The Supreme Court of Illinois Is Not Interested in the Non-Compete Consideration Rule

For the third time, the Supreme Court of Illinois has declined to hear a petition for leave to appeal that confronts the question of continued employment as consideration for a non-compete agreement.

For at least the past few years, practitioners have operated under the assumption, perhaps wrongly, that Illinois courts established a bright-line two-year rule under which continued employment may serve as consideration for an employee restrictive covenant agreement. This is the so-called Fifield rule, stemming from a 2013 First District Appellate Court case that appeared to set forth a bright line. The Supreme Court declined to hear an appeal in Fifield, so the lack of interest in follow-on cases is not surprising.

This past week, the Court declined a petition for leave to appeal in the case of Automated Industrial Machinery, Inc. v. Christofilis, 2017 IL App (2d) 160301-U. This was my case, and I represented Tom Christofilis at trial and on appeal. Early on in the litigation, the circuit court had granted our motion to dismiss a breach of contract claim given that Christofilis' former employer, AIM, had required him to sign an afterthought non-compete that lasted only for 5 months before he resigned. The court noted that it was not relying at all on Fifield, rightly stating that not a single case in Illinois endorsed consideration of just 5 months' continued employment.

Illinois' consideration rule has come under criticism from some, who apparently are dissatisfied that courts have tread a middle ground between the absolutist positions. Those positions state either that continued employment is not valid contract consideration for a non-compete, or that it is. Very few states require some sort of meaningful period of employment, and Illinois' "substantial period of time" rule is perhaps the most well-developed line of cases that forges a pragmatic path.

Though I say the cases are well-developed, they could certainly be clearer. I think Fifield is misunderstood because sometimes easy cases make for bad law. In retrospect, the two-year pronouncement was both unnecessary to the case's disposition and simply a product of loose opinion writing. I hate to say that and don't mean to indict the appellate court, but it's simply true.

In the bigger picture, the notion of continued employment as adequate consideration at all for a restraint of trade is just weird. It is ephemeral and in many cases illusory. It fails to account for the adhesive nature of the arrangement and the fact that the employee receives nothing at all comparable to what he or she is giving up. As lawyers, we're stuck with this silly, non-sensical paradigm of analyzing contract consideration that makes very little sense to clients and seems directly at odds with the disfavored nature of non-competes in the first instance.

Legislating this issue will prove difficult. But there's another way. If a court ever took a fresh look (and based on Fifield and Christofilis, I don't see that as imminent), it may want to ask just why continued employment is a permissible form of consideration in the first instance. Or how it comports with the adequacy rule that requires some decent fit between the restraint and the benefit conferred on the party restrained. Inertia is not often a good reason for justifying a legal rule, even if lawyers and judges assume that it is.

The Reading List (2017, No. 23): The "Welcome Back, Ken" Edition

Non-Compete and Trade Secrets News for the week ended August 4, 2017

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This week, I welcome myself back!

I'm happy to be here, really I am. The time away from blogging was great, a much-needed break. What did I do? I went camping (in the rain). I ran a race (the Bix7 in the lovely Quad Cities), and - oh yea - I tried a case in Chicago. Eventful. Not as eventful as Anthony Scaramucci's month, but eventful nonetheless.

Speaking of my trial, it was a doozy. A replevin trial over a stolen shipment of Mexican cheese, which the Chicago Tribune reported on. And, you know your case is good when it merits discussion in Food & Wine magazine. Just so you know, cheese heists appear to be a thing. But I'll take the set of facts I tried over any of these half-baked schemes. And it turned out great a - a replevin judgment about three weeks after we filed the case.

It did get me thinking about remedies, because you know I'm always looking to relate something to non-compete and trade-secrets law. Readers of this blog know that I've written a lot about the ex parte seizure order available under the Defend Trade Secrets Act. That procedure allows for an early court hearing, without notice, through which a federal court can empower a U.S. Marshall to seize stolen items containing protected trade secrets.

This replevin remedy is kind of similar, though there's process afforded. A replevin is simply an interim order that directs the seizure of property. In my case, cheese. But it could in theory be the replevin of a trade secret, too, depending on the facts. In Illinois, at least, replevin is only available for chattels or tangible goods. Again, cheese would be an example. Most trade secrets exist electronically, making the statute in Illinois a somewhat poor fit. Also, most items that a plaintiff would want back are legitimate in and of themselves (a computer, a thumb drive). In a replevin case, the plaintiff must show a superior possessory right to the thing itself - not what may reside on it.

