Illinois Appellate Court rules on enforcement of restrictive covenants

In a somewhat surprising development, the Illinois Appellate Court recently ruled that restrictive covenants are not enforceable if an employee has worked less than two (2) years for the employer seeking enforcement, unless that employee has received special, additional consideration beyond being hired for agreeing to the restriction. Fifield v. Premier Dealer Services (Illinois Appellate Court, 1st District, June 24, 2013). In other words, agreeing to hire an employee in exchange for his or her agreement not to compete or solicit is insufficient consideration unless the employee works for two or more years.

What does this mean for your company?

Initially, it means that if you have any employees governed by a restrictive covenant who have been employed less than 2 years, an Illinois court may not enforce the restrictive covenant, even when the employee voluntarily resigns or is terminated by your company with cause.

Additionally, if you are thinking of drafting employment agreements containing restrictive covenants, and have a business with ties to Illinois (especially in the Chicagoland area), you should be alert to this key development and understand that you must provide some additional consideration beyond simply hiring the employee for a restrictive covenant to be enforceable.
What can be done to increase enforceability of restrictive covenants?

There are alternative strategies available that may still allow you to enforce either your existing restrictive covenants or to develop and implement new covenants against departing employees with less than two years of service. These strategies may include developing bonus/compensation programs (both pre- and post-hire) to provide the extra consideration sufficient to enforce a restrictive covenant. Additionally, depending on the circumstances and your business objectives, you could carefully draft choice of law and jurisdiction clauses to avoid disputes within the courts governed by the First District. Finally, you could carefully draft special recitals to enhance the possibility of enforcing the covenant against short-term employees.

Of course, each situation will be different, but it is safe to say that Fifield poses a significant problem for any business that wants to protect its assets from departing employees under Illinois law. You must consider the ramifications of this decision on existing and future employment agreements since, while many feel that the decision may be reversed by the Illinois Supreme Court, for now it is the law in the First District (Cook County).
As always, we are here to discuss with you this case, as well as the best way to protect your business in light of this significant legal development.

 

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