Enforcing Restrictive Covenants gets more unclear: Federal Judge Rejects Illinois Appellate Court Ruling that Two Years of Employment is Necessary Consideration for Restrictive Covenant Enforcement

 

A Northern District of Illinois Court has rejected the Illinois First District Appellate Court’s holding in Fifeld v. Premier Dealer Services.   The 2013 Fifeld decision held for the first time that an employee must work for at least two years after signing a restrictive covenant agreement for the continued employment to constitute adequate consideration.

 

The decision raises the possibility that the Seventh Circuit Court of Appeals will review the issue, as three federal district judges now disagree over the viability of the “bright line rule.”  Employer and their counsel should monitor this case as this decision gives a ray of hope for employers seeking to enforce non-competes in Illinois,  While Fifield remains binding precedent that will be applied by Illinois state courts, this federal court opinion provides useful and important insight to arguments employers should be mindful of when seeking to enforce their non-compete covenants.

 

Defendants Argue Fifield Precludes Enforcement of Their Employment Agreements

In Bankers Life & Casualty Co. v. Miller, No. 14 CV 3165, 2015 WL 515965 (N.D. Ill. Feb. 6, 2015), some insurance sales agents and managers left Bankers Life to work for a competitor.  They convinced several current Bankers life employees to leave also, and also allegedly downloaded confidential client lists and contact information prior to their departure. The sales agents and managers had employment agreements containing restrictive covenants that prohibited them from using Bankers Life’s confidential information, soliciting its customers, and inducing any Bankers Life employees to leave.

 

Inevitably, Bankers Life filed suit in federal court, alleging that the sale agents and managers violated the restrictive covenants contained in their agreements.  The ex-employees relied on Fifield, arguing that Illinois applies a “bright line rule” that continued employment for less than two years is insufficient consideration for a restrictive covenant.  Because these ex-employees worked there for less than two years, they argued the covenants were unenforceable.

 

Court Rejects Fifield’s Bright Line Rule

Judge Manish Shah rejected the holding in Fifield, and held that adequate consideration existed to enforce the covenants against those employees with less than two years employment.  The Illinois Supreme Court has not ruled on the validity of Fifield and as a federal judge applying Illinois law, Judge Shah’s task was to determine how the Illinois Supreme court would rule on the issue in light of prior precedent.  As noted by Judge Shah, Appellate Court rulings prior to Fifield held that two years of employment constituted sufficient consideration, but had never held that two years employment was the minimum length of employment necessary to support a non-compete. Therefore, Fifield’s holding was inconsistent with other Appellate Court decisions. Additionally, the Illinois Supreme Court in Reliable Fire Equip. Co. v. Arredondo, 358 Ill. Dec. 322 (2011), recently endorsed a “rule of reason, grounded in the totality of the circumstances” when analyzing the enforceability of a restrictive covenant.  According to Judge Shah, Fifield’s rigid approach is contrary to the Supreme Court’s more flexible rule. Therefore, according to Shah, the Supreme Court will likely reject Fifield sometime in the future, and he refused to apply it to the defendants in Bankers Life.

Federal Courts in Illinois continue to disagree on viability of 2 year rule and restrictive covenants

This is the third time in the past year that Northern District of Illinois judges have considered the viability of Fifield’s bright line rule. In Montel Aetnastak, Inc. v. Miessen, 998 F. Supp. 2d 694 (N.D. Ill. 2014), Judge Castillo declined to follow, Fifield, applying a similar line of reasoning as Judge Shah. Several months later, in Instant Tech., LLC v. DeFazio, No. 12 C 491, 2014 WL 1759184 (N.D. Ill. May 2, 2014), Judge Holderman reached the exact opposite conclusion, and predicted that if called upon to rule on Fifield, the Illinois Supreme Court would adopt the bright line rule.

 

Bankers Life represents a positive development for employers seeking to enforce restrictive covenants. However, a Seventh Circuit decision refusing to apply Fifield would only apply to suits in federal court. As such Illinois employers, especially those in Cook, Lake, DuPage, McHenry, Will and Kane County should expect that Fifield’s bright line ruling will remain the law of the land in Illinois state courts unless and until the Illinois Supreme Court weighs in on the issue.