Depending on the facts, a replevin order could issue on an ex parte basis. But in the main, a replevin claim really is an early trial that is akin to a mandatory injunction proceeding, which if successful results in a sheriff seizing property. All that said, don't overlook replevin as a potential remedy in a trade secrets case.

Anyway, on to news and updates.

***

Consideration for Non-Competes in Illinois

Illinois courts continue to debate and discuss the so-called Fifield rule of continued employment. Generally, that case suggests two years of continued employment is required to serve as adequate consideration for a restrictive covenant. The case, however, is more a result of sloppy legal writing than it is a bold pronouncement of what amounts to lawmaking.

In reality, the facts of Fifield weren't particularly compelling and the case wasn't that close. The employee had been working only for a few months before leaving, meaning his tenure was far short of the rough two-year guidepost old Illinois cases had established. And there certainly was no indication he received anything more than the job itself.

The Appellate Court of Illinois (Second District) weighed in somewhat in Paul Joseph Salon & Spa, Inc. v. Yeske in affirming the grant of a temporary restraining order. There, the defendant resigned two days before the expiration of the two-year employment period. The court held that, at least when reviewing a TRO, the court did not abuse its discretion in finding the consideration adequate even if it fell just short of the two-year mark. The case is not particularly useful since it's an unpublished decision and given the "quick-look" review afforded TROs. And in fact, the Second District in prior cases never has embraced a bright-line rule of two years' continued employment. It appears the reason why is that the two-year rule only sort of exists and stems from an unforced error in the drafting of the Fifield decision.

A link to the case is available here.

From the Southern District of Illinois, we received another district court memorandum order that rejects any bright-line rule concerning continued employment. This follows a trend of cases from Illinois federal courts. In Apex Physical Therapy, LLC v. Ball, No. 17-cv-119, 2017 WL 3130241 (S.D. Ill. Jul. 24, 2017), the court noted the problem with bright-line rules and inequitable results which could occur. Interestingly, the court stated that "consideration can be comprised of benefits beyond continued employment." As with many of the federal decisions, it is not clear what the employee's agreement said about consideration or what else the employer might have alleged in addition to continued employment.

Injunction Bonds

One overlooked aspect of injunction practice in competition cases is the need for a bond. A bond generally provides the defendant some security in case the court was wrong in issuing a preliminary injunction. To be sure, those orders can inflict economic harm on the defendant. And to complicate the equation, courts must issue those orders on a relatively undeveloped record.

In my experience, plaintiffs who seek an injunction treat the bond requirement as an afterthought. It's one thing to ask for a low or nominal bond. It's quite another to be totally unprepared in contacting a broker, filling out a surety application, and getting the bond issued. Assuming a plaintiff does secure a bond, however, it must recognize that it has responsibilities to continue with the litigation responsibly. Or else, the bond may provided the defendant with a ready source of damages.

Against this backdrop, I was interested by the North Carolina Court of Appeals' opinion in Van-Go Transportation, Inc. v. Sampson County. This is not a non-compete case, but it's about the closest analogue and certainly relevant for the bond discussion. It involved a public contract for the transportation of Medicaid patients seeking health-care services. The incumbent, Van-Go, obtained a temporary restraining order against a competing ride company that prevailed in a request-for-proposal process with a municipality. As a condition of the TRO, the court required Van-Go to post a bond.

After the defendant filed a motion to dismiss, Van-Go voluntarily dismissed its case but also sought a release of the TRO bond. The trial court denied that effort and awarded the bond proceeds among the defendants. The Court of Appeals affirmed that decision, holding that a voluntary dismissal is equivalent to an admission that the TRO was wrongfully obtained in the first instance. The ruling is obviously defense-friendly, and it forces the plaintiff to take a long-view of litigation. In rejecting Van-Go's argument that it discontinued the litigation for "responsible financial business practices," it effectively tells plaintiffs that they must continue a case in which they have secured an injunction at pain of forfeiting a bond.

Depending on the amount of the bond (and the damages a defendant can prove), that may be an acceptable risk for the plaintiff to take. But it's crucial to understand that getting an early injunction comes at a price. The plaintiff may not be able to abandon its case free of charge.

A link to Van-Go Transportation can be found here.

Independent Contractors

The enforcement of non-competes against consultants and independent contractors raises a host of tough questions. After all, the essence of being an independent contractor is freedom and, importantly, freedom to control your own work. Non-competes, by definition, stifle freedom and seem to be at odds with an independent contractor relationship. Still, many companies use non-competes with consultants or sales representatives much as they would with ordinary W-2 employees.

