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Year's End Is a Perfect Time to Review Employees' Non-Compete Agreements
By Thadford Felton on November 15, 2013 at 9:47 AM

Recent Illinois appellate court decision puts in doubt enforceability of many existing employment restrictive covenants

iStock_000000234992XSmallMany businesses use restrictive covenants, such as non-solicitation and non-competition restrictions, in employment and other agreements to protect the competitive advantage that they derive from their investment in the development of customer relationships and confidential information. However, a recent Illinois appellate court decision raises serious doubt about the enforceability of many existing employment restrictive covenants. This case necessitates prompt action by employers that have restrictive covenants in agreements with their executives, managers, sales persons or employees in order to secure the protection and value they thought they had through these agreements.

Recent Illinois Appellate Court Decision

A decision this year by an Illinois Appellate Court in Fifield v. Premier Dealer Services held that less than two years of continued employment is not sufficient consideration to support restrictive covenants, even where the restrictive covenants were agreed to before employment began. Specifically, the court found that an employment agreement that contained restrictive covenants was unenforceable for lack of adequate consideration, even though the employee negotiated the agreement, the agreement was entered into before the employee began employment, the agreement was given in exchange for continued employment for an indefinite period of time, and the employee voluntarily resigned his employment. This decision was an abrupt departure from how restrictive covenants had generally been viewed in Illinois where conditioning employment on entering into an agreement containing restrictive covenants was thought to be sufficient consideration to support the enforcement of those restrictive covenants.

Impact of the Decision on Businesses

Unless and until this decision is overturned – the Illinois Supreme Court recently decided not to hear the case – it would be wise for business owners to revisit their existing agreements with employees that contain restrictive covenants. This review should include both agreements that have been recently entered into with employees and “form” agreements that will be used in the future. The focus of the review should be on whether the restrictions were/are supported by adequate consideration. To the extent that the restrictions were/are not supported by adequate consideration, business owners need to evaluate the value they perceive from their restrictive covenants and, as appropriate, take steps to enter into new agreements to replace existing agreement and revise any “form” agreements.

Going Forward

For those businesses that have employment agreements where the restrictive covenants are not supported by adequate consideration, the end of the year is a good time to revisit and revise those agreements as salary increases, discretionary bonuses and promotions may provide the needed consideration. It is also important to make sure going forward that agreements with employees that contain restrictive covenants will be enforceable. This can be done either by providing adequate consideration to the employee and/or possibly redrafting your agreement to apply the law of a jurisdiction where continued employment constitutes adequate consideration. In either case it is important that business owners do not take a one-size-fits-all approach when imposing restrictive covenants on employees, but cause the restrictive covenants to be drafted to protect the employer’s actual needs and tailored to the business and the interests to be protected.

Restrictive covenants still remain a viable and valuable tool to protect a business’s assets and future income stream. But business owners should make sure that their existing restrictive covenants are drafted in a manner likely to withstand a challenge. Restrictive covenants should be tailored to the specific employees, supported by adequate consideration and impose restrictions no greater than what is legitimately necessary to protect their business.

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