A recent decision from the Northern District of Illinois favors the “totality of circumstances” approach to evaluating the sufficiency of consideration necessary to support a restrictive covenant
Another judge from the Northern District of Illinois has thrown his hat into the ring in the debate over what is required to make a non-compete agreement enforceable in Illinois.
Several Illinois appellate courts have found that two years of continued employment are required when the only consideration for a non-compete is continued employment. However, the Illinois Supreme Court has not addressed this issue, and most of the federal courts that have considered it have concluded that there is no “bright line” basic standard for the adequacy of consideration. In Allied Waste Services of North America v. Tibble, 2016 WL 1441449 (N.D. Ill. 2016), Judge Harry Leinenweber joined the majority of other federal courts and declined to follow the two-year bright line rule announced in Fifield v. Premier Dealer Services, Inc.
Siding with four of the five judges in the Northern District of Illinois (and one from the Central District of Illinois) who have addressed this issue, Leinenweber concluded that the Illinois Supreme Court will reject such a bright line approach in favor of a more fact-specific approach.
In Allied Waste, the employee, Tibble, was originally hired as a major account executive. Three years later, he was promoted to regional national account executive and, with that promotion, signed a confidentiality, non-solicitation and non-competition agreement. Tibble was later promoted to sales manager and signed an updated confidentiality, non-solicitation and non-competition agreement. Along with the promotion to sales manager, Tibble’s compensation was changed so that his wages no longer included a commission, but he received an increase in his base salary and an increase in his potential bonus.
Under Tibble’s updated agreement, he agreed not to render a range of services on behalf of Allied Waste’s competitors within his area of responsibility for 12 months after his termination of employment. In addition, he agreed not to use or disclose Allied Marketing’s confidential information for five years after his termination of employment.
However, 15 months after signing the updated agreement, Tibble resigned and went to work for a competing waste management company as a sales manager. Allied Waste filed a complaint against Tibble for breach of the updated agreement. Despite the fact that Tibble quit to compete, he moved to dismiss the complaint, asserting that the updated agreement was not supported by adequate consideration because he had only been employed by Allied Waste for 15 months after he entered into the agreement.
Joining four other judges in the Northern District of Illinois, the Allied Waste court rejected the two-year bright line approach from Fifield, stating that while Illinois courts have found two years of continued employment to be sufficient consideration, that “is very different than saying that anything less than two years is automatically insufficient.”
Instead, the Allied Waste court said that an evaluation of the adequacy of consideration is to ensure that employers cannot lock an at-will employee into a restrictive covenant and then fire the employee shortly thereafter, rendering the consideration of future employment “illusory.” However, this goal may be accomplished through 15 months or 24 months of employment depending upon other circumstances surrounding the signing of the restrictive covenant, the conditions of continued employment and the termination of the employment relationship, among other things.
Denying the motion, the Allied Waste court found that historically Illinois courts have taken a more fact-specific approach to evaluating adequacy of consideration. For example, courts have considered such things as raises and bonuses, whether termination of employment was voluntary and whether the employee received increased responsibilities after signing the restrictive covenants. Applying this more flexible “totality of the circumstances” approach, the court found that Allied Waste had sufficiently alleged adequate consideration, i.e., when Tibble signed the agreement, he received a promotion and an increase in pay. In addition, the Allied Waste court found that Tibble’s voluntary resignation was relevant to the analysis of whether a shorter length of employment was sufficient consideration. As a result, Tibble’s motion to dismiss was denied.
The takeaway for an employer is that it is risky at this time to rely exclusively on continued employment as the consideration for a non-compete for at-will employment. As a result, employers should consider the benefits of providing additional consideration to the employee upon agreeing to restrictive covenants and specifically identify the additional consideration provided in the restrictive covenant agreement. That additional consideration may take many forms, such as a change in position and responsibilities, a change in compensation, a change in benefits and or the payment of some amount of money at the time of signing, among other things. The best practice remains to tailor the restrictions to the employer’s protectable interest and design consideration in addition to continued employment that fits the particular circumstances of both the employee and employer.