A pair of cases reveals the limitations, though, of shoehorning consultants into the typical employment non-compete framework. The first comes from the Eighth Circuit, where a panel concluded that a company could not restrict an outside sales representative from engaging in competing crop management and fertilizer sales since he had developed his customer contacts through his own labor and without support from the company. The case, Ag Spectrum v. Elder, is a great read on the reasonableness inquiry through its analysis of the company's protectable interest. In particular, the opinion emphasized the resources that the sales representative invested and the absence of any specialized training or assistance that the principal provided. In those circumstances, a customer non-solicitation covenant was unreasonable as applied.

The opinion from the Eighth Circuit panel is available here.

In a similar case, an Ohio federal district court denied an injunction brought by a company that sells, among other things, office chair mats against a former consultant. The non-compete entered into between the company and the consultant broadly prohibited him from competing in the sale of chair mats and other products. The problem for the company is that the consultant's work, following the end of the relationship, involved those other products. And the consultant's services had nothing to do with them. Put another way, the company was trying to prevent competition for work related to products over which its consultant had no involvement.

The opinion, written by Judge Edmund Sargas, reflects a terrific example of judicial engagement - a perspective I often find lacking in non-compete cases. Judge Sargas credited the consultant's prior history in developing the same type of products that he was offering after the end of the relationship, concluding that the consultant in fact did not try to capitalize on anything confidential he learned through his contract arrangement.

Together, both cases demonstrate the difficulty of enforcing non-competes in a more arms-length relationship where the employer simply cannot demonstrate a protectable interest - that is, an interest that stems from a significant investment of time, resources, or information.

***

Much more next week, including an update on the big Wal-Mart trade secrets case and more non-compete coverage in the New York Times.

More Rejection by Illinois Courts of Bright-Line Consideration Rule

The federal courts have become the final frontier for Illinois employers looking to enforce non-compete agreements against at-will employees. Those agreements contain embedded consideration problems if the gap between signing and termination dates is less than two years and if the employer cannot point to some other form of consideration beyond the job itself.

With the recent district court decision in Allied Waste Servs. of N. Am. v. Tibble, there is firm momentum in federal court to move away from the two-year, bright-line rule that two of the five appellate courts have established. The Supreme Court of Illinois twice has refused to weigh in on the matter, apparently content to let this issue play out in the other appellate districts.

Allied Waste breaks no new ground and largely follows the reasoning of other federal district courts, the most persuasive of which is Judge McDade's thoughtful opinion in Cumulus Radio Corp. v. Olson. The essence of these cases is that consideration is too fact-intensive for bright-line rules and that courts should consider the totality of the circumstances (e.g., method of termination, length of at-will employment, conditions of employment).

Indeed, one could argue that Allied Waste is not all that relevant, since it appears the account executive also received a salary bump, greater bonus potential, and promotion in conjunction with his non-compete agreement. Put differently, this really wasn't a classic case in the mold of Fifield and the other disputes that truly center on "continued employment as consideration."

***

Having now read and thought about these consideration cases for nearly three years, I am warming to an alternative way of thinking of how the consideration question could be resolved. I developed three rules of thumb, which are more or less working concepts and not specific proposals at this point. They seek to balance important interests related to contract formation with the need to avoid bright-line rules, which remove the important function of judicial discretion.

First, if the contract recites the consideration granted for the restrictive covenant, then it should control and the employer may not introduce evidence to contradict (or even supplement) its own agreement. This requires no more than a plain reading of the agreement and informs how the court will proceed with further analysis over the consideration issue.

Second, if the contract is silent or ambiguous as to consideration, then a court may consider extrinsic evidence of specific consideration that would support the agreement. Here, the employer would need to identify something tangible and concrete as opposed to an after-the-fact reconstruction of an individual's employment status that may not have anything to do with consideration for the restrictive covenant.

Third, if the consideration is continued employment and the employee is terminated, then the court should find as a matter of law that the consideration is illusory. This should be an obvious, black-letter principle that poses none of the problems sometimes associated with bright-line rules.

Fourth, courts should conduct limited evidentiary hearings to resolve consideration questions at the earliest possible moment, much like they do now with jurisdictional discovery. The issue of contract formation is essential and requires prompt resolution in a way that is divorced from the other issues that attend non-compete disputes. If the court finds that the consideration given was not adequate in light of the specific restraints, then the court should enter a judgment on the contract in the employee's favor immediately. In this regard, employers who use very broad restraints but only support themwith nominal or potentially meaningless consideration (like continued employment) likely will suffer an early defeat before broad expensive discovery begins.

