Fifield v. Premier Dealer Services. Illinois Two-Year Rule for non-compete agreements.
Non-Compete Covenant found unenforceable. Employers Non-Compete Covenant was not supported by Adequate Consideration where employment period did not exceed two years.
It is not uncommon for employers and employees to enter into employment agreements containing a restrictive covenant. Typical restrictive covenants include confidentiality agreements, non-solicitation agreements, and agreements not to compete. Unfortunately, all too often these agreements fail to set forth separate and specific consideration for the restrictive covenant provisions. Instead they rely upon a general recitation that the promise to employ is the consideration given for all of the promises or agreements extended by the employee. Employers need to be mindful that a restrictive covenant must be supported by consideration in order to be enforceable. In the context of an employment agreement, the promise to employ – by itself – may be insufficient.
The case of Fifield v. Premier Dealer Services, 2013 IL App (1st) 120327, is enlightening on this topic. The Fifield decision is a ruling by the Illinois Appellate Court, First District. Justice Cunningham, with concurring opinions from Justice Hoffman and Delort, followed the Illinois rule that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant. The facts of the case are reasonably straight forward. In their simplified form, Fifield was employed by Great American Insurance Company (Great American) and assigned to work exclusively for Premier Dealership Services (PDS). PDS was purchased by Premier. Following the purchase of the business, Premier made an offer of employment to Fifield conditioned on his agreement to sign an “Employee Confidentiality and Inventions Agreement” which included nonsolicitation and noncompetition provisions. Under the agreement, Fifield was prohibited, for a period of two years from his termination, from directly or indirectly competing with his employer. Specifically, he was prohibited from soliciting customers, prohibited from interfering with the Employer’s customer relations, and prohibited from accepting business from customers which Fifield has contact with through the Employer. Fifield negotiated the inclusion of an additional provision which stated that the nonsolicitation and noncompetition provisions would not apply if Fifield was terminated without cause during the first year of his employment. Fifield signed the agreement on October 30, 2009, began his employment on November 1, 2009, and ultimately resigned his position on February 12, 2010. Thereafter, he went to work for one of Premier’s customers.
The dispute was presented to the trial court through a complaint for declaratory judgment. This is an action where the court is asked to determine the rights and liabilities of parties locked in a dispute. In this way, the court is able to state the rights and liabilities of parties under the terms of an agreement.
Postemployment restrictive covenants are carefully scrutinized by Illinois courts because they operate as partial restrictions on trade. Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc., 378 Ill. App. 3d 437, 447 (2007). In order for a restrictive covenant to be valid and enforceable, the terms of the covenant must be reasonable. Id. However, before even considering whether a restrictive covenant is reasonable, the court must make two determinations: (1) whether the restrictive covenant is ancillary to a valid contract; and (2) whether the restrictive covenant is supported by adequate consideration. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc., 292 Ill. App. 3d 131, 137 (1997). The only issue before this court in this case is whether there was adequate consideration to support the restrictive covenants in the agreement. Under Illinois law, continued employment for a substantial period of time beyond the threat of discharge is sufficient consideration to support a restrictive covenant in an employment agreement. Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 728 (2008). Illinois courts analyze the adequacy of consideration in the context of postemployment restrictive covenants because it has been recognized that a promise of continued employment may be an illusory benefit where the employment is at-will. Id. Generally, Illinois courts have held that continued employment for two years or more constitutes adequate consideration. Id. The restrictive covenant will not be enforced unless there is adequate consideration given.
Fifield resigned his employment approximately three months after he started with Premier. Because Fifield’s post contract employment was substantially less than two years, the court found that the restrictive covenant was not supported by consideration and could not be enforced. This rule is maintained even if the employee resigns on his own instead of being terminated. Diederich, 2011 IL App (5th) 100048; Brown, 379 Ill. App. 3d at 729. Without the requisite two years of at-will employment, the covenant was not supported by adequate consideration under Illinois law.
Justice Cunningham followed and clarified Illinois’ standing rule that relatively short periods of at-will employment do not constitute adequate consideration for the purpose of enforcing restrictive covenants contained in those employment agreements. Employers are admonished to pay separate and distinct consideration for their restrictive covenants or be subject to losing the value of the covenant if the employment relationship does not last for a period exceeding two years. Bryan Bagdady is a business trial attorney with over thirty years of litigation experience. He has experience in litigating complex business disputes, intellectual property ownership disputes, non-compete agreements, and many different types of business and commercial litigation disputes including lawsuits between businesses or between shareholders and owners of the same business. You can contact Bryan by calling (630) 778-9600 or by email at Bryan@celsinfo.com. You can also contact him online here.