Noncompetes aren’t enforceable against employees who leave within two years
A recent and groundbreaking Illinois Appellate Court case, Fifield and Enterprise Finance Group, Inc. v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327, holds that "a noncompetition agreement is not valid and enforceable if an employee is fired or resigns within two years,” Ayla N. Ellison writes in the September issue of ISBA’s Labor & Employment Law newsletter.
“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," Ellison writes. "There must be two years of continuous employment to be considered adequate consideration to support a postemployment restrictive covenant.” Read her summary and analysis of Fifield.
Member Comments (2)
This is a legislative decision that should not be made by three judges.
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.