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.

Pennsylvania Follows Trend in "Consideration" Cases

The subject of consideration is the new frontier of non-compete disputes.

Although Illinois is at the forefront of this burgeoning consideration debate, other states increasingly have begun exploring the concept of what exactly an at-will employee receives in exchange for agreeing to a non-compete agreement. This "exchange" is the fulcrum of consideration, a legal term that ensures the enforceability of a contract obligation.

Pennsylvania, like other state supreme courts, has waded into the arena, albeit with an arcane and interesting twist to the legal problem. Yesterday, the Supreme Court of Pennsylvania in Socko v. Mid-Atlantic Systems of CPA, Inc. held that an employee can challenge a restrictive covenant agreement signed after the start of employment on the grounds that it lacks consideration, even if the agreement contains specific language that the employee "intends to be legally bound."

Why does that intent-to-be-bound language matter?

Pennsylvania is the only state to adopt something called the "Uniform Written Obligations Act." Consider, for a second, whether a statute can be uniform if 1 out of 50 states has enacted it. The Act provides that a written promise:

shall not be invalid or unenforceable for lack of consideration if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound.

The challenge for the Supreme Court of Pennsylvania was to harmonize this very old statute with the general common-law principle that says an employee who signs a restrictive covenant after the inception of employment must receive new consideration beyond employment itself. This rule generally requires an employer to provide something tangible such as a promotion, a bump in pay, or some severance benefit. Continued employment never suffices in Pennsylvania.

The Court, facing a somewhat daunting challenge, did its best to reach what it felt was the right result, consonant with years of legal decisions in the restrictive covenants area. It concluded that, despite the plain language of the Act, extending it to contracts in restraint of trade would be "unreasonable." The Court considered the "historic background regarding" non-competes, as well as their "unique treatment in the law." Therefore, even if non-compete contracts include the mandated "intends to be legally bound" language, an employee still can challenge the agreement on the grounds that it lacks consideration.

The main canon of statutory interpretation that the Court had going for it was the strict construction rule. That rule generally states a statute in derogation of the common law must be strictly construed. Applied to non-competes, the Court traced the history of these "unique" agreements and the special issues pertaining to consideration that the law had afforded them.

The case is perhaps not a model of how to resolve questions of statutory construction. Nevertheless, it continues a clear and definite trend. In the last several years, courts seem to be pivoting away from examining whether an employer has a legitimate business interest to protect through a non-compete and towards looking at whether there even is consideration at all. To be sure, questions of reasonableness and protectable interest are vitally important in cases like this. But the consideration issue is fundamental to the issue of contract formation in the first place and often results in a rapid disposition of the suit.

Seventh Circuit Smartly Avoids Fifield Issue, Disses Illinois Law

In the detritus of Illinois law following the Fifield v. Premier Dealers Services case, one federal case actually appeared to have the potential to reshape how state courts (not to mention an increasing number of lower federal courts) viewed the issue of non-compete consideration for at-will employees.

Instant Technology, LLC v. DiFazio (7th Circuit, Nos. 14-2132 & 14-2243) was one of the diversity cases where the court followed Fifield and endorsed the two-year, bright-line consideration rule, which holds that non-compete/non-solicit covenants are enforceable only if an at-will employee has been employed two years or more. (This, of course, assumes the only consideration offered was employment itself, not something more tangible.) Other diversity cases declined to follow Fifield on the grounds that it did not accurately state the law in Illinois. Those cases have said that if the Illinois Supreme Court were confronted with the issue, it would come out with a different rule than that set forth in Fifield.

Instant Technology was always somewhat of a flimsy candidate for a broad, doctrinal repudiation or endorsement of Fifield, since the case appeared to founder on whether the covenants in the IT staffing business supported a "legitimate business interest." The district court found not, and the Seventh Circuit held that this finding was supported by the evidence. And on that score, Judge Easterbrook's opinion in Instant Technology gave nary a mention of Fifield or the current debate over consideration.

However, at oral argument, the Court discussed Fifield at length. And Judge Easterbrook is not the kind to wilt away and blindly assume the appellate court got it right in Fifield. He would seem to have little trouble excoriating the state court rule if he felt the legal standard was groundless. But his opinion avoided the issue, so we have nothing authoritative from a case that at least held out the possibility of being a game-changer in the consideration debate.

