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Fifield and Enterprise Finance Group, Inc. v. Premier Dealer Services, Inc.: Two years of continuous employment necessary to enforce postemployment restrictive covenants
Introduction
The First District Appellate Court, in its recent decision in Fifield and Enterprise Finance Group, Inc. v. Premier Dealer Services, Inc.,1 held that a noncompetition agreement is not valid and enforceable if an employee is fired or resigns within two years. Illinois companies can still require newly hired workers to sign noncompetition agreements, but if the employee is employed for less than two years the restrictive covenant will lack the consideration necessary to be enforceable by an employer. There must be two years of continuous employment to be considered adequate consideration to support a postemployment restrictive covenant.
Factual Background
Premier Dealer Services, Inc. (“Premier”) made an offer of employment to Fifield (“Plaintiff”). As a condition to employment, Premier required Plaintiff to sign an employment agreement that contained both a noncompetition and a nonsolicitation provision that lasted two years. After negotiations between Plaintiff and Premier, the noncompetition and nonsolicitation provisions of the final employment contract extended for two years unless Plaintiff was terminated without cause within his first year of employment. In that case, the restrictive provisions did not apply.
Plaintiff began his employment at Premier on November 1, 2009, and he resigned from his position on February 10, 2010.
Proceedings below
On March 5, 2010, Plaintiff and his new employer filed a complaint in the Circuit Court of Cook County for declaratory relief. The complaint requested the Court declare the noncompetition and nonsolicitation provisions of the Plaintiff’s employment contract unenforceable as a matter of law for lack of adequate consideration.
Premier filed an answer, affirmative defenses, and a counterclaim seeking to enforce the noncompetition and nonsolicitation provisions.
After argument, the trial court granted Plaintiff’s motion for summary judgment. The Court held that the noncompetition and nonsolicitation provisions Plaintiff signed were unenforceable as a matter of law for lack of consideration. Premier appealed.
Appellate Court affirmed
The First District affirmed the trial court and found that the two year noncompetition and nonsolicitation terms of the Plaintiff’s employment contract were unenforceable for lack of consideration.
A. The restrictive covenants were unenforceable despite the Plaintiff signing his employment contract before beginning employment
On appeal, Premier first argued that the two year consideration rule recognized by Illinois courts did not apply because the Plaintiff signed the restrictive covenants before he was hired.
The Appellate Court soundly rejected Premier’s first argument. The Court cited to Brown & Brown, Inc. v. Mudron2 and held that it did not matter whether Plaintiff signed the restrictive covenants before or after he was hired since the noncompetition and nonsolicitation provisions clearly governed the Plaintiff’s post employment conduct.
B. Employment itself is not adequate consideration to enforce a postemployment restrictive covenant
Premier’s second argument on appeal was that the noncompetition and nonsolicitation provisions of the employment agreement were enforceable because there was adequate consideration given to support the provisions. Premier argued that the offer of employment itself was sufficient consideration to support the restrictive covenants.
The Appellate Court rejected this argument as well. The Court began by stating the elements of an enforceable restrictive covenant. The Court noted that postemployment restrictive covenants must be: (1) ancillary to a valid contract; and (2) supported by adequate consideration.3 The Court once again followed Brown & Brown, Inc., and held that at-will employment can constitute an “illusory benefit” and that “continued employment for two years or more” was necessary to constitute adequate consideration to support a postemployment restrictive covenant.4
Implications of Fifield
By inviting employees to breach restrictive covenants with impunity, Fifield could prove to be troublesome for employers. As long as an employee resigns within two years of their start date, Fifield supports the notion that restrictive covenants will not stick to employees. Additionally, by viewing at-will employment as an “illusory benefit” this case also suggests that at-will employment is insufficient to constitute consideration to enforce postemployment restrictive covenants. ■
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Member Comments (2)
One Note of distinction for parties seeking to enforce restrictions that are one year in length is that the restrictive covenant in Fifield was for two years. Likewise, the restrictive covenant in Brown & Brown, Inc. v. Mudron, which is the case the Fifield court relied upon, was also two years. Indeed the two cases cited by the Brown court when discussing the two year period of employment (Lawrence & Allen v. Cambridge and Millard Maintenance) also had restrictive covenants that were two years in length. It does not seem to me that "two years" is a bright line threshold. The test seems to me to still be is there "sufficient consideration" and under Reliable Fire each case should be decided upon its own set of facts. Consequently, if the restriction is for only one year and the period of employment was for at least one year, it would seem you can use the holding in Fifield to support a contention of adequate consideration. What happens though in situations where you have a one year restriction and employment for less then one year? Maybe the solution is a tiered restrictive covenant where an employer accounts for different scenarios. For example if you are employed for 9 months you are restricted for 9 months. 6 months then 6 months etc....?
This case was probably decided correctly but for the wrong reasons. The main purpose of a noncompete is to protect the employer's goodwill, which the employer has an ownership interest in, having earned it over years of doing business. A legitimate interest in specific customer goodwill needs to be distinguished from competition in general. A short-term post-employment restrictive covenant is often justified to allow the employer to secure its pre-existing relationship with customers -- but after that, the employer should be expected to compete for ongoing business in a free and open marketplace.
The need for the noncompete doesn't necessarily bear a direct relationship with the duration of the employment before the breach. Depending on the situation, a court could rightly decide not to enforce a noncompete against a former long-term employee if it wasn't needed to protect the former employer's goodwill under the circumstances. Alternatively, an employee leaving before two years can, and in many cases does, unfairly interfere with their former employer's goodwill, especially when the employee starts a new business and takes away the former employer's major customer.
The reason that noncompetes are usually not enforced for short-term employment situations is because the employee rarely has developed the ability in that short period of time, through knowledge or contact with customers and confidential information, to appropriate the employer's goodwill by leaving and joining a competitor. But courts instead rationalize their decisions in these cases based on fairness arguments. Usually this leads to the same result, but it doesn't work in all situations and reflects a misunderstanding of why and when these agreements should be enforced. And in this case, explaining the result in terms of a fairness argument compelled this and previous courts to say some ill-advised things like at-will employment itself being an "illusory benefit" -- how about getting wages and salary as being consideration? Or on-the-job training and experience? The consideration is, and always has been, the employment itself -- if the employee needs more than that, they can certainly bargain for it and in this case, the agreement was indeed modified through negotiation.
My own view is based on my personal experiences as a former business owner who had to deal with the adverse fallout of breaches of noncompetes on my business, as well as having researched the subject extensively and writing my third-year law school paper about the enforceability of employee noncompetes. The unifying theme in all of my own legal research, as well as my practical experience as a business owner, is the protection of identifiable customer goodwill specific to the business and what are the minimum post-employment restrictions necessary to protect this goodwill.
These cases are always difficult and depend largely on the specific facts -- they don't lend themselves to simplistic rules. I suspect that this two-year rule will continue to be treated as a rule of thumb, which is how it appears to have been treated thus far. Many of these cases might be better decided by shortening the restrictive period to say 3-6 months, or barring solicitation or competition as to specific customers instead of completely invalidating the noncompete -- in other words, "right sizing" the post-employment restrictions.