by: Brian LaFratta
Non-compete agreements are very important tools for protecting your business and customer relationships. However, non-compete agreements must be reasonable in scope and properly drafted in order to be enforceable, and courts routinely refuse to enforce improperly drafted non-competes. Further complicating this picture are recent court rulings fundamentally changing non-compete law.
Among other requirements, in order for a non-compete agreement to be enforceable, it must be supported by consideration. For years, the rules regarding consideration for non-competes was as follows. With a new employee, the consideration for the non-compete is the employer’s agreement to hire the employee in the first place. With an existing employee, the employee has to be given additional consideration, typically in the form of (a) additional cash compensation or (b) continued employment for a substantial period of time (essentially 18 months or more).
However, the recent Illinois Appellate Court opinion of Fifield v. Premier Dealer Services, Inc. significantly modified these rules. In Fifield, the employee’s employer was purchased by another company. As part of the transaction, the employee was terminated by his employer, and then rehired by the purchaser, at which time he signed a non-compete. Under the old non-compete consideration rules, his hiring by the new employer should have qualified as consideration for the non-compete. Three months later, the employee resigned and went to work for a competitor. Litigation ensued, and the case ultimately was appealed.
On appeal, the court held that, contrary to settled law, a new employee also needs to work for the employer for a substantial period of time in order for the non-compete to be enforceable. The court also held that a substantial period of time is a minimum of two years. As a result, the court held that there was no consideration for the non-compete and the employee was free to work for a competitor.
In effect, the court held that non-competes are not enforceable if the employee ends his employment within two years of the date of hire. The only potential way around this ruling is to provide the employee with additional consideration at the time of his or her hire.
Accordingly, employers need to review their existing non-compete agreements and determine whether they need to be revised to make them enforceable. The consequences of an unenforceable non-compete are obviously significant, as it can be the difference between protecting your business or losing it to a former employee.
On a related note, many employers are unaware of a less-recent change in Illinois law, which held that customer non-solicitation provisions must be narrowly drafted and are not enforceable if they apply to all of the company’s customers. This too requires review of existing non-competes to determine whether they are enforceable.
For additional information, or to consult with one of our employment law attorneys, please feel free to contact Brian LaFratta at (630) 344-1187, or at email@example.com.