Provided by: Judge Ruth B. Kraft
In June, the Illinois Appellate Court issued a noteworthy decision, holding a restrictive covenant unenforceable because of a lack of adequate consideration (quid pro quo). It ruled that there must be at least two years of continued employment to constitute adequate consideration to support a restrictive covenant. What makes this noteworthy are the underlying facts:
1. The employee signed the restrictive covenant at the time he started work---the court rejected the employer’s argument that the offer of employment constituted adequate consideration.
2. The restrictive covenant was the result of negotiations between the parties and included a caveat that the nonsolicitation and noncompete clauses would not apply if the employee was terminated without cause during the first year of employment—the court rejected this as adequate consideration.
3. The employee voluntarily resigned after three months of work—the court rejected this as being immaterial.
The implication of this case, Fifield v. Premier Dealer Services, Inc. is that unless separate consideration is provided for the restrictive covenant, the Illinois courts will not enforce it.
While this is a local precedent, it does make employment lawyers think about whether other jurisdictions might apply the same reasoning. The courts have consistently construed restrictive covenants narrowly (although it remains to be seen whether the Roberts court would take the same position; I, for one, cannot imagine Justices Alito and Scalia doing so but, as my professors used to say, it just takes five for any interpretation to prevail!). Employers do have options, including:
1. Offering consideration other than employment itself in exchange for the covenant;
2. Making the covenant inoperative if the employee is terminated without cause—but that would leave you with limited protection against solicitation of your clients or competing in the same geographical realm; or
3. Creating a restrictive covenant agreement apart from the employment agreement with its own valuable consideration.
Remember, consideration need not take the form of cash remuneration. It can consist of a benefit such as 401k matching, additional leave time, etc.
The crucial take-away here is that employers should not automatically assume that restrictive covenants will fly. Contracts should be reviewed by counsel for legal sufficiency and can be rewritten to better protect the employer’s needs.