Continued Employment as Consideration for Execution of a Non-Compete Agreement

Recently, the First District Appellate Court issued a ruling in Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, regarding the length of continued employment necessary to constitute adequate consideration to support a non-compete agreement. Although this decision has received a great deal of press lately, it appears that the publicity is due to the fact that many attorneys were unaware of the existing law in this area, rather than due to the Fifield court setting any new precedent.

In Fifield, the employee signed a 2-year non-compete agreement upon starting work for Premier. Three months later, the employee quit and joined a competitor. Premier sued, seeking to enforce the non-compete. The appellate court first noted that, in Illinois, courts have generally held that continued employment of least two years is adequate consideration. The appellate court also noted that the Third District had held, in the case of Brown and Brown, Inc., v. Mudron, 379 Ill. App. 3d 724, 887 N.E.2d 437 (3rd Dist. 2008), that seven months of continued employment did not constitute adequate consideration. After disposing of Premier’s novel arguments for why the agreement should be enforced, the First District simply held that Fifield’s mere three months of employment (less than half the time in the Brown case) did not provide consideration for the execution of the non-compete.

It is important to note that the Fifield court did not hold that 2 years of continued employment is a bright line test for determining adequate consideration. In fact, the First District previously held, in the case of Woodfield Group v. DeLisle, 295 Ill. App. 3d 935, 943, 693 N.E.2d 464, 469 (1st Dist. 1998), that 17 months of employment constituted adequate consideration to support a restrictive covenant, and stated that the test for continued employment is not limited to “a numerical formula for determining what constitutes substantial continued employment.” Instead, “[f]actors other than the time period of the continued employment, such as whether the employee or the employer terminated employment, may need to be considered to properly review the issue of consideration.”

Thus, in the case of LKQ Corporation v. Thrasher, 785 F. Supp. 2d 737 (N.D. Ill. 2011), the court held, after applying the reasoning of DeLisle and examining in detail the history of Illinois decisions on the issue, that, based on the facts of the case, one year of continued employment constituted adequate consideration for the non-compete agreement at issue.

 

The Illinois Supreme Court, in the case of Melena v. Anheuser-Bush, Inc., 219 Ill. 2d 135, 847 N.E.2d 99 (2006), held that “just shy” of two years of employment after execution of an acknowledgement of an agreement to arbitrate employment disputes was sufficient consideration.

Also, in the case of Gallagher Bassett Services, Inc. v. Vacala, 2012 WL 6969297 (Ill. App. 2nd Dist. 2012), the court, following DeLisle, declined to follow a “numeric formula”, but nevertheless determined that 4 months of continued employment was inadequate consideration.

In sum, it does not appear that the Fifield decision has radically altered the law in this area. Rather, it merely confirms existing precedent – continued employment of more than two years clearly provides adequate consideration, and less than seven months of continued employment does not provide adequate consideration. For any employment in between seven months and two years, a court should apply the DeLisle reasoning in making a determination.

That said, many clients may not be aware that they are unlikely to be able to enforce a non-compete agreement against an employee who quits shortly after signing the agreement (and being given access to confidential information). The best way to avoid this problem is to provide some additional consideration to the employee at the time of signing, over and above the normal benefits of employment. The Brown case, in dicta, indicated that it could be possible for the employer to prove the existence of consideration for the restrictive covenant through the provision of such extra benefits.

Therefore, the best way to ensure that a non-compete agreement will be enforceable from the moment the employee signs the agreement is to provide some consideration over and above mere employment, such as a signing bonus. Although no case law has determined the minimum amount necessary to provide consideration to support a non-compete agreement, Illinois law in general holds that nearly any consideration is adequate.

In our practice, in providing consideration for a release of an employee’s discrimination claims at termination, we typically provide the employee a small severance amount, over and above accrued benefits, to make the release enforceable. Therefore, it could be persuasively argued that any signing bonus of say $500.00 or more, which is tied directly to the execution of the non-compete, is sufficient to support enforcement of the non-compete if the employee leaves in less than two years.

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