Non-Competes: A Question of Consideration
Approximately one year ago, the Illinois Supreme Court decided Reliable Fire Equipment Co. v. Arredondo, its first major decision on restrictive covenants in a number of years. Reliable, once and for all (we hope), articulated the proper test in Illinois for determining whether a non-compete and non-solicitation agreement is enforceable.
By now, most everyone is familiar with the standards established by the Illinois Supreme Court. In essence, the Court held that a restrictive covenant would be enforceable if it contained a reasonable restraint and the agreement was supported by adequate consideration. In determining whether the restraint was reasonable, the Court employed a three-part test:
- The restraint must be no greater than required for the protection of a legitimate business interest;
- It must not impose an undue hardship on the employee; and
- It must not be injurious to the public.
And in its most dramatic holding, the Reliable Court held that in determining whether a legitimate business interest was involved, courts must look at the “totality of the circumstances.”
Somewhat lost in this discussion was the Court's holding that a restrictive covenant must be supported by adequate consideration. Since the Reliable Court did not elaborate on what constituted adequate consideration, we must assume that prior case law on that issue remains unchanged. And as we have discussed in prior Litigation & Counseling Alerts, for the most part Illinois law has been consistent that, when employment is the only consideration, there must be at least two years of continuing employment for it to be considered adequate.
Again, most of the pre-Reliable decisions have recognized this two-year minimum, but not all of them. In the Fourth District, the home of the infamous Sunbelt decision, the court recently upheld a non-compete that was based on less than one year of employment, 104 days to be exact. In Zabaneh Franchises, LLC v. Walker, the Fourth District did not even discuss the 104 days in connection with consideration. Rather, it merely looked at time of employment as one of the many factors in the totality of the circumstances. That should not be surprising, since in that same opinion the Fourth District essentially ignored Reliable and reinterpreted the case in such a way that its test was basically no different from the test espoused in the Sunbelt case that the Supreme Court expressly overruled. But that is another story perhaps for another Alert.
So the question remains, what is the effect of Reliable on adequate consideration, especially when that consideration consists of nothing but employment? Only time will tell, of course, but we may have a better understanding of how the First District feels very soon. Much Shelist currently has a case pending before that District, Fifield v. Premier Dealer Services, Inc., in which the main issue on appeal concerns that very issue. InFifield, the defendant-employee, Fifield, worked for a company that was sold to the plaintiff. As a result, Fifield's employment with the company ended, but he was offered and accepted a job with Premier. As a precondition to employment, Premier required Fifield to sign a restrictive covenant. After only four months with Premier, Fifield resigned and was hired by a competitor. Premier then sought to enforce the restrictive covenant. The trial court dismissed Premier's complaint, finding that Fifield's employment had lasted far less than the two years required by most Illinois courts to constitute adequate consideration.
Premier has appealed, arguing among other things that the two-year period does not apply to Fifield because he supposedly was not an existing employee when he signed the restrictive covenant. Premier claims that, as a "new employee," Fifield received adequate consideration by being hired. Our position is that that the two-year period applies whenever employment is the only consideration.
The appeal in Fifield has been fully briefed and is awaiting either argument or decision. When the ruling comes down, we will know whether, post-Reliable, the First District will still require at least two years of employment for adequate consideration. As soon as the court rules, we will be sure to let everyone know.