividends.

Unfortunately, no one yet knows what type of consideration the Illinois courts will deem adequate in light of this new case, and it will inevitably be litigated.  The Illinois Supreme Court denied the employer Enterprise’s Petition for Writ of Certiorari on September 25, 2013; it remains to be seen if the First District’s decision in Fifield will be adopted by other Appellate Districts.

Laura Platt

Laura Platt

Laura Platt is an associate licensed to practice in Illinois and Wisconsin and works both in the firm's Libertyville and Milwaukee offices. She focuses her practice on medical malpractice defense, insurance defense and employment law.

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