July 24, 2008

Many Illinois employers require new employees to sign non-compete agreements at the time of their hire. In most instances, the employee in question is hired on an at-will basis, meaning he or she can be let go or can leave with or without cause. Also, there is generally no special consideration tied to the non-compete agreement (i.e., the employee obtains no special benefit for agreeing to the non-compete). Instead, the offering of the job serves as the consideration for the non-compete.

Evolving Case Law

For years, the rule of thumb under Illinois case law was that continued at-will employment could be sufficient consideration for a non-compete agreement. However, when an employer terminates an employee through no fault of the employee's own within less than two years, the courts will consider whether the length of the actual continued employment was sufficient consideration to support the covenant. Thus, if relatively soon after the date of hire an employer terminates an employee as part of a reduction in force or if an employee is forced to leave because the employer materially breached a promise it has made, the employee can then contest the non-compete as being unenforceable for "failure of consideration."

But what if an employee simply quits after seven months? One would think that if the employee chose to leave the company, and therefore, the lack of continued employment was not the employer's fault, then the non-compete should be enforceable.

Not necessarily so, according to a recent Illinois Appellate Court decision filed on March 11, 2008. In Brown & Brown v. Mudron, No. 3-06-0908, an insurance agency bought another agency and required all the acquired employees to sign an employment agreement prohibiting them from soliciting or servicing any of the agency's customers for two years after leaving the company. One employee, Diane Gunderson, signed the agreement but quit after seven months to work for a competitor. The insurance agency then sued for breach of the covenant.

Affirming the lower court's ruling against the employer, the majority of a three-judge panel of the Illinois Appellate Court saw the seven months of employment after the employee signed the non-compete agreement as too short a period of time to constitute consideration under state law. The panel majority said that even though the employee resigned—rather than being let go—that fact did not change its analysis. The dissenting judge, however, disagreed, noting that "[t]o hold as the majority does here, that an employee can void the consideration for any restrictive covenant by simply quitting for any reason renders all restrictive covenants illusory in this state. They would all be voidable at the whim of the employee."

Safeguards for Employers

Illinois courts have always noted their disfavor of restrictive covenants as restraints of trade, but this latest decision creates a potentially huge loophole for any employee to lawfully abrogate an otherwise valid contractual non-compete obligation by simply jumping ship within two years after he or she signs a non-compete agreement that is not supported by any consideration except for continued employment. As the dissenting judge noted, the failure of consideration in such an instance is not caused by the employer but by the employee, who otherwise presumably would have continued his or her employment.

The decision of the majority seems to have little justification from a policy standpoint. An employee who works for a short period of time can still acquire considerable sensitive customer information or other trade secrets about his or her employer. It stands to reason that such an employee's value to a competitor would be enhanced if the employee and the competitor knew they could defeat a claim for breach of a non-compete agreement by the employee simply electing to sever the employment relationship within two years from the date he or she signed the agreement.

For employers, this decision points to the advisability of offering consideration other than – or in addition to – mere employment or continued employment as the quid pro quo for signing a non-compete agreement. With respect to an existing employee who already has signed a non-compete agreement, employers should consider tying receipt of a new bonus or benefit to a renewal of the employee's commitment to a non-compete agreement. When asking new or existing employees to sign non-compete agreements for the first time, employers may want to expressly tie receipt of some type of promised compensation, benefit or other enumerated consideration to the employee's promise not to compete.

In light of the decision in Brown & Brown v. Mudron, Illinois employers should consider a thorough review of their existing and future non-compete agreements.

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.