A Recent Ruling that Illinois Non-Compete Agreements for Employees With Less than Two Years of Service Are Not Enforceable May Impact Purchases and Acquisitions of Existing Businesses
Many practitioners and Employers in Illinois are now familiar with the fact that an Illinois Appellate Court recently ruled that non-compete agreements may not be enforceable against employees who are employed less than two years after signing a restrictive covenant. In Fifield v. Premier Dealer Services, the First District Appellate Court held that in order to be enforceable, a non-compete agreement must be accompanied by adequate consideration. The court found unless the employee works continuously for at least two years after signing the non-compete, in the absence of other consideration, the non-compete will be unenforceable. In the wake of this ruling, Illinois businesses and employers should certainly consider whether their current covenants not to compete are sufficient to protect their interests when temporary or short term employees leave or are terminated. However, because the Fifield case arose out of the purchase of an existing business, those involved in acquisitions or mergers of existing businesses should also carefully consider the impact of this ruling in structuring the transition of any of the target’s existing employees and management personnel.
In Illinois, a non-compete provision in an employment contract, a form of restrictive covenant, is not enforceable without adequate consideration for the restriction. Until recently, most employers and their counsel simply assumed that the promise of subsequent employment and the actual payment of salary or wages to an “at will employee” was sufficient consideration to make a covenant not to compete enforceable. In connection with the prospective purchase of a business, frequently a Purchaser would opt to make “new offers” of employment to key employees of the Seller, accompanied by a new covenant not to compete. It was generally assumed that this approach would provide the Purchaser with better protection against the acquired employees resigning shortly after the closing, and then immediately becoming employed by a competitor. However, in the wake of Fifield, these measures alone may no longer be viable. In Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, the court found that even where the employee voluntarily separates from his Employer, an employment term of less than two years alone will not likely be considered sufficient consideration. The court also made clear that in an acquisition of an existing business, making “new” offers of employment to the Seller’s existing employees, or even negotiating the terms of the duration and scope of the new covenant with those employees, will not necessarily satisfy the consideration requirement.
In Fifield, Eric D. Fifield worked for a company that was purchased by the defendant company, Premier Dealer Services, Inc. (Premier). As part of the sale, he was notified that his employment would be ending. Subsequently, Premier made a new offer of employment to Fifield that contained the non-compete agreement, which became the focal point of the litigation. Id. at ¶ 3.
The new non-compete provided that if Fifield’s employment was terminated for any reason within two years, he would be restricted in his ability to compete with Premier. Fifiled negotiated with Premier and modified the agreement so that the non-compete provision would not apply if Fifield was terminated without cause within the first year of his employment. Id.
However, three months later, Fifield resigned and went to work for Enterprise Financial Group (EFG). He and his new employer, EFG, filed a declaratory judgment action seeking a judicial determination that the Premier purchaser’s non-compete he had signed was unenforceable. Id. at ¶ 5.Primarily because the length of his service under the new employment was less than two years, the trial court order stated: “the non-solicitation and non- interference provisions found within [the agreement] are unenforceable as a matter of law for lack of adequate consideration.” Id. at 6.Although the parties had litigated more issues than the bargained for consideration, or lack thereof, the Illinois First District Appellate Court stated clearly at the outset of its opinion that “the only issue before this court in this case is whether there was adequate consideration to support the restrictive covenants in the agreement.” Id. at ¶13. In analyzing what constitutes consideration generally, the court said: “[u]nder Illinois law, continued employment for a substantial period of time beyond the threat of discharge is sufficient consideration to support a restrictive covenant in an employment agreement.” Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 728 (2008). Fifield, at ¶14.
The court explained that the rational behind requiring extended employment before a postemployment restrictive covenant can be enforceable is that, in the context of at will employment, the mere “promise” of continued employment is illusory. Put differently, an employer telling its at-will employee that they should sign a non-compete because they “promise” to continue employing that employee is as far as the court was concerned, a clever parlor trick. Fifield, at ¶14. To arrive at its conclusion that at least two years of continuous service would be required to constitute adequate consideration for a postemployment restrictive covenant, the court analyzed Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 726 (2008). In Brown, the plaintiff purchased the defendant’s employer. As part of the purchase and as a condition of the defendant’s continued employment, the defendant was required to sign a postemployment restrictive covenant. Seven months passed and the defendant resigned. The court held that the seven months, which had elapsed between the signing of the covenant and the resignation, constituted insufficient consideration and therefore the non-compete was unenforceable. Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 726 (2008).Notably, the Brown court held that the defendant’s resignation was not material to the analysis. Instead, the court held that in the absence of some clearly defined consideration for the restrictive covenant it was unenforceable for a failure of consideration. Id. at 729. The Fifield Court’s refusal in connection with a business purchase to recognize any distinction as to whether the covenant is a condition of “continued employment” or instead part of a “new offer” of employment should caution prospective purchasers to structure an acquisition carefully to address the post-closing enforceability of any covenants not compete that are intended to apply to Seller’s employees. In Fifield the employer attempted to distinguish its situation from the circumstances in Brown, where the employee was already employed when the agreement was signed. Fifield had technically not yet become an employee of the new employer when he signed the restrictive covenant. However, the court held that the distinction between pre and post-hire restrictive covenants was insignificant to the instant case.On its face, Fifield makes clear that employment of less than two years jeopardizes the enforceability of any convenant not to compete. However, we think that an important but far less obvious aspect of this case is the warning to those acquiring a business with an existing workforce to carefully consider how to insure that any existing or new covenants will be enforceable after the closing.Thus, both present employers and those who seek to merge with or acquire businesses must carefully evaluate the restrictive covenants they have or do use to protect their interests against short term employees. What once may have been an adequate tool to protect employer interests may no longer be effective. Employers should be abundantly cautious and should consider restructuring their non-compete agreements so as to more adequately comply with the First District Appellate Court’s ruling in Fifield.