Jul 16, 2016

What consideration must Illinois employers give to ensure their restrictive covenants are enforced?


Illinois employers should generally be aware that postemployment* restrictive covenants are enforceable only where they are reasonable in geographic and temporal scope and necessary to protect a legitimate business interest. The restriction is reasonable if it (1) is no greater than is required for the protection of the employer’s legitimate business interest, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.

However, before analyzing the reasonableness of the covenant, a Court must make two determinations. First, the Court must find that the covenant is ancillary to a valid contract or valid relationship and subordinate to the main purpose of the contract. Second, the Court must determine whether there is adequate consideration to support the covenant. The “adequate consideration” requirement has in recent years seen some development in the courts.

What exactly is “adequate consideration” for a restrictive covenant? 

The short answer, according to an oft-cited 2013 Illinois Appellate Court decision, is two or more years of continued employment.  In Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, an insurance salesman accepted an employment offer on the condition that he sign a non-compete and non-solicitation agreement. However, the employee voluntarily resigned after just three months and began working for a competitor. The employer filed suit alleging violation of the restrictive covenant. The trial court held that the restrictive covenant was unenforceable as a matter of law for lack of adequate consideration. On appeal, the Appellate Court analyzed several prior Illinois cases and found that those decisions are consistent in holding two years of continued employment to be “adequate consideration” for a restrictive covenant.  The rule is maintained even if the employee voluntarily resigns before the end of the two-year period.  In other words, the fact that an employer is ready, willing, and able to provide continued employment but for the employee’s resignation does not amount to any consideration at all.  This rule reflects the policy that the promise of continued future employment is often illusory where the employment relationship is at-will.

Several Illinois decisions in the last three years have helped put Fifield into perspective for employers. In Prairie Rheumatology Associates v. Francis, 2014 IL App (3d) 140338, a rheumatology practice sued a former physician to enjoin her from taking its current patients and from practicing within a 14-mile radius under a restrictive covenant. The physician left the practice after 19 months. The Appellate Court held that the 19 month period was not substantial enough under Fifield to constitute substantial consideration. The Court also considered whether there was anything other than length of employment that may constitute “adequate consideration” for the restrictive covenant. In particular, the Court considered whether the practice helped the physician build her practice by providing her with assistance in obtaining hospital credentials, helping her pay hospital dues, or introducing her to patients and referral sources.  Although the employment contract included terms requiring the practice to provide these types of benefits, the employer had in fact not done so. Thus, consideration was not adequate, and the restrictive covenant was unenforceable.

In McInnis v. OAG Motorcycle, 2015 IL App (1st) 142644, the plaintiff was a Harley Davidson salesman who resigned after three years with the defendant dealership to work for a competitor. After just one day on the new job, the plaintiff contacted his former employer and asked for his old position back. The defendant employer agreed to take the plaintiff back if he signed a confidentiality and non-compete agreement. The plaintiff agreed, and the defendant agreed to waive its 90-day trial period applicable to new hires before they are eligible for benefits. 18 months later, the plaintiff voluntarily resigned. The plaintiff then filed a declaratory judgment action alleging that the restrictive covenant was unenforceable for lack of adequate consideration. The defendant employer filed a counterclaim and motion for injunctive relief to enforce the restrictive covenant. Following an evidentiary hearing, the trial court found no evidence of additional consideration beyond 18 months of continued employment. The consideration was thus inadequate under Fifield to support a restrictive covenant, and the Appellate Court affirmed.

The lack of direction from the Illinois Supreme Court after Fifield has caused some federal district courts sitting in Illinois to downplay the two-year rule. Federal district courts are not bound by state appellate court decisions. Where the state’s highest court has not spoken on the issue, federal courts must predict how the state’s highest court would rule. A district court in the Central District of Illinois, Cumulus Radio Corporation v. Olson, 2015 WL 643345 (C.D.Ill. Feb. 13, 2015), examined a pre-Fifield 2011 Illinois Supreme Court opinion, Reliable Fire Equipment Co. v. Arrendondo, 2011 IL 111871, which rejected a lower court’s “rigid and preclusive” test for the related issue of whether a legitimate business interest existed in favor of examining the totality of the facts and circumstances of the individual case. The district court predicted that the Illinois Supreme Court would likewise reject a rigid 2-year “bright line” approach to adequate consideration. The district court ultimately concluded that the employee’s 21 months of employment was adequate consideration to support a postemployment restrictive covenant where the employee had voluntarily resigned. The majority of recent district court decisions in the Northern District of Illinois have reached similar conclusions.

The present state of the law in the wake of Fifield can be summarized as follows: If employment lasted less than two years, then a restrictive covenant is unenforceable unless the employee received some degree of additional consideration beyond mere employment to make up the difference. Additionally, it is irrelevant to Illinois state courts that it is the employee who voluntarily resigns prior to completing two years of employment. However, federal courts in Illinois may take an employee’s voluntary resignation into account in determining whether the length of employment is sufficient to warrant a finding of “adequate consideration.”

Though the initial excitement caused by the Fifield two-year rule has been tempered somewhat by subsequent case law, its impact on employers survives. Employers cannot rely on the mere offering of employment or the promise of future employment to support their restrictive covenant. Employers should anticipate that employees will terminate their employment before accruing two years, and plan accordingly. Additional consideration beyond the promise of employment should be provided to the employee and clearly set forth in writing along with the restrictive covenant.  This additional consideration should be irrevocable and given either at the inception of employment or soon thereafter. Courts are not likely to side with an employer who is merely “ready, willing, and able” to give consideration but for the employee’s early resignation.

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*In case law, “postemployment” refers to the period in which the restriction applies (after employment terminates), not when the restrictive covenant was signed (i.e. after employment began).  Covenants entered into after employment begins must, like all additional contract terms, come with additional consideration.  Courts use the same analysis to determine if this “additional consideration” is also “adequate consideration.”