But, not surprisingly, Judge Easterbrook used the opportunity to take a not-so-veiled shot at Illinois law, and in particular the "totality of the circumstances" test from Reliable Fire Equipment Co. v. Arredondo. That case changed the analytical framework for determining how an employer can establish a legitimate business interest to support a non-compete. It discarded the traditional approach - which looked at whether an employer had a near-permanent relationship with clients or whether it sought to protect confidential business information the employee subsequently tried to use - and set forth a rather malleable (cavernous?) test that considered the totality of the facts from the case.

In Instant Technology, the IT staffing firm disputed the district court's analysis and basically said the judge didn't consider "everything," without specifying what it exactly it was that the court missed.

Judge Easterbrook says:

"Making validity turn on 'the totality of the circumstances' - which can't be determined until litigation years after the events - makes it hard to predict which covenants are enforceable. If employers can't predict which covenants courts will enforce, they will not make investments that may depend on covenants' validity, and they will not pay employees higher wages for agreeing to bear potentially costly terms. Both employers and employees may be worse off as a result. Risk-averse employees who hope that their covenants will be unenforceable, but fear that they will be sustained, may linger in jobs they would be happier (and more productive) leaving. But our rule of decision comes from state law. Erie R.R. v. Tompkins, 304 U.S. 64 (1938). Reforming that law, or trying to undermine it, is beyond our remit."

This passage largely pivots off many of the questions Judge David Hamilton asked during oral argument in the case. Judge Hamilton was concerned about the blank-slate landscape of Illinois law (a term used by Instant Technology's counsel) and the lack of apparent predictability in an area that demands it. Predictability and certainty usually arrive in the form of bright-line rules, which (oddly enough) Fifield establishes. As for the broader question of reasonableness, the Seventh Circuit seems to be saying that Illinois employers got what they asked for: flexibility. The price? Often times, disappointment.

Seventh Circuit Seems Uninterested in Fifield Rule

Last week, the Seventh Circuit heard oral argument in the case of Instant Technology v. DiFazio, No. 14-2132. The DiFazio case is one of several Illinois district court cases that apply the so-called Fifield rule on consideration.

Readers of this blog know all too well the contours of this rule, but as a refresher, it holds that at-will employment itself only can serve as consideration for a non-compete agreement if the employment lasts at least two years. Effectively, the rule means that employers must consider alternative forms of consideration, such as a signing bonus or grant of severance, to bind at-will employees to a non-compete or non-solicit covenant.

(My discussion of the district court's ruling is found here.)

DiFazio was a pro-employee decision, as the district court found that several of the individual defendants had unenforceable non-competes by virtue of their short stint of employment with Instant Technology. The defense-friendly decision had a litany of other facts, particularly concerning the protectable interest underlying the covenants, so consideration was somewhat of a tangential issue in the case. It's likely that even without the rule the employees would have won.

Will the Seventh Circuit weigh in on whether Fifield is good law? That's undecided even after oral argument. Instant Technology downplayed Fifield in its appellate briefs. And then it hired as appellate counsel the same attorney, Anthony Valiulis, who argued on Fifield's behalf in the Appellate Court of Illinois. That must have been awkward, and indeed Mr. Valiulis made light of this during his presentation.

By and large, I thought the argument was a let-down. The panel consisted of Judges Frank Easterbrook, David Hamilton, and Ann Williams. In particular, Judge Hamilton has a strong interest in this area of the law, as he handled a number of trade secret and non-compete cases while in private practice. And as usual, Judge Hamilton asked the best, clearest questions. (Judge Easterbrook, surprisingly, asked none).

On Fifield, though, the court revealed very little. Judge Hamilton asked Mr. Valilulis whether the Appellate Court correctly decided Fifield. Not surprisingly, he had to admit that the court got it wrong. Instant Technology argued that consideration should be judged by a totality-of-the-circumstances approach, consistent with the underlying rule-of-reason analysis concerning a covenant's terms. That strikes me as a position that is principled, in that it relies on prior precedent in this area, but ultimately misguided since it conflates two entirely separate legal concepts. However, none of the circuit judges really took issue with Mr. Valiulis' argument on this.

Though not speaking about consideration necessarily, Judge Hamilton said when questioning Mr. Valiulis that non-compete law is an area where predictability is incredibly important, both for employees and employers. That may provide a justification for the Fifield rule, which for all its faults is at least easy to apply in practice. In fact, Mr. Valilulis conceded that was one of his arguments in the Fifield case for the bright-line rule.

