Employment Contract And Non-Competition Litigation
Remember: most employees are “At Will” which means that there is no contract between the employer and employee and either can terminate the arrangement at any time.
Employment contracts are extremely important both to a business and to the individual employee. There are several provisions of any employment contract that both parties should consider carefully. Here, we are assuming that the employment contract is governed by Illinois law.Non Solicitation Clause
This clause prohibits an employee who departs the business from soliciting other employees to leave with him. Here is a sample non solicitation clause:
Non-Solicitation. During the period commencing on the Effective Date and ending one year following the Termination Date, the Company shall not, without the Advisor’s prior written consent, directly or indirectly, (i) solicit or encourage any person to leave the employment or other service of the Advisor or its Affiliates, or (ii) hire, on behalf of the Company or any other person or entity, any person who has left the employment within the one year period following the termination of that person’s employment the Advisor or its Affiliates. During the period commencing on the date hereof through and ending one year following the Termination Date, the Company will not, whether for its own account or for the account of any other Person, intentionally interfere with the relationship of the Advisor or its Affiliates with, or endeavor to entice away from the Advisor or its Affiliates, any person who during the term of the Agreement is, or during the preceding one-year period, was a tenant, co-investor, co-developer, joint venturer or other customer of the Advisor or its Affiliates.
Illinois court enforce non solicitation clauses.Non Competition Clause or Restrictive Covenant.
This is the most often litigated issue in employment contracts. Here is a sample non competition clause:
Non-Compete. During the term of this Agreement and for a period of twenty four (24) months following the Employee’s removal or resignation from the Board of Directors of the Company or any of its subsidiaries or affiliates (the “Restricted Period”), Employee shall not, directly or indirectly, (i) in any manner whatsoever engage in any capacity with any business competitive with the Company’s current lines of business or any business then engaged in by the Company, any of its subsidiaries or any of its affiliates (the “Company’s Business”) for the Employee’s own benefit or for the benefit of any person or entity other than the Company or any subsidiary or affiliate; or (ii) have any interest as owner, sole proprietor, stockholder, partner, lender, director, officer, manager, employee, consultant, agent or otherwise in any business competitive with the Company’s Business.
The company will also have a clause in the Agreement allowing it to seek injunctive relief if the employee or former employee violates the non-compete provision in the Agreement.
First, if you have signed a non-compete with your former employer, consider carefully whether your new job will violate the provisions of the non-compete.
One important issue in non-compete litigation is whether the employer gave the employee something in return for the non-compete clause. That is known as consideration. If there is no consideration, the agreement is void.Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327
The Fifield case has been viewed as an important case concerning the enforcement of non-competition agreements. In Fifield the court held that to enforce a non-compete against an employee, the employer must provide at least two years of employment. Because the covenant guaranteed only one year, it was void. Some of the court’s discussion follows:
¶ 13 Postemployment restrictive covenants are carefully scrutinized by Illinois courts because they operate as partial restrictions on trade. Cambridge Engineering, Inc. v. Mercury Partners 90 BI, Inc., 378 Ill.App.3d 437, 447, 316 Ill.Dec. 445, 879 N.E.2d 512 (2007). In order for a restrictive covenant to be valid and enforceable, the terms of the covenant must be reasonable. Id. However, before even considering whether a restrictive covenant is reasonable, the court must make two determinations: (1) whether the restrictive covenant is ancillary to a valid contract; and (2) whether the restrictive covenant is supported by adequate consideration. Lawrence & Allen, Inc. v. Cambridge Human Resource Group, Inc.,292 Ill.App.3d 131, 137, 226 Ill.Dec. 331, 685 N.E.2d 434 (1997). The only issue before this court in this case is whether there was adequate consideration to support the restrictive covenants in the agreement.
¶ 14 "Under Illinois law, continued employment for a substantial period of time beyond the threat of discharge is sufficient consideration to support a restrictive covenant in an employment agreement." Brown & Brown, Inc. v. Mudron, 379 Ill.App.3d 724, 728, 320 Ill.Dec. 293, 887 N.E.2d 437 (2008). Illinois courts analyze the adequacy of consideration in the context of postemployment restrictive covenants because it has been recognized that a promise of continued employment may be an illusory benefit where the employment is at-will. Id. Generally, Illinois courts have held that continued employment for two years or more constitutes adequate consideration. Id. at 728-29, 320 Ill.Dec. 293, 887 N.E.2d 437. The restrictive covenant will not be enforced unless there is adequate consideration given. Id.
