One of the continuing themes we’ve stressed here at Suits by Suits is that a tsunami is brewing that will change the national landscape regarding whether and how employers can enforce covenants not to compete contained within an employee’s employment agreement. (We call this, with typical lawyerly restraint, “The State-by-State Smackdown.”)
Last week, Illinois got in on the act. Read on….
To bring you up to speed: California law essentially prohibits the enforcement of virtually all covenants not to compete; Massachusetts is considering a law that would scale back the length of enforceable noncompete clauses; and New York courts have refused to defer to California courts out of deference to New York’s policy in favor of noncompetes, all within the past few months.
Last week, an Illinois state appellate court weighed in on this rapidly-changing landscape with its opinion in Fifield v. Premier Dealer Services, upholding a trial court opinion which found that the nonsolicitation and noncompetition provisions contained in Eric Fifield’s employment contract were not enforceable under Illinois law.
The case presented a question we haven’t seen in other jurisdictions (yet): whether a former employee can use the length of his employment to challenge the adequacy of consideration and hence the enforceability of noncompete clauses. Eric Fifield was a long-standing employee of Great American Insurance Company, working for a a Great American subsidiary, Premier Dealership Services (PDS), which developed, marketed, and sold vehicle after-market insurance programs. In October of 2009, Great American spun off PDS, selling it to a third-party named “Premier Dealer Services, Inc.” The new entity fired and re-hired Fifield, subject to the following clauses in his employment agreement
"Employee agrees that for a period of two (2) years from the date Employee's employment terminates for any reason, Employee will not, directly or indirectly, within any of the 50 states of the United States, for the purposes of providing products or services in competition with the Company (i) solicit any customers, dealers, agents, reinsurers, PARCs, and/or producers to cease their relationship with the Company … or (ii) interfere with or damage any relationship between the Company and customers, dealers, agents, reinsurers, PARCs, and/or producers … or (iii) … accept business of any former customers, dealers, agents, reinsurers, PARCs, and/or producers with whom the Company had a business relationship within the previous twelve (12) months prior to Employee's termination."
Three and a half months later, Fifield resigned from PDS and began working for a competitor. Fifield and his new employer filed a declaratory judgment action in Illinois state court seeking a declaration that the above-quoted noncompete and nonsolicitation provisions were invalid and unenforceable; PDS counterclaimed for injunctive relief, seeking to enforce the noncompete. The gravamen of Fifield’s argument is that the clauses were not supported by adequate legal consideration because Fifield only worked for PDS for three and a half months. PDS argued that the consideration was Fifield’s employment itself, because he had been terminated by Great American and re-hired by PDS.
The Illinois appeals court sided with Fifield, holding that Illinois law requires that an employee must have two years or more of continued employment in order for an employer to enforce a noncompete agreement against the employee, even if the employee resigns voluntarily. One obvious question the Illinois courts will now face is whether this general rule applies even in the context of bad faith; that is, where the employee resigns in order to steal secrets and take them to a competitor. We’ll continue to monitor the landscape, as always.