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Employer Beware: Restrictive Covenants

A case recently decided in the First District Appellate Court in Illinois (Cook County) will have a big impact on employers and employees who impose or are subject to restrictive covenants (non-solicitation and con-competition) clauses. Restrictive covenants in employment are disfavored in the law, but they will traditionally be enforced if they are reasonable in scope and supported by consideration. Employers use them to protect their businesses from employees who will gain sensitive trade information and develop key relationships while employed who might use the inside information and connections go compete with the employer.

Restrictive covenants are often used with employees in sales, management or key positions in which the employees are privy to financial, trade, customer and other sensitive information and who establish key connections with clients, customers and even other employees. Employees are required to sign them at the beginning of a new job, or sometimes after already employed, as a condition of the employment. They typically provide that the employee can not solicit other employees, customers and clients or compete in any other way with the employer/company during the term of employment and for a designated period of time in a designated geographical area after employment ends. The employer uses them to protect itself from the possibility that it will train and provide an employee with all the information and connections necessary to make the employee a dangerous competitor only to have the employee leave and to just that. For employees, however, restrictive covenants can put them in the unemployment line for six months to three years or even more after the employment term ends.

In the recent case, just decided in June 2013, Eric Fifield worked for Premier Dealer Services, Inc., a company that sold finance and insurance products to the automotive industry. Premier was a subsidiary of Great American Insurance Company. Great American sold Premier to a company that provided aftermarket automobile products and programs. Fifield was told he was being terminated. Then he was offered a new job with a restrictive covenant that prohibited him from competing with the new company for two years anywhere in the United States. Fifield accepted the new job and agreement, but he resigned three months later to take a job with Enterprise Financial Group, Inc. EFG competed with Fifield’s old employer.

Fifield and EFG argued that the restrictive covenant agreement was unenforceable due to a lack of consideration. “Consideration” basically means getting something for something. Premier argued that Fifield got a new job in exchange for the agreement not to compete. It was not the same company (at least the ownership had changed). Fifield was terminated by the old company, and the new company only offered the job on condition that Fifield sign the covenant not to compete. The court rejected Premier’s argument and declared the restrictive unenforceable – a victory for Fifield, and a loss for employers in Illinois (assuming that the precedent continues with subsequent cases).

Recent cases in Illinois were edging toward this result, but the Fifield case solidifies the direction of Illinois courts, at least for now. Fifield signals that Illinois courts will make no distinction between restrictive covenants that are entered pre-employment or post-employment. Prior to Fifield, an employer or employee might have counted on the assumption that a restrictive covenant signed prior to or at the time of beginning employment would be enforceable on the basis that the job, itself, was the consideration to support it. That is no longer the case.

Traditionally, post-employment restrictive covenants (without other consideration) required a length of continued employment to be enforceable. At some point, sufficient continued employment is considered “adequate” consideration to support the covenant and make it enforceable. Since the continued employment is a principle set forth in case law, and not by statute, there is no bright line. All we have are the string of cases finding that a, b, c number of months under particular facts and circumstances was considered adequate in a particular case and x, y and z number of months under particular facts and circumstances was not considered adequate. By looking at all the cases, a person could extrapolate some rough guides for determining whether a restrictive covenant might be enforced or not enforced, but any determination is always subject to a court’s consideration of the unique facts and circumstances in each case.

Following Fifield, all restrictive covenants, both pre-employment and post-employment covenants, are apparently subject to the requirement of a sufficient period of continued employment to be enforceable. Fifield also makes clear that it does not matter whether the employer lets the employee go or the employee resigns. The only question is whether termination for cause might change the enforceability of a restrictive covenant. The Fifield court did not reach that issue because Fifield voluntarily resigned.

Further, a person should note that the Fifield court did not address the issue of other consideration. If the compensation for the restrictive covenant was given over and above the compensation for the job, the result may have been different.  Fifield only applies to the typical situation in which an employer requires an employee to sign a restrictive covenant as a condition for the job without any consideration other than the job, itself.