One issue did not come up. The court didn't even suggest that it would certify the consideration question to the Supreme Court of Illinois, which it is able to under Seventh Circuit Rule 52 (as well as state Supreme Court Rule 20(a)). It may be that the other flaws in Instant Technology's case prevent this, because Circuit Rule 52 only allows for certification on a state-law question that "will control the outcome of a case."

My guess is that Judge Hamilton will write an opinion affirming the district court's ruling and will discuss in passing the controversy concerning Fifield's consideration rule. Ultimately, though, because it may not be case-dispositive, I do not think he'll weigh in on what the rule should be.

Supreme Court of Wisconsin Follows Majority Rule on Non-Compete Consideration

Wisconsin generally is known as a pro-employee state when it comes to enforcement of non-compete agreements. However, last week it gave employers a fairly significant victory in Runzheimer Int'l, Ltd. v. Friedlen, when the state supreme court held that an employer's election to refrain from firing an existing at-will employee constitutes lawful consideration for signing a non-compete agreement.

The Supreme Court of Wisconsin correctly noted that this issue has divided courts across the country, with a minority taking the opposite approach. Pennsylvania happens to be considering a similar question right now. Illinois courts are a mess when it comes to determining the adequacy of consideration for non-competes in the at-will context. In the past, Wisconsin courts had sent mixed signals and had not definitively reached the issue presented. The Court's decision - confusing in its rationale, to be sure - at least provides much-needed clarity for employers and employees moving forward.

The issue that percolates beneath the surface in cases like this is the employer's ability to fire the employee. So the reasoning goes, an employer can "trick" an employee into signing a non-compete, secure that commitment, and then fire the employee without any liability (for at-will employment is a relatively risk-free relationship). According to the Court, it's not correct to view the forbearance from firing as "illusory consideration." Rather, other contract defenses (like fraudulent inducement) provide a legitimate check against such trickery.

The other, less formal, check is that an employer which engages in these kinds of tactics will be less attractive to potential new hires. Further, when it comes time to enforcement, an employer will have a separate issue to confront wholly apart from the consideration question: whether enforcement after involuntary discharge is reasonable. Part of the reasonableness test will examine whether enforcement will present an undue hardship on the employee.

In the past, I have been an advocate for looking at this hardship factor when the employment ends at the behest of the employer, rather than the employee. It is an issue separate from the four corners of the contract, but it still relates to the reasonableness of enforcement. Courts will view attempts to enforce non-competes against terminated employees with much greater suspicion than those who leave of their own volition.

As Runzheimer suggests, we can view this issue wholly apart from the element of consideration. It may be another contract defense. It may be within the overall reasonableness inquiry. But it clearly is something, and employers always will need to factor in the equities when enforcing non-competes.

Runzheimer Int'l v. Friedlen (Wisconsin) by Ken Vanko

Central District of Illinois Explains Its Disagreement With Fifield Consideration Rule

At this rate, I should have about 20 blog posts this year concerning Illinois' controversial Fifield rule.

As I have explained in numerous posts, Illinois appears to have a unique rule concerning the type of consideration needed to enforce an employee non-compete agreement. And, once again, it's critical to point out that this unique rule applies only when: (a) the employee is at-will, and (b) the sole consideration provided in exchange for the non-compete restriction is the job itself.

The Appellate Court of Illinois in two separate cases (called Fifield v. Premier Dealer Services and Prairie Rheumatology Assocs., S.C. v. Francis) appeared to establish a bright-line test for determining the adequacy of this consideration. Those cases hold that two years of continued employment is necessary. And if the employee never gets to this two-year threshold, then the contract fails for inadequate consideration. (Recall, that courts almost never examine the adequacy of consideration in traditional contract disputes, but they do when restraints of trade are involved.)

Much of the controversy concerning the rule first announced Fifield stems from three truisms:

1. The prior case law seemed to suggest that the "continued employment" rule was limited to a fact pattern where the employee signed the agreement after starting the job, not in connection with taking the job.
2. The two-year rule is arbitrary and sounds like something more suited to a legislative enactment.
3. The rule does not differentiate between voluntary and involuntary terminations, in effect giving an employee a two-year option in which to void his own contract.

I wrote last year that Francis seemed to provide momentum for this consideration rule and that attorneys better not discount Fifield as an aberration. And I have written on several occasions (including a few weeks ago) that federal courts have split in their understanding of how the Supreme Court of Illinois would interpret the Fifield rule.

