The Illinois Appellate Court recently held that the promise of new employment alone provides insufficient consideration for post-employment restrictive covenants, such as non-compete and non-solicitation agreements, unless the new employee continues his or her employment for at least two years.
The new hire in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, signed an “Employee Confidentiality and Inventions Agreement” that included two-year non-compete and non-solicitation provisions. The Agreement stated that the restrictive covenants would not apply if the employee were terminated without cause during the first year of employment. The employee quit three months later, went to work for a competitor, and filed suit with his new employer seeking a declaration that the Agreement’s restrictive covenants were invalid and unenforceable.
The trial court issued a declaratory judgment invalidating the restrictive covenants. The appellate court affirmed after declining to draw a distinction between restrictive covenants signed by new employees before beginning employment and those signed by current employees based on promises of continued employment. The court first held that the covenants at issue qualified as post-employment restrictive covenants because, although signed before the start of employment, they applied only to the employee’s post-employment activities.
The court then turned to whether the Agreement provided adequate consideration for the post-employment restrictive covenants and concluded that it did not, holding “Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant.” The court further stated that the two-year rule applied even if the employee voluntarily resigned. Because the employee resigned only three months after signing the Agreement, even taking into account the Agreement’s promise to suspend the restrictive covenants if the employee were terminated without cause within one year, the court held that employment of less than two years was inadequate consideration and that the restrictive covenants were unenforceable.
While the Illinois Supreme Court may ultimately review the appellate court’s ruling in Fifield, the appellate court noted that its approach was consistent with holdings in federal courts such as the Seventh Circuit and the Northern District of Illinois. In light of this decision, Illinois employers should strongly consider reexamining their approach when asking new employees to sign agreements containing restrictive covenants. Should the Fifield ruling stand, employers will have to provide new employees with some form of additional consideration—such as sufficiently substantial cash payments or possibly participation in bonus or other programs—to ensure the restrictive covenants are supported by adequate consideration. Alternatively, employers will have to be prepared to accept non-enforceability of such covenants unless the employee has been employed for at least 2 years before resignation or termination of employment.