Clear as Mud: Illinois Courts Continue to Grapple With The “Adequacy” Of Consideration for Non-Compete Agreements
It is axiomatic that a contract requires consideration to be binding. Ordinarily, courts only inquire into the existence, but not the “adequacy,” of consideration. Illinois courts, however, also scrutinize the adequacy of consideration when it comes to determining whether restrictive covenant agreements qualify as an enforceable contract. Absent adequate consideration for the restrictive covenant, there is no contract, and the court never gets to the question of whether the restrictions are otherwise reasonable and enforceable.
Since the 2013 Illinois appellate court decision in Fifield v. Premier Dealer Services, Inc., state courts in Illinois have consistently held that, absent 2 years of continued employment after the restrictive covenant is signed, additional consideration beyond simply continued employment is required; whether such additional consideration is adequate is determined on a case-by-case basis. In contrast, the federal courts in Illinois have quarreled with the Fifield decision and its progeny, usually finding that the 2-year requirement is not a “bright line” test for adequacy of consideration, and then engaging in an analysis as to whether the amount of continued employment in the particular case was “substantial” enough to qualify as adequate consideration. This state-vs-federal court distinction persists, as revealed in two recent cases.
On October 20, 2017, the federal court for the Northern District of Illinois again announced that it did not consider the 2-years-continued-employment to be a bright-line test for the adequacy of consideration. In Stericycle, Inc. v. Simota, Case No. 16 C 4782, the court held that the enforcement a non-compete supported by continued employment requires an individualized, case-by-case assessment, and is not subject to a bright-line rule.
Factually, the Court noted that in February 2015, approximately one month into their employments with Stericycle, Donald Simota, Dana Sullivan, and Chad Van Houton signed employment agreements prohibiting them from soliciting any Stericycle customers or employees for twelve months following their separations from the company. Two months later, Simota signed a separate agreement with an additional prohibition against general competition for the same twelve-month period.
In March 2016, Simota, Sullivan and Van Houton tendered their resignations from Stericycle. Shortly thereafter, they allegedly commenced employment with a competitor, solicited customers of Stericycle, and solicited at least one Stericycle employee to join them in their new venture. Stericycle promptly filed suit for breach of contract, and in July 2016, the three defendants moved for dismissal of the complaint. As a basis for dismissal, the defendants argued that even if Stericycle’s accusations were true, they did not work for the company long enough to be bound by the applicable non-solicit and/or non-compete covenants.
In reviewing the motion to dismiss, the court noted that the defendants’ employment with Stericycle lasted for approximately thirteen months after they signed the non-solicit agreement, and for approximately eleven months after Simota signed the separate non-compete agreement. The court further noted that three recent Illinois appellate court decisions “appear[ed] to adopt” a “bright-line rule” that at-will employment must continue for two years in order to constitute adequate consideration for post-employment restrictions on solicitation and/or competition. Ultimately, however, the court denied the motion to dismiss, based on the prediction that the Illinois Supreme Court would reject the two-year rule.
As the court explained, “a promise of continued employment may be an illusory benefit where the employment is at-will.” For that reason, “at-will employment [must] continue for a ‘substantial period’ after an employee signs a restrictive covenant” in order to qualify as adequate consideration for the covenant. The court added, however, that while two years of employment would normally be sufficiently “substantial” to support a restrictive covenant, it did not follow that “anything less than two years is automatically insufficient.” Rather, the court advocated a “fact-specific approach” that takes into account not only the length of employment but also various other factors, including “the circumstances surrounding the employee’s signing of the covenant, the conditions of his employment, and his termination.” In the case of Simota, Sullivan, and Van Houton, the court considered “the length of their employment and that all three resigned,” and concluded that their employment “continued for a ‘substantial period’ under Illinois law.”
Only 11 days later, on October 31, 2017, an Illinois appellate court affirmed the dismissal of a non-compete claim in Automated Industrial Machinery, Inc. v. Christofilis, No. 2-16-0301, where the lower court found inadequate consideration based on the two-year bright-line rule. Although the appellate court noted the “possibility” that the Illinois Supreme Court might ultimately reject the two-year rule, it pointed out that the defendant in that case only worked for five months after signing his non-compete agreement – a duration the court found to be insufficient under any standard. Importantly, the court also rejected the former employer’s argument that the non-compete was supported by additional consideration beyond just continued employment, pointing to the fact that no other consideration was specified in the agreement.
The lesson for employers, once again, is that drafting matters. For example, enforceability may be enhanced if the agreement with the employee spelled out what the employee is receiving beyond mere employment in exchange for the employee’s covenants not to compete or solicit