Non-Compete Agreements in Illinois: The Latest on Sunbelt and Adequate Consideration
In today's economy, the enforceability of non-solicitation and non-compete agreements has become increasingly important to employers and employees alike. Businesses rely on them to protect their confidential information, trade secrets and customer relationships. Faced with a marketplace where jobs are fewer and harder to get, employees are often hindered by them when pursuing new opportunities. That is why everyone should take note when the courts address this area of the law, which happened recently in two Illinois cases: Steam Sales Corporation v. Summers and Peckham v. Metal Management, Inc.
Legitimate Business Interest: In or Out?
In general, to be enforceable in Illinois, restrictive covenants (including non-competes and non-solicitation agreements) must be reasonably limited in time and territory and intended to protect what is known as a "legitimate business interest." As has been discussed in previous issues of the Litigation & Counseling Alert, however, the Fourth District Illinois appellate court rejected the requirement for a legitimate business interest in Sunbelt Rentals, Inc. v. Ehlers, basing its analysis solely on the reasonableness of the scope of the agreement. To date, no other Illinois court has followed suit, butSteam Sales Corporation v. Summers (a 2010 Second District appellate court decision) analyzed Sunbelt and noted that its "rejection of [the legitimate business interest] test does merit some consideration."
Although Steam Sales is the first Illinois case to treat Sunbelt seriously, that court ultimately appeared to reject its rationale, at least to the extent that Sunbelt could "be interpreted to require analysis of only the time and territory aspects of a restraint." (Emphasis in original.) Thus, Steam Sales noted in dicta that even if the legitimate interest test were eliminated, a court should still examine the reasonableness of time and territory "in relation to a protectable interest." (Emphasis added.)
This makes sense. In Sunbelt, the Fourth District not only eliminated the legitimate interest test but apparently believed that the reasonableness of a time and territory restriction could be determined in the abstract. Thus, Sunbelt provided no guidance as to what would make a time and territory restriction reasonable. Steam Salesrecognized this flaw and apparently believed (but without yet holding) that the court would still have to judge the reasonableness of time and territory in relation to some protectable interest. The court did not say, however, what those protectable interests were or whether they would be limited to the two long-recognized legitimate interests: confidential information and a near permanent relationship with customers.
If Steam Sales' analysis were to be accepted, however, it would likely broaden the basis on which a court could uphold a restrictive covenant. For example, a protectable interest might include good will, which does not currently fall within the parameters of a legitimate business interest in the employee context.
Adequate Consideration: Is Employment Enough?
Illinois also requires that there be so-called "adequate consideration" in order to uphold a restrictive covenant. Generally, continuing employment can be sufficient to satisfy this requirement if it is long enough. Applying state law, Peckham v. Metal Management, Inc. (a 2010 Southern District of Illinois decision) reinforced the holding of past cases that continuing employment of less than two years may not constitute adequate consideration. Importantly, the Peckham court applied this principle to a new hire, finding that six months of employment was inadequate.
Like Steam Sales, the Peckham case is potentially significant. Following Brown v. Mudron and Mid-town Petroleum, Inc. v. Gowen, the Peckham court held that, when employment is the sole consideration for a restrictive covenant, six months is not sufficient. Interestingly, Peckham applied this test to an entirely new hire in which the restrictive covenant was contained within the employee's initial employment agreement. After examining the employment agreement, the court determined that the only consideration for the restrictive covenant appeared to be employment. That being the case, the court felt that when the employee was terminated six months later, that length of time did not provide adequate consideration upon which to enforce the restrictive covenant.
Together with prior Illinois case law holding that less than two years of employment is inadequate consideration (even if the employee leaves voluntarily), this new decision could make it virtually impossible to enforce a non-compete if an employee leaves within six months of being hired. That would be true, however, only when employment is the sole consideration. If some other adequate consideration is given for the restrictive covenant, the result could be different.
Accordingly, in drafting restrictive covenants and employment agreements, employers may want to consider adding clear language indicating that some other consideration (e.g., a signing bonus) is being exchanged for the promise not to compete or solicit customers. The key is to provide consideration other than employment, even with new hires.