Those decisions all come from the Northern District of Illinois, which hears a fairly high volume of competition disputes under diversity jurisdiction. (I also have been involved in one unreported case where a court in the Northern District declined to apply Fifield, finding that the Supreme Court of Illinois would not apply the rule.)

To my knowledge, the case of Cumulus Radio Corp. v. Olson is the first reported federal case outside the Northern District of Illinois where a judge has had the opportunity to weigh in on, and apply, the Fifield consideration rule. In that case, Judge McDade from the Central District of Illinois decided not to follow Fifield and Francis and found persuasive the reasoning of some of his colleagues in the Northern District of Illinois.

Judge McDade's conclusion embraces much of my prior criticism of the rule (though, I am slightly offended he didn't cite my blog):

"...the Court does not believe that the Illinois Supreme Court would adopt the bright-line test announced in Fifield. Such a rule is overprotective of employees, and risks making post-employment restrictive covenants illusory for employers subject completely to the whimsy of the employee as to the length of his employment. A case-by-case, fact-specific determination, on the other hand, can ensure that employees and employers alike are protected from the risks inherent in basing consideration on something as potentially fleeting as at-will employment."

In this very brief italicized passage, there is a lot of grist for the mill. Judge McDade notes and criticizes the option nature of the Fifield rule, the lack of a distinction in who ends the relationship, and the problems with basing consideration on employment itself. To that end, employers still should consider using something far more tangible and substantial than employment as non-compete consideration.

Judge McDade also analyzed the first truism that I outlined above - the weak case law support that seems to have motivated Fifield. His discussion notes that the impetus for the rule was Judge Posner's oft-cited opinion in Curtis 1000, Inc. v. Suess, where he noted employers could trick employees into signing onerous covenants only to terminate them and gain the benefit of a serious restraint. The illusory nature of "employment as consideration" justifies, therefore, a serious look when the employer is the one ending the relationship. Again, this is part of the original problem I had with the intellectual foundation of Fifield - in that there wasn't one.

Although the Supreme Court of Illinois originally declined to take up Fifield, we now are at serious risk of forum shopping and (worse) the piling on of flimsy Computer Fraud and Abuse Act claims just so an employer can get into federal court. The next time a party petitions for leave to appeal on a Fifield issue, the Court must take the case.

A copy of the Cumulus Radio decision is embedded below.

Cumulus Radio v. Olson

Fifield and the Northern District: A Stormy Marriage

The much-maligned Illinois decision of Fifield v. Premier Dealer Services, Inc. got a big jolt of life when another appellate district reaffirmed its essential holding: when an at-will employee signs a non-compete, continued employment can serve as adequate consideration for the agreement only if that employment continues for at least two years.

Before the Third District appellate court spoke in Prairie Rheumatology Assocs., S.C. v. Francis, there was a pretty legitimate debate brewing about whether Fifield was a one-off outlier that attorneys could take the chance of discounting. Francis gave Fifield credibility, as it is an awfully tall order for attorneys to criticize two separate appellate court rulings from different districts and argue Fifield did not represent the law of the state.

The Northern District of Illinois, though, apparently does not feel Francis did much to establish Illinois law on the adequacy of consideration for restrictive covenants.

Another federal court has declined to follow the Fifield-Francis two-year rule. Judge Shah's opinion in Bankers Life & Cas. Co. v. Miller, 2015 U.S. Dist. LEXIS 14337 (N.D. Ill. Feb. 6, 2015), found that the "the Illinois Supreme Court would ...reject a rigid approach to determining whether a restrictive covenant was supported by adequate consideration; it would not adopt a bright-line rule requiring continued employment for at least two years in all cases."

The reasoning for the court's analysis, in which it barely even cited Fifield, does not really mention that the Fifield-Francis rule applies in a limited factual circumstance: when the only consideration for an at-will employee's non-compete is continued employment itself. If the employee received a signing bonus, a contractual severance right, or stock options, then Fifield-Francis does not apply.

But in a great many cases - probably a majority - the rule will apply, because employers don't want to pay employees more than they have to, either in bonus, incentives, or equity. I am a little dubious of the proposition that "access to confidential information" or "training" qualifies as consideration, because employers probably will have a hard time showing they wouldn't have provided the employee these aspects of employment even without the non-compete. Further, it's somewhat illusory and intangible, hard to articulate really.

