“What is adequate consideration for a restrictive covenant?” has been a question that has been plaguing the Illinois courts.
Consideration in contract law is simply the exchange of one thing of value for another. In order for a contract to be enforceable, there must be adequate consideration. Post-employment restrictive covenants (non-compete agreements) are carefully scrutinized under Illinois law because they operate as partial restrictions on trade.
What is adequate consideration for a non-compete agreement in Illinois? In 2013, The Illinois Appellate Court held and concluded that mere employment constitutes adequate consideration for a restrictive covenant only if the employee remains employed for two years. Fifield v. Premier Dealer Servs., Inc., 373 Ill.Dec. 379, 993 N.E.2d 938 (Ill.App. 1st Dist. 2013). If an employee is employed for less than two years after signing the non-compete, there must be additional consideration other than simply continued employment. This rule has come to be known as the “Bright-Line Rule.”
The Federal Courts in Illinois, however, have not embraced the two year employment requirement. Rather, the U.S. District Courts will take into consideration other factors. In Allied Waste Services of North America, LLC v. Brian Tibble, 2016 WL 1441449 (N.D.Ill. April 7, 2016), the Federal Judge held that determination of whether an at-will employee’s continued employment after signing a restrictive covenant constitutes sufficient consideration to support the restrictive covenant is not to be made under the Bright-Line Rule requiring continued employment for at least two years, but rather, by a case-by-case analysis considering the totality of circumstances.
In Airgas USA LLC v. Adams, 2016 WL 3536788 (N.D.Ill. June 27, 2016), Timothy Adams, a former employee of Airgas USA LLC (“Airgas”), resigned from Airgas approximately eighteen months after signing a non-compete agreement and began working in a similar sales capacity for a competitor of Airgas. Adams allegedly contacted two of Airgas’ customers in violation of his non-compete agreement. Adams argued that because he was not employed by Airgas for two years after signing his non-compete, there was not sufficient consideration to support the non-compete agreement. The trial court in Airgas held that employment, even for a period of less than two years could be sufficient consideration for a non-compete and recognized a “totality of the facts and circumstances” test.
Because the Illinois Supreme Court has not yet ruled on the issue of adequate consideration, Federal Courts are faced with making a “predictive judgment as to how the Supreme Court of the State would decide the matter if it were presently to that tribunal.” Allstate Ins. Co. v. Menards, Inc., 285 f.3d 630,635 (7th Cir. 2002). Of the five federal courts in the Northern District of Illinois, four have predicted that the Illinois Supreme Court will reject the “Bright-Line Rule” and instead would analyze each issue on a case-by-case basis and consider the totality of circumstances. For example, courts may consider the employee’s raises, bonuses, increased responsibilities, acquisition of confidential information through their employment and whether the resignation was voluntary.
So, as an employer, what can you take away from this?
- Provide additional compensation to employees who sign a restrictive covenant such as a cash payment, stock options, assisting with dues or obtaining credentials, raises, etc. in order to ensure a court finds there was adequate consideration. Relying on the employee’s employment alone is risky considering the law is currently unsettled.
- Have your employment contracts and restrictive covenants reviewed annually by an attorney to ensure that you are compliant with current and constantly changing Illinois laws.
- If you wish to enforce a non-compete for an employee who has worked for less than two years, consider raising your claim in Federal Court.
The information in this article is for informational purposes only and does not constitute formal, legal advice. Contact Roberts McGivney Zagotta LLC to discuss, review and revise your company’s employment contracts and restrictive covenants.