¶ 19 Illinois courts have repeatedly held that there must be at least two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant. Diederich Insurance Agency, LLC v. Smith, 2011 IL App (5th) 100048, ¶ 15, 351 Ill.Dec. 792, 952 N.E.2d 165; see also Lawrence & Allen,292 Ill.App.3d at 138, 226 Ill.Dec. 331, 685 N.E.2d 434; Brown, 379 Ill. App.3d at 728-29, 320 Ill.Dec. 293, 887 N.E.2d 437. This rule is maintained even if the employee resigns on his own instead of being terminated. Diederich, 2011 IL App (5th) 100048, ¶ 15, 351 Ill.Dec. 792, 952 N.E.2d 165; Brown, 379 Ill.App.3d at 729, 320 Ill.Dec. 293, 887 N.E.2d 437. In this case, Fifield resigned from Premier after being employed for slightly longer than three months. This period of time is far short of the two years required for adequate consideration under Illinois law. Additionally, the first-year provision in the agreement does not affect the application of the two-year standard for adequate consideration. 944*944 At most, Fifield's employment was only protected for one year, which is still inadequate under Illinois law. Therefore, we hold that the trial court did not err in granting Fifield and EFG's motion for declaratory judgment.
The Fifield opinion held that Illinois Courts require two years of employment for a non-compete to be enforceable. The Fifield case has been controversial and some courts have refused to follow it. Even so, any lawyer practicing in Illinois should consider the Fifield opinion before drafting or reviewing a non compete clause.
Some Federal Courts in Illinois have refused to follow Fifield.
In another case, Stericycle v. Simota,16 C 4782 (N. D. Ill. 2018), the Clinton Law Firm represented the defendants who were former employees of Stericycle. The employees moved to dismiss the lawsuit on the basis of the Fifield case, but the motion to dismiss was denied. Here is the Judge Tharp’s reasoning:
Although the First District of the Illinois Appellate Court appeared to abandon a fact-specific analysis in Fifield, see 2013 IL App (1st) 120327, ¶ 19, 993 N.E.2d at 943, it recently stated otherwise. In McInnis, the court expressly held that "Fifielddid not abolish a fact-specific approach to determining adequacy of consideration" and that the analysis is not limited to "a numerical formulation." 2015 IL (1st) 142644, ¶¶ 35-36, 35 N.E.3d at 1084-85. The court went on to discuss with approval how the trial court examined whether additional factors besides length of employment (such as bonuses) provided sufficient consideration for the employee's covenant. Id. ¶ 36, 35 N.E.3d at 1085. Even so, the court made clear that the Fifield two-year rule applied in at least one instance: where at-will employment is the only basis for consideration. McInnis, 2015 IL (1st) 142644, ¶ 32, 35 N.E.3d at 1084 ("What Fifield clearly holds is that employment alone, which of less than two years duration, is inadequate consideration to support enforcement of a postemployment restrictive covenant.").
Neither Fifield nor McInnis, however, offers a persuasive reason to apply a bright-line rule even in such limited circumstances. At bottom, the rule is based on an observation that Illinois courts have generally held that two year or more of continued employment constitutes adequate consideration. See Fifield, 2013 IL App (1st) 120327, ¶¶ 14, 19, 993 N.3d.2d at 942-43. But just because two years of employment has been a sufficient basis for consideration, does not make it a necessary one. See Allied Waste Servs. of N. Am., LLC v. Tibble, 177 F. Supp. 3d 1103, 1108 (N.D. Ill. 2016) ("[S]aying that courts have generally found [two years] `to be sufficient is very different than saying that anything less than two years is automatically in sufficient.'") (quoting McInnis, 2015 IL App (1st) 142644, ¶ 61, 35 N.E.3d at 1089 (Ellis, J. dissenting)). Fifield also fails to explain why an employee's resignation is irrelevant to the issue of adequacy. As another federal district court has stated, Fifield and the cases it cites "contain near-identical language which is devoid of analysis: `The fact that [the employee] resigned does not change our analysis.'" Cumulus Radio Corp., 80 F. Supp. 3d at 908. None of the cases following Fifield offer an explanation either. See Prairie Rheumatology Assocs.,2014 IL App (3d) 140338, ¶ 15, 24 N.E.3d, at 62; McInnis, 2015 IL App (1st) 142644, ¶ 35, 35 N.E.3d at 1085. As a result, Illinois appellate courts have provided little reason to write a two-year minimum into the substantial period analysis.