Judge Shah's opinion doesn't really address what else the employer may have offered the employees in Bankers Life, and perhaps the company threw in enough allegations to move beyond Fifield-Francis. But his opinion is the first to rely on the overall "totality of the circumstances" test that Illinois courts use to analyze a restrictive covenant's reasonableness. That rule does not, by its plain terms, implicate consideration at all.

Judge Shah appears to have looked at the logic underlying that test to conclude that courts would take a more holistic approach at assessing what consideration is adequate to support a restrictive covenant, depending on the employee and probably the terms of the covenant itself.

Or he may have read my dissenting opinion in Fifield and been persuaded.

Third District in Illinois Follows Fifield's Consideration Rule

Business lawyers have discounted the much-bastardized decision in Fifield v. Premier Dealer Services, Inc. as unmoored, largely because it seems to be one-of-a-kind and pulled from the ether.

With the exception of a few federal district court opinions (which aren't authoritative), the validity of the Fifield case largely has been confined to the blogosphere and to those state trial courts which probably are trying to figure it out.

To take a step back...

Fifield rewrote the rules on what kind of consideration an employer must show to enforce a non-compete agreement in Illinois. For an at-will employee (that is, those workers who have no contract for a set term), Fifield says the employment itself only provides consideration for the non-compete if the employee remains on the job for two years-plus. The rule is meant to reflect that an at-will employment arrangement is somewhat illusory; an employer could trick an employee into an onerous covenant with the hope of a long-term relationship, yet pull the rug out quickly. Fifield makes no distinction between terminations that are involuntary and those an employee initiates.

Yesterday, Fifield gained a large measure of credibility when a separate district of the Appellate Court of Illinois (the Third District) followed it and endorsed the two-year consideration rule. The case is Prairie Rheumatology Associates, S.C. v. Francis, 2014 IL App (3d) 140338, linked here, and the facts aren't really any different than Fifield itself.

The analysis is predictably non-academic and thin. The court endorsed the Fifield rule to vacate a preliminary injunction against a physician who signed a 2-year, 14-mile non-competition agreement at the start of her employment. She resigned 15 months after the start of her practice and officially separated within 19 months. Fifield precluded enforcement.

Francis gives Fifield a much-needed injection of credibility. Many, including me, were highly critical of Fifield. (I was more aghast at is reasoning and rather glib conclusion, and not so appalled at the disposition). Having a second branch of the Appellate Court endorse Fifield creates some momentum and likely will encourage other districts (there are five) presented with the question to follow suit.

The Fourth District is the most likely to distance itself from Fifield, and it likely will need to do so for the Supreme Court of Illinois to intervene. The Supreme Court declined to hear Fifield, which one could read as a tacit endorsement of the holding.

Seventh Circuit Appeal Downplays Fifield Consideration Rule

The federal case of Instant Technology LLC v. DiFazio is somewhat of a rare breed in that the parties tried the case to the end. Most business disputes settle, frequently after an initial injunction hearing, and this generally holds true when the case arises from an acrimonious divorce (as was certainly the case with the key players in DiFazio).

I wrote last year on the case, primarily because the district court followed the Illinois Appellate Court's ruling in Fifield v. Premier Dealer Services, Inc. and invalidated several non-compete agreements on the grounds that the employees were not employed for the required two years to vest the contracts with consideration. (Remember, for at-will employees in Illinois, Fifield established the two-year rule if the sole consideration was the job itself.) On the facts in DiFazio, the case appeared to have some strengths for the plaintiffs, but like many non-compete disputes, the facts only get you so far. There's still the law to deal with, not to mention judicial distaste for these types of cases. Instant Technology had trouble during its bench trial on a number of fronts, including its presentation of damages.

Seeing that the case went up on appeal, I was interested to see what role the Fifield rule would play in the Seventh Circuit. Instant Technology's brief is now in.

Fifield appears to have taken a back seat, though that's not to say the Seventh Circuit won't issue some kind of analysis or statement about how the Supreme Court of Illinois might weigh in. The brief is long, but only a few pages mention Fifield. And the analysis seems intentionally thin. The reason could be that the employees who presented Instant Technology with a Fifield problem appear to be secondary players. Many appellate lawyers will abandon issues on appeal so that the reviewing court does not get too lost in a sea of issues.

Interestingly, Instant Technology shifted gears after losing its bench trial and hired a new law firm, Much Shelist, to represent it on appeal. That firm, ironically, represented the winning party in Fifield and helped create the two-year rule that now presents some problems for Instant Technology.

Instant Technology detoured around Fifield in an interesting way. Essentially, it argued the Supreme Court might use its overall "totality of