August 17, 2011

An employer trying to enforce a non-competition or non-solicitation agreement today might feel like Mick Jagger did back in 1965 when he lamented, "I can't get no satisfaction/ 'Cause I try and I try and I try and I try." Replace "satisfaction" with "adequate consideration," and you'll have a sense of the frustration employers often face. By now, every company likely knows that to have enforceable restrictive covenants (both non-solicitation and non-competition agreements), they must give adequate consideration in return. When an employee is "at will" (which generally means that he or she can be fired at any time), employment itself is usually the consideration.

Let's say you hire somebody who signs a restrictive covenant as a condition of employment. Or, as is often the case, you want an existing employee to be governed by a restrictive covenant. In return for that individual's continuing employment, he or she signs a non-compete agreement. Under Illinois law, that continuing employment, like the initial employment, can be adequate consideration.

"Can be," but not necessarily "will be." And there's the rub. For employment to be considered adequate enough to enforce a restrictive covenant, it also has to last a sufficient amount of time. The policy behind this requirement makes sense. For example, right after a new "at will" employee signs a non-competition or non-solicitation agreement, the employer can turn around and fire the individual. If the restrictive covenant is enforceable, the employee can be prevented from competing or soliciting customers for as much as two or three years—even though he or she worked for the company for only a few days. The law does not consider that fair.

So how much time is necessary before a court will deem consideration adequate? Until recently, Illinois law was somewhat unclear on this issue. In Brown & Brown Inc. v. Mudron, a 2008 case that one of my colleagues discussed in a previous issue of the Litigation & Counseling Alert, the court said that seven months is not enough, even if the employee quits voluntarily, while also implying that two years might be the minimum. In an earlier case, Mid-Town Petroleum, Inc. v. Gowen, the court similarly held that seven months was not long enough. But in Lawrence & Allen, Inc. v. Cambridge Human Resources Group, Inc., a 1977 case, the court found that two years was sufficient. That case, however, did not expressly hold that two years was the minimum amount of time necessary. Although these Illinois cases established that two years was sufficient and seven months was not enough, employers were left wondering if there was a number in between that would also be adequate. Would one year of employment be enough, for example? Apparently, the answer is no.

In a very recent 2011 case, Diederich Insurance Agency, LLC v. Smith, the Illinois Appellate Court expressly held that "in general, there must be at least two years...of continued employment to constitute adequate consideration." The court further noted that the two years begins to run from the date the restrictive covenant is signed, even if it is an amendment of an old agreement. In Diederich, the employee signed a two-year non-solicitation agreement in October 2007. Then in March 2008, he signed a new agreement that reduced the period of non-solicitation from two years to 12 months. In June 2008, he quit. The employer argued that the reduction of the non-compete term constituted sufficient consideration in and of itself. The court, however, disagreed—and held that two years of continued employment was the minimum necessary.

Despite these recent strides towards clarity, Illinois case law leaves some questions unanswered. For example, would the result in Diederich have been different if two years had passed from the date of the original agreement? Perhaps yes; perhaps no. But in any event, the overall message is clear. If a company uses employment as consideration for a restrictive covenant, then there must be at least two years of employment before the non-compete or non-solicitation agreement will be enforceable. To avoid this result, a company must give its employee some additional consideration to support the restrictive covenant. What would constitute sufficient alternative consideration is another unresolved question. But it likely must be something more than a nominal payment or a change in the terms of the restrictive covenant. For example, a significant signing bonus might satisfy the requirement.

In light of the Diederich opinion, along with prior case law, Illinois employers should work with experienced legal counsel to review their non-compete and non-solicitation agreements and determine if any steps should be taken to help make them enforceable.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.