Indeed, the two-year rule does not logically follow from the rationale underlying the substantial period requirement. As discussed above, courts require a substantial period of continued employment to prevent an employer from locking an at-will employee into a restrictive covenant and then immediately terminating that employee. There is no reason why one year of employment (as opposed to two years) could not alleviate this concern under certain circumstances. See LKQ Corp., 785 F. Supp. 2d at 744 (concluding that 12 months of at-will employment constituted "substantial period" where employee had resigned); see also Allied Waste Servs., 177 F. Supp. 3d at 1109 (discussing how 15 months of employment could be adequate consideration depending on circumstances surrounding the employee's signing of the covenant, the conditions of his employment, and his termination). In other words, "there is nothing particularly significant about the term of 24 months that should elevate it to a per se minimum requirement." Allied Waste Servs., 177 F. Supp. 3d at 1109 (quoting McInnis, 2015 IL App (1st) 142644, ¶ 61, 35 N.E.3d at 1089 (Ellis, J. dissenting)). More importantly, a two-year minimum effectively turns the purpose of the substantial period requirement "on its head." Cumulus Radio Corp., 80 F. Supp. 3d at 907. While the rule protects employees from the whim of its employers, it puts employers at the mercy of their employees: the "employee can void the consideration for any restrictive covenant by simply quitting for any reason." Id. at 907-08 (citing Brown and Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 730, 887 N.E.2d 437, 442 (3d Dist. 2008) (Schmidt, J. dissenting)); see also Apex Physical Therapy, LLC v. Ball, No. 17 C 119-JPG-DGW, 2017 WL 3130241, at *3 (S.D. Ill. July 24, 2017) (discussing how employee could quit one day before "hitting the magical two year mark" to void restrictive covenant).
Finally, while the Illinois Supreme Court has not evaluated the Fifield rule, it has embraced a fact-specific approach for analyzing other aspects of restrictive covenants. In Reliable Fire Equipment Co. v. Arredondo, the court overruled appellate decisions that had applied a "rigid and preclusive" legitimate business interest test in assessing a covenant's reasonableness. 2011 IL 111871, ¶ 46, 965 N.E.2d 393, 404. In reaching that conclusion, the court reiterated the need to apply a test based "on the totality of the facts and circumstances of the individual case." Id. ¶ 43, 965 N.E.2d at 403. This Court believes that if faced with a question of consideration, the Illinois Supreme Court would apply the same reasoning and look to the totality of the circumstances to assess adequacy. In fact, a vast majority of Illinois federal district courts that have addressed this issue have predicted that the Illinois Supreme Court would apply such a flexible, fact-based approach. See Apex Physical Therapy, 2017 WL 3130241, at *2-3 (discussing how six of seven other Illinois federal courts have made same prediction in denying employee's motion to dismiss breach of covenant claim due to inadequate consideration).
In viewing the totality of the circumstances, the Court finds that Stericycle has pled adequate consideration for the Nonsolicitation Agreements. According to the complaint, the defendants continued to work for Stericycle for approximate thirteen months after signing those agreements. (Compl. ¶¶ 32, 34-35, 46-48.) All three defendants then voluntarily left Stericycle together in March 2016 to join a competitor. (Id. ¶¶ 46-50.) Given the length of their employment and that all three resigned, the Court finds that the defendants' employment continued for a "substantial period" under Illinois law. See LKQ Corp., 785 F. Supp. 2d at 744; see also Montel Aetnastak, Inc. v. Miessen, 998 F. Supp. 2d 694, 716 (N.D. Ill. 2014) (15 months of employment with resignation was substantial period); Cumulus Radio Corp., 80 F. Supp. 3d at 909 (22 months of employment with resignation was adequate consideration).
The full opinion in the Stericycle v. Simota case can be found here.
The case was ultimately resolved by a confidential settlement.
In sum, if you have a question about an employment agreement, do not hesitate to contact us to discuss it. We have represented both employers and employees in matters involving non-competition clauses.