Federal Judge Rules that Non-solicitation Provision of Employment Agreement is Enforceable

On October 20, 2017, a federal district court judge for the Northern District of Illinois held that a non-solicitation restrictive covenant contained in an employment contract was not unenforceable for lack of adequate consideration, even though the defendants were employed for fewer than two (2) years.  Stericycle, Inc. v. Simota, et al., No. 16 C 4782 (N.D.Ill. 10/20/2017).  In so holding, the court rejected the Illinois Appellate Court's ruling in Fifield v. Premier Dealer Servs., 2013 IL App (1st) 120327, which held that a non-competition or non-solicitation restrictive covenant contained in an employment at-will employment agreement is unenforceable for lack of adequate consideration when the employee was employed for fewer than two (2) years.  Several other Illinois Appellate Court decisions have followed Fifield and adopted the so-called "two-year rule," but the Illinois Supreme Court has not reached the issue.  Accordingly, federal court judges are not bound to follow Fifield, and instead must make a predictive judgment on how the Illinois Supreme Court would decide the issue.

The court disagreed with the defendants' argument, that the restrictive covenants are unenforceable, as a matter of law, for lack of adequate consideration, because they worked for fewer than two years, and their employment was at-will.  The court found that the defendants' thirteen (13) months of employment were sufficient consideration under Illinois law to support the restrictive covenants.  One key factor in the court's decision was that defendants had voluntarily resigned their employment.  The court stated that, "[b]ecause the defendants resigned from Stericycle after about thirteen months of continued employment to work for a competitor, the Court finds that there is enough consideration to enforce the Nonsolicitation Agreements."  The court was critical of any "bright-line" arbitrary "two-year rule," though, reasoning that a fact-specific analysis makes more sense and is more consistent with the underlying principles of Illinois restrictive covenant law.  Illinois courts require that consideration based on at-will employment continue for a substantial period after an employee signs a restrictive covenant.  Fifield and the recent Illinois appellate decisions that follow it have adopted a bright-line rule that defines the required substantial period as two years, regardless of whether the former employee was terminated or resigned.  The court in Stericycle decided that the Illinois Supreme Court would reject a bright-line two-year rule and apply a fact-specific approach in assessing consideration.  The court reasoned that Illinois courts applied a fact-specific approach prior to Fifield.  Moreover, the two-year rule is only based on the fact that Illinois courts have generally held that two or more years of continued employment constitutes adequate consideration.  It does not follow that two years should necessarily be the rule.  The two year rule, "does not logically follow from the rationale underlying the substantial period requirement."  Court require a substantial period of continued employment to prevent an employer from locking an at-will employee into a restrictive covenant and then immediately terminating the employee.  However, this policy could be accomplished with a shorter period of employment; and there is nothing particularly significant about a two-year term of employment that would justify an arbitrary two-year minimum requirement.  The court also pointed out that the two-year rule puts employers at the mercy of their employees since an employee could void the consideration for any restrictive covenant by resigning just before reaching the two-year mark.  Lastly, the Illinois Supreme Court has embraced a fact-specific approach for analyzing other aspects of restrictive covenants, and would likely apply the same approach to assess the adequacy of consideration based on the totality of the circumstances.