Monday, January 4, 2016

Illinois Federal Courts Continue to Turn Away from Fifield Rule

When it comes to non-compete agreements, the rift between Illinois state and federal courts continues to deepen.

The so-called Fifield rule generally holds that for employment itself to constitute sufficient consideration for a non-compete agreement, the employment must continue for a period of two years. As developed, the rule applies with equal force to both existing and new employees. In this respect, Illinois appears to drift further away from a minority rule on "continued employment as consideration." That minority position looks to whether the employment continuation is "substantial" but courts adopting this position have not done stated the rule with respect to new hires - only existing ones.

For all its analytical foibles, Fifield at least provides some guidance for lawyers when drafting contracts. This is the benefit of a bright-line rule. The downside, of course, is that bright-line rules do not adjust for idiosyncratic fact-patterns, which (in truth) define non-compete suits.

And therein lies the problem for federal courts.

Their charge is to predict what the state supreme court would say, and appellate decisions are persuasive but not binding. State courts must follow appellate authority, regardless of their disagreement with it. Federal courts now have tread their own path and mostly have found that Fifield is not a case the supreme court would follow. The rationale: courts look to the totality of the circumstances when assessing a non-compete's reasonableness, so the same view should color their view as to consideration.

The Northern District of Illinois followed this very reasoning in Traffic Tech, Inc. v. Kreiter last week when it decided not to follow Fifield, denying an employee's motion to dismiss a complaint on the grounds of inadequate consideration. Of particular importance to the court's decision was the defendant's decision to leave voluntarily and the $250,000 signing bonus he received at the time he was hired (regardless of whether it was earmarked as non-compete consideration). Kreiter would be decided differently were it a state court case.

Kreiter illustrates that non-compete disputes, at their core, often rest on notions of equity. The defendant's position simply was not as appealing as those found in other cases, where at-will employees received nothing other than a job, suffered a change in their commission structure, a reduction in their sales territory, or even were terminated. In this respect, if one views consideration as a reflection of "equity," Fifield tends to fall apart quickly. If one subscribes to the need for predictability, Fifield starts to garner more merit.

The federal courts' position on Fifield seems to rest on their view that the Supreme Court of Illinois views equity as the foundation for enforcement of non-compete cases. And equity, viewed under the "totality of the circumstances" approach, demands a very fact-specific assessment as to not only the agreement's terms but also what the employee received for signing it. It is likely that the federal courts are right on this point, but it continues to be a major source of discontent for non-compete lawyers and the clients they advise. And it means that, first and foremost, any attorney needs to look at jurisdictional rules when advising on a non-compete matter. That is no simple task.

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