The “bright line” rule for the adequacy of non-compete agreements in Illinois first announced in Fifield v. Premier Dealer Servs., Inc., just became a bit hazier for parties evaluating the enforceability of their restrictive covenants.
Last week, a federal district court judge applying Illinois law declined to void a non-compete agreement on the basis that the at-will employment relationship that was the consideration for the restrictive covenant lasted less than two years. Adopting the reasoning of three of the four federal court judges in the Northern District of Illinois that have addressed the issue, the court, in R.J. O’Brien & Associates v. Williamson,1 concluded that the Illinois Supreme Court would reject a two-year bright line rule for the adequacy of consideration required for a non-compete agreement to be enforceable.
In R.J. O’Brien & Associates, the plaintiff employer was a large independent futures brokerage and clearing firm. It offered the defendant a position on a team that executes trades on behalf of commodity funds and other brokers. The defendant was offered an at-will position contingent on the execution of an agreement that included non-solicitation and non-compete restrictions.
About a year after accepting employment including the restrictive covenants, the defendant quit and immediately violated those restrictions, allegedly soliciting the plaintiff’s employees and customers. The defendant moved for summary judgment asserting that under Illinois law, restrictive covenants in at-will employment relationships are unenforceable when the consideration for them is employment for fewer than two years.
Rejecting the employee’s argument, the court concluded that the Illinois Supreme Court would not adopt a bright-line rule but instead is likely to adopt a fact-specific test in evaluating the sufficiency of consideration for restrictive covenants. The court noted that the plaintiff employer did not do anything to alter the terms of the defendant’s employment. Instead, the defendant simply opted for what he perceived to be greener pastures. While employed, the defendant received the commissions due to him under his agreement and received a “generous” salary. Further, the court noted that the employer was subjected to potential liability for rules violations and trading errors during the course of the employment relationship.
Finally, in evaluating the adequacy of the consideration, the court concluded that the nature of the remedy sought by the employer was also significant. In particular, the court noted that the employer was seeking damages rather than injunctive relief. The court held that where a party seeks damages rather than equitable relief, the adequacy of consideration required to support the contract is minimal.
Restrictive covenants, properly drafted, can be effective tools in an enterprise’s risk management portfolio. However, the adequacy of consideration required to support a non-compete is an open question in Illinois and will remain so until addressed by the Illinois Supreme Court. But R.J. O’Brien & Associates identifies factors, in addition to duration of employment, that should be considered when evaluating the adequacy of the consideration including:
- the facts and circumstances resulting in the termination of employment (voluntary or involuntary);
- whether there were changed circumstances in the employment relationship;
- whether the employer had met its obligations;
- what potential liabilities to third parties the employer assumed through the employment;
- what protectable interests the agreement was designed to address (are the restrictions tailored to the employee’s position); and
- whether the remedy sought for breach was tied to the damages flowing from a breach.
Additionally, because damages from a breach of a non-compete can be challenging to establish, one thing employers should consider is incorporating a provision that provides a formula that approximates the consequences of a breach Employers (and employees considering a move) should consider revisiting their restrictive covenants with these factors in mind.