Tag: start-ups

Fifield v. Premier Dealer Services, Inc.

BACKGROUND

The plaintiff in this declaratory judgment action had been employed by a subsidiary of an insurance company that marketed finance and insurance products to the automotive industry. After a sale of that business, plaintiff’s employment was terminated, but he was offered employment conditioned upon his acceptance of an “Employee Confidentiality and Inventions Agreement” (the agreement) which included non-solicitation and non-compete provisions. The agreement states in pertinent part:

“Employee agrees that for a period of two (2) years from the date Employee’s employment terminates for any reason, Employee will not, directly or indirectly, within any of the 50 states of the United States, for the purposes of providing products or services in competition with the Company (i) solicit any customers, dealers, agents, reinsurers, PARCs, and/or producers to cease their relationship with the Company *** or (ii) interfere with or damage any relationship between the Company and customers, dealers, agents, reinsurers , PARCs, and/or producers *** or (iii) *** accept business of any former customers, dealers, agents, reinsurers, PARCs, and/or producers with whom the Company had a business relationship within the previous twelve (12) months prior to Employee’s termination.”

Plaintiff successfully negotiated with Premier a provision that the restrictive covenants would NOT apply if he was terminated without cause during the first year of his employment (the first-year provision). Three months later, plaintiff resigned, began working for a competitor and sued to have the restrictive covenants held unenforceable stating that plaintiff had no access to confidential and proprietary information. The trial court held that the restrictive Covenants were unenforceable for lack of “consideration” – a legal term of art that generally means a bargained-for exchange of value. The appeals court affirmed.

ANALYSIS

Defendant argued that the non-solicitation and non-compete provisions were enforceable because the offer of employment was adequate consideration, there was a mutual exchange of promises (employment in exchange for restrictions), and the covenants were pre-employment, not post- employment. Defendant further argued that “the purpose of Illinois law regarding restrictive covenants is to protect against the illusory benefit of at-will employment” which was “nullified by the inclusion of the first-year [non-enforcement] provision in the agreement.”

Plaintiff countered with the argument that the provisions in the agreement are unenforceable because Illinois law requires employment to continue for a substantial period of time and that “Illinois courts have repeatedly held that two years of continued employment is adequate consideration to support a restrictive covenant…regardless of whether an employee is terminated or decides to resign on his own.”

The appellate court agreed with plaintiff citing Brown & Brown, Inc. v. Mudron, 379 Ill. App. 3d 724, 728 (2008) which held that the promise of continued employment in the context of post-employment restrictive covenants may be an illusory benefit where the employment is at-will. “Illinois courts have held that continued employment for two years or more constitutes adequate consideration. Id. at 728-29.”

TAKE AWAYS

The Fifield decisions has already generated a great deal of discussion from corporate board rooms to legal blogs. Unfortunately for businesses and their lawyers, the case leaves many unanswered questions.

For example, the court does not discuss whether the outcome would have been different if the employee were a high-level executive with immediate access to a wide range of highly sensitive confidential and proprietary information. At best,mother court simply mentions the plaintiff’s allegations that he had no access to such information.

Another area of uncertainty impacts start-up and early stage businesses. Very young businesses are often highly dynamic and early employees have access to a broad swath of the company’s Intangible assets such as business and revenue models, marketing plans, computer software and hardware and prospective customers, regardless of whether they serve a customer service function or “C-suite” executive function. The requirement that an employee have two years continued employment before a restrictive covenant becomes enforceable ignores the very real dynamic of start-up companies.

Lastly, an important question that went unanswered is whether the employer can offer some other “consideration” besides two years continued employment. For example, is there a pure monetary consideration that would support enforcement of the covenant? What if the covenant only lasted as long as the period of the departing employee’s employment?

NEXT STEPS

If you have restrictive covenants in your agreements with employees, it is strongly recommended that you meet with your lawyer to discuss the impact of this case on these agreements and your business. At the very least, you should carefully review your non-compete and non-solicitation agreements to see if they are supported by adequate consideration. If you have questions or concerns, or just don’t know how to begin, feel free to contact the lawyers at Leavens, Strand, Glover & Adler for a free, in-person or over-the-phone consultation. You can also email the author here: dadler@lsglegal.com.