Tag: Fifield

“Will It Play in Peoria?!”: Fed. Court Casts Doubt on Continued Vitality of ‘Two – Year Rule’ to Enforce Non-Compete

Peoria

Fifield v. Premier 2013 IL App (1st) 120327 is (was?) an important case in employment law circles for cementing the “two year rule”: two years of continuous employment is the bare minimum length of at-will employment required for an employer to enforce a restrictive covenant.

From the employer’s vantage point, the rule was troubling since it gave the employee all the leverage: he could leave a job at any time before he reached the two-year mark regardless of whether he signed a non-compete.

About two years later, Prairie Rheumatology Assocs. v. Francis, 2014 IL App (3d) 140338 followed Fifield but with a twist: it considered whether an employer could elude the two-year rule if by offering am employee an additional benefit (e.g., training, marketing support, bonus payments, etc.) beyond continued employment.  Still, the court in that case nullified the non-compete since the doctor defendant decamped less than two years  of her hire date.

Enter Cumulus Radio Corporation v. Olson, 2015 WL 643345 (C.D.Ill. 2015), a Federal case that examines whether the two-year rule is inexorable in the context of a radio station’s injunction suit against a competitor in the Peoria, Illinois market.

The plaintiff sued its former account executive and his new employer, a competing station, for violating restrictive covenants contained in an employment contract signed by the executive.  The contract contained a six-month/sixty mile non-compete term and a 12 month non-solicitation and non-disclosure term.  The non-solicitation clause barred the executive from contacting certain of plaintiff’s customers (radio advertisers) for 12 months after he leaves.

The plaintiff resigned 21 months into his tenure with plaintiff and began working for the competitor just two days later.  The plaintiff sought a temporary restraining order (TRO) preventing the executive from working for the competitor for the duration of the non-compete term.  The Southern District granted in part and denied in part the plaintiff’s TRO request.

Under Federal Rule of Civil Procedure 65, a TRO plaintiff must show that (1) he will suffer immediate, irreparable injury; (2) a likelihood of success on the merits; and (3) lack of an adequate remedy at law.  If the plaintiff makes the required showing on elements (1)-(3), the court then balances the relative harms to the parties and the public if the TRO is granted.  *2.

On the breach of contract count – alleging the executive breached all the restrictive covenants – the court found that the executive’s 21-month tenure with the plaintiff was sufficient consideration to support the non-compete.

The court refused to rigidly apply Fifield and “predicted” that Illinois’ Supreme Court would apply a more flexible test than the dogmatic two year rule.

For support, the court pointed to two  recent Northern District decisions that rejected the two-year rule in favor of a more fact-specific and flexible test.  The reason, according to the court, was that if the two-year test is formulaically applied, restrictive covenants would be rendered illusory and voided at the “whim of the employee.” (**4-5).

In finding that employing the executive’s for a 21-month term was adequate consideration to support the restrictive covenants, the court found that the plaintiff showed a likelihood of success on the merits on its TRO claim that the executive breached the employment contract.

Takeaways

Significant in that it’s another Federal court casting doubt on the continued vitality of the two-year rule.  Practitioners who are seeking to enforce restrictive covenants where the underlying employment length didn’t reach two years, now have three District court cases – two from the Northern, one from the Southern – that show a willingness to depart from the two-year rule.

 

 

Two-Year Continuous Employment Rule to Support Non-Compete Validated by Illinois Appeals Court

Fifield v. Premier, 2013 IL App (1st) 120327 is rightly regarded as a watershed case in Illinois employment and non-compete law circles for squarely stating that two years of continuous employment is the required consideration to support a non-compete agreement in an at-will setting.

Prairie Rheumatology Associates, SC v. Francis, 2014 IL App (3d) 140338 represents an appeals court’s recent validation of the two-year rule in the context of a medical practice suing to prevent one of its former physician employees from competing against it.

The plaintiff medical company and the doctor defendant entered into an at-will employment contract (it could be terminated by either side at any time) that contained a 2-year and 14-mile non-compete term. The defendant agreed not to perform competing medical services for 2 years and within 14 miles of the plaintiff’s office measured from the date defendant’s employment ceased and the physical office location.

19 months into her tenure, defendant quit and went to work for a medical services firm located nine miles from plaintiff’s office. Plaintiff sought a preliminary injunction to enforce the non-compete. The trial court entered an injunction that prevented the defendant from treating plaintiff’s current patients but allowed defendant to treat patients that belonged to her before she started working for the plaintiff. The defendant appealed.

Held: reversed. Non-compete lacks consideration and is not enforceable.

Reasons:

In Illinois, a post-employment restrictive covenant (like a non-compete agreement) is enforceable only where it is reasonable in geographic and temporal scope (“space and time”) and necessary to protect a legitimate employer interest.  A restrictive covenant is reasonable where (1) it’s no greater than necessary to protect the employer’s legitimate business interest, (2) it doesn’t impose an undue hardship on the employee, and (3) isn’t injurious to the public. (¶ 12).  But before the court analyzes these three factors, it must first determine whether the restrictive covenant is supported by consideration.

The reason for the consideration rule is because an employer’s promise of continued employment is often illusory in an at-will relationship since the employer can fire the employee at any time without warning.  Two years or more of continued employment constitutes adequate consideration in the non-compete setting and the two-year rule applies even where the employee resigns on his own instead of where he is fired.  (¶¶ 14-15).

Here, the defendant resigned 19 months after her employment commenced – five months short of the required two-year consideration period. As a result, the court declined to enforce the non-compete.

The court rejected plaintiff’s argument that it gave the defendant “additional consideration” in the form of marketing support and facilitating defendant’s hospital privileges. Looking at the evidence, the court found plaintiff gave defendant minimal assistance in obtaining hospital privileges and failed to introduce defendant to any referral sources as was promised. At the injunction hearing, plaintiff’s principal couldn’t name a single doctor to whom she introduced defendant during defendant’s time practicing at plaintiff’s office.  (¶¶ 18-19).

Afterwords:

This case cements rule that two years of continuous employment is required for there to be adequate consideration to enforce a post-employment non-compete term.  An employer can possibly get around this by offering additional consideration (i.e., something the employee is otherwise not entitled to).  But where the employer cannot offer evidence of the additional consideration, the two-year rule controls and will bar enforcement of the non-compete.

Non-Compete Signed 16 Years After Employment Start Date Is Too Late (To Be Enforced) – Says KY High Court

In prior articles, I’ve discussed how restrictive covenants (i.e., non-disclosure, non-solicitation and non-competition provisions) are staples of modern-day employment contracts and business sale agreements.  In Creech, Inc. v. Brown (http://law.justia.com/cases/kentucky/supreme-court/2014/2012-sc-000651-dg.html) the Supreme Court of Kentucky struck down a non-competition provision in a hay supplier’s written contract the supplier made a long-time employee sign several years after he started working there.

The defendant worked for the plaintiff in various capacities through the years.  Sixteen years into his tenure, plaintiff’s new management asked the defendant to sign a Conflict of Interest Agreement (the “Agreement”) that contained broad non-disclosure provisions and a non-competition clause.  The non-compete spanned three years and had no geographic boundaries.  Fearing job loss, defendant signed the Agreement.  The defendant continued to work for the plaintiff for a couple more years when he took a job with a rival supplier.  Plaintiff then sued to enforce the Agreement’s non-competition provision.  The trial court sided with the defendant and the appeals court reversed.  On remand, the trial court entered summary judgment for the plaintiff employer and found that the defendant violated the Agreement.  This time, the appeals court upheld the non-competition clause.  Both parties appealed to Kentucky’s Supreme Court.

Held: Reversed.  The non-competition provision is unenforceable because it lacks consideration.

Reasons:

The defendant worked for nearly two decades for the plaintiff hay supplier and wasn’t asked to sign a non-compete until more than sixteen years after his start date.  The plaintiff gave defendant nothing in exchange for defendant signing the Agreement.  It didn’t give the defendant a raise, didn’t change the defendant’s job duties and offered no training or other benefits.  There was no consideration flowing to the defendant to bind him to the non-competition provision’s three-year term.

Consideration means a benefit to the party making a promise and a loss to the party to whom the promise is made.  Each side gives and gets something.  Benefit means the promisor has gained something to which he is not otherwise entitled.  Detriment or loss means that the promisee has given up something in exchange for the promise.  (p. 12).

The Court rejected the plaintiff’s claim that the defendant’s continued employment was sufficient consideration.  The plaintiff didn’t give the defendant anything in exchange for him signing the Agreement.  The Agreement was silent on defendant’s job duties or rate of pay and as a result couldn’t be considered a “rehiring.”  Nor did the Agreement alter defendant’s employment terms.  He remained an at-will employee at the same pay rate. (p. 14).  The Agreement imposed a three-year restriction on defendant seeking alternative employment without giving him any corresponding benefit.  Since the Agreement didn’t require plaintiff to give up anything in exchange for the defendant signing the Agreement, the non-competition provision lacked consideration and wasn’t enforceable.  (p. 15).

Besides defendant’s job description and pay remaining static, the plaintiff hay supplier also didn’t offer any specialized training to the defendant after he signed the Agreement.  A contract law axiom posits that a promise devoid of a reciprocal flow of benefits and detriments can’t be enforced.  (pp. 15-17).  By not giving up anything in consideration for defendant executing the Agreement, the plaintiff’s offer of continued employment was illusory.

Afterword: I’ve never practiced in Kentucky but the case is relevant to Illinois restrictive covenant law since it’s congruent with Fifield’s (Fifield v. Premier Dealer Services, Inc., http://www.state.il.us/court/Opinions/AppellateCourt/2013/1stDistrict/1120327.pdf) two-year rule. (Two years of continued employment is required for a non-compete to have adequate consideration.)  

The result in Creech seems fair.  An employer shouldn’t be able to unilaterally foist a non-compete on a long-time employee without providing some additional benefit to him.  For employers, the lesson is clear: if you’re going to have an employee sign a restrictive covenant after he’s started working, you should pay the employee a bonus, give him a raise or provide some other tangible benefit so that there is sufficient consideration – loss or detriment –  flowing to the employee so that you can bind him to a non-competition provision.