Employers seeking to require an existing employee to sign a restrictive covenant should consider current litigation trends surrounding what constitutes “adequate consideration.” Under the traditional rule followed by a majority of states, continued employment, standing alone, is adequate consideration for a restrictive covenant signed by an at-will employee. Several courts, however, have recently reexamined this issue, so employers must be aware of differences among the states as to whether some consideration beyond mere continued at-will employment is required.
Fifield v. Premier Dealer Services, Inc.
For example, the Illinois Appellate Court held in Fifield v. Premier Dealer Services, Inc., that, absent other consideration, at least two years of continued employment are required to constitute adequate consideration for a restrictive covenant. Under Fifield, the two-year rule applies regardless of whether the employee signed the restrictive covenant as a new or existing employee and regardless of whether the employee voluntarily resigned or was fired.
Although Fifield has been followed in subsequent Illinois state appellate decisions, multiple federal district courts in Illinois have refused to apply Fifield’sbright line, two-year rule. For example, last month, the U.S. District Court for the Northern District of Illinois concluded that the Illinois Supreme Court, which has not yet ruled on the issue, “would reject a two year bright-line rule in favor of a fact specific test.” Therefore, while “[t]wo years may be sufficient to find adequate consideration,” “it is not always necessary,” particularly when considering other factors, like compensation, raises and bonuses, and the terms of the employee’s termination.
Differing State Rules
Since Fifield, other state courts have similarly grappled with the issue of what constitutes adequate consideration for a restrictive covenant. Kentucky, North Carolina, and Pennsylvania courts each have issued decisions requiring some consideration beyond mere continued employment to enforce a non-compete.
In contrast, the Wisconsin Supreme Court recently held in Runzheimer Int’l, Ltd. v. Friedlen, that employers may require existing at-will employees to sign non-compete agreements without offering additional consideration beyond continued employment, although the court did not provide clear guidance as to the period of time that the employment must continue after the non-compete is signed.
Courts in New York and New Jersey have been relatively consistent regarding the required consideration for a restrictive covenant. Both states consider continued employment to constitute adequate consideration for a restrictive covenant signed by a current employee, provided that the employer forbears from discharging the employee for a “substantial” period of time.
What Employers Should Do Now
In light of this judicial focus on appropriate consideration and given the number of states that have recently addressed adequacy of consideration, employers nationwide should monitor this issue—even in states where the law is currently stable.
In terms of addressing this issue, employers should consider these options:
- Where there is a plausible nexus to a state with more favorable laws regarding the enforceability of restrictive covenants, include a choice-of-law provision designating the law of that state (e.g., the state where the employer’s headquarters is located or where the employee actually works). Courts generally enforce contractual choice-of-law provisions unless they violate the fundamental public policy of a state with a materially greater interest in the situation or where the parties and contract do not have a substantial relationship with the chosen state.
- Provide consideration in addition to an offer of employment or continued employment. Examples of such possible “additional consideration” include a cash payment, stock options, training, education, a raise, additional paid time off, guaranteed severance, or a promotion. In the absence of judicial guidance, it would be prudent to be as generous as possible and to provide consideration that is more than de minimis. Regardless of the “additional consideration” ultimately decided upon, the restrictive covenant itself should both explicitly recite the consideration provided to the employee for signing it and further provide that the employee acknowledges the consideration and its adequacy.
- Agree to continue the employee’s salary during any restricted period, thereby alleviating concern about consideration being illusory.
- Consider trying to evade consideration concerns entirely by having employees agree to a “garden leave” or “required notice” clause, rather than a traditional non-compete or non-solicit clause. Under such a provision, an employee is required to give advance notice of his or her resignation (e.g., 30 – 90 days) and, during the notice period, the employee remains on your payroll and owes you a fiduciary duty of loyalty (and therefore cannot work for a competitor during that period). Because the employee remains on the payroll and because garden leave provisions tend to be shorter in duration than traditional restrictive covenants, they are less onerous to the individual and thus more likely to be enforced.
A version of this article originally appeared in the Take 5 newsletter “In Today’s Environment, What Is “Adequate Consideration” for a Restrictive Covenant Signed by an Existing Employee?”