On June 24, 2013, the Illinois Appellate Court for the First District (encompassing Cook County and Chicago) decided Fifield v. Premier Dealer Services, Inc., Case No. 1-12-0327 (June 24, 2013). The court found that Premier Dealer Services’ (Premier) offer of at-will employment at the onset of the plaintiff’s employment constituted insufficient consideration to support nonsolicitation and noncompetition provisions contained in his employment contract, but it would have constituted adequate consideration if his employment had continued for two years. The court relied on prior authority, which held that when a current employee signs a restrictive covenant and receives nothing more than continued at-will employment in return, this only constitutes adequate consideration if the employment ultimately continues for a significant period.
Facts of the Case
The plaintiff was a long-standing employee of a Great American Insurance Company subsidiary, which marketed finance and insurance products to the automotive industry. In October of 2009, Great American sold the subsidiary to Premier, a separate and distinct company that developed, marketed and administered a variety of after-market automotive products and programs. As a result, Great American informed the plaintiff that his employment would end as of October 31, 2009. Premier offered the plaintiff employment late in October 2009, but required him to execute its “Employee Confidentiality and Inventions Agreement” that included two-year noncompetition and nonsolicitation covenants.
Three and a half months later, he resigned from Premier and began working for a competitor. The plaintiff and his new employer then filed a complaint in the Circuit Court of Cook County for declaratory relief that the noncompetition and nonsolicitation provisions in the agreement were invalid and unenforceable. Premier countersued for injunctive relief, seeking to enforce the noncompete provision. The plaintiff’s main argument was that the restrictive covenants were not supported by adequate legal consideration because he only worked for Premier for three and a half months. In response, Premier argued that the consideration was his employment itself, because he had been terminated by Great American and re-hired by Premier. The circuit court sided with the plaintiff and his new employer and invalidated the restrictive covenants for lack of consideration. The appellate court affirmed.
Illinois courts have long held that “substantial continued employment” can constitute sufficient consideration for an enforceable restrictive covenant. In determining what constitutes “substantial” continued employment, Illinois courts have generally found that terms of two years or greater constituted adequate consideration while terms of less than one year have constituted insufficient consideration. However, there have been exceptions and Illinois courts have been reluctant to adopt a strict “numeric formula” for determining the necessary duration of continued employment. For example, in LKQ Corp. v. Thrasher, 785 F. Supp. 2d 737, 744 (N.D. Ill. 2011), the court refused to apply a bright-line two year test and found that 12 months of continued employment, which ended with the employee quitting as opposed to being fired, constituted the necessary “substantial period” of continued employment to act as consideration in support of a restrictive covenant.
Prior Illinois cases have also held that when a restrictive covenant is contained in the initial contract of employment, the job itself serves as sufficient consideration for the covenant. Smithereen Co. v. Renfroe, 325 Ill. App. 229, 244 (Ill. App. Ct. 1st Dist. 1945) (reviewing Illinois law and finding that restrictive covenants entered into at the onset of an at-will employment relationship do not fail for want of consideration because the employment itself is sufficient); Abel v. Fox, 274 Ill. App. 3d 811, 820 (Ill. App. Ct. 4th Dist. 1995) (same; “a covenant in such a situation is not a "naked" restraint on trade, but instead is merely ancillary to the primary purpose of the relationship: an employer-employee relationship.”). However, in Curtis 1000, Inc. v. Suess, 24 F.3d 941, 947 (7th Cir. 1994), the Seventh Circuit discussed the “illusory benefit” of the at-will employment relationship. In that case, the employee (Suess) entered into a restrictive covenant with his employer (Curtis 1000) at the commencement of employment, and was required to sign three subsequent and superseding noncompetition agreements. On none of these occasions did he receive any consideration for signing the document other than his retention as an employee. The Seventh Circuit concluded that “the new covenant was the modification of an existing contract and hence required consideration to be enforceable.” Curtis 1000 argued that adequate consideration was present in the form of the continued employment relationship after Suess’ execution of the final covenant. The Seventh Circuit agreed, finding that although the employment-at-will relationship could be terminated at any time after the execution of a subsequent agreement, when the employment relationship continues thereafter for a “substantial period” of time, consideration exists and the promise of continued employment is not illusory. Notably, the Seventh Circuit did not state that the commencement of employment itself was inadequate consideration to support a restrictive covenant.
The Appellate Court’s Analysis in Fifield
The Fifield court found that the fact that the employee resigned, as opposed to being terminated, was irrelevant for purposes of establishing adequate consideration. Likewise, the court deemed it irrelevant that the employer promised not to invoke the post-employment covenants if the employee was terminated without cause within the first year of employment.
The court implicitly rejected common law that, at the outset of the employment relationship, employment itself constitutes adequate consideration for post-employment restrictive covenants.See Restatment 2d of Contracts, § 188 (“When a restrictive covenant is contained in the initial contract of employment, the job itself serves as sufficient consideration for the covenant.”). Relying in part on its interpretation of Curtis 1000, the court found that “there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant.” (Fifield at 10). The court did not recognize any distinction between an initial restrictive covenant entered into at the outset of an employment relationship and a subsequent restrictive covenant or amendment entered into after the employment relationship has started.
This ruling, coupled with the court’s finding that the circumstances of the termination are irrelevant, arguably provides an employee with a two-year window to quit, prior to facing the ramifications of the previously agreed-upon contract, if the only consideration is the employment relationship itself and that relationship is “at-will.”
Implications for Employers
- The Fifield decision highlights the need for employers operating in Illinois to examine the adequacy of the consideration supporting their restrictive covenants. Because the Illinois Supreme Court has not examined the issue, it is still uncertain whether Fifield is contrary to other authority under Illinois law and will be modified or even rejected. However, at a minimum, currently there is a significant risk that less than two years of continued at-will employment, without more, is inadequate consideration to support a restrictive covenant under Illinois law. As a corollary, Illinois employees arguably can void the consideration for a restrictive covenant simply by quitting prior to the two-year anniversary of the agreement in question.
- Illinois employers should consider whether an additional benefit is necessary and sufficient to save future and existing restrictive covenants that rely on nothing more than at-will employment as consideration. Those employees who remain employed with a company for more than two years after the execution of the relevant restrictive covenant agreement do not appear to be at issue. However, for those employees who have been with a company for less than two years and for future employees, providing additional consideration above and beyond continued at-will employment may reduce the risk of nonenforcement. Illinois courts have recognized various forms of adequate consideration in the employment restrictive covenant area including, but not limited to: bonuses, stock options, additional vacation and other fringe benefits. See First Health Grp. Corp. v. National Prescription Adm’rs, Inc., 155 F. Supp. 2d 194, 299 (M.D. Pa. 2001) (applying Illinois law to covenant issues; finding stock options adequate consideration for restrictive covenant); Southern Illinois Medical Business Assocs. V. Camillo, 190 Ill. App. 3d 664 (5th Dist. 1989) (finding $8,000 in 1989 to be adequate consideration); Midwest Tel., Inc. v. Oloffson, 298 Ill. App. 3d 548 (3d Dist. 1998) (finding specified pay raises and guaranteed terms of employment sufficient consideration); H. B. G. Corp. v. Houbolt, 51 Ill. App. 3d 955, 958 (Ill. App. Ct. 3d Dist. 1977) (finding salary of $25,000 per year and “various fringe benefits” sufficient consideration). One court has indicated that “In the context of postemployment restrictive covenants, Illinois courts depart from the traditional rule that the law does not inquire into the adequacy of consideration, only its existence.” Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 728-729 (Ill. App. Ct. 3d Dist. 2008). Arguably, in context, this relates only to circumstances where at-will employment constitutes the consideration. Nonetheless, the less valuable such additional consideration is, the greater the risk that a court will deem it to be insufficient. Employers should speak with employment counsel to determine whether additional consideration would pass the Illinois courts’ scrutiny of “illusory benefits.”