A non-compete agreement is a contract, and, with one major exception, is reviewed for enforcement on the same standards as other contracts. So-called "consideration" is an essential element of any contract, requiring the party seeking enforcement to demonstrate that something of value was given in exchange for the other party's promises and obligations. Although Illinois courts generally look only for the existence of consideration, and do not address the sufficiency (i.e., did the enforcing party make sufficient payment or give appropriate value?), an exception to that rule is applied when a non-compete is reviewed. In such cases, the court not only determines the presence of consideration, but also weighs the sufficiency.
A very recent decision of the Illinois Appellate Court in the First District raises concerns for Illinois employers seeking to enforce non-compete agreements, and for employers drafting such agreements. In Fifield v. Premier Dealer Services, Inc., Fifield's original employer was purchased, and he was terminated effective with the transaction closing. Prior to the closing and termination, he was offered at-will employment with the new business, conditioned upon his agreement to a non-compete. Fifield accepted that offer after negotiating changes to the non-compete protecting him if he were terminated without cause in the first year, and he entered employment. He voluntarily resigned three months later to work for a competitor. He and his new company then filed an action for declaratory judgment, seeking to invalidate the non-compete agreement and bar the employer from attempting to enforce it.
The court rejected the argument that employment itself was consideration because Fifield was unemployed when he entered the agreement. Although the court rejected the distinction between pre-employment and postemployment agreements, it went on to hold that this agreement was postemployment. "We also disagree with [employer's] argument that the nonsolicitation and noncompetition provisions in the agreement were not postemployment restrictive covenants because Fifield signed the agreement before he was employed by Premier. Premier cites no authority for its novel definition of postemployment restrictive covenants. Additionally, Illinois courts have treated restrictive covenants signed by individuals in situations similar to Fifield's, as postemployment restrictive covenants. . . we find that the nonsolicitation and noncompetition provisions in the agreement were postemployment restrictive covenants."
The court went on to draw a bright line, holding that a term of at-will employment of at least two years is necessary to establish adequate consideration, even if the employee voluntarily resigns during that time.
This decision impacts enforcement and drafting of non-compete agreements in Illinois. The Fifield decision effectively eliminates the viability of at-will employment as consideration for a non-compete agreement because the employee retains the right to resign at any time. Adequate consideration must be found outside an at-will relationship, either through cash payment, increases in compensation or benefits, or a guarantee of employment. Non-compete agreements previously entered into should be evaluated for enforceability in light of this decision and, if necessary, revised and executed anew.
For further information on this decision, contact Mike Gifford, Leonard Sachs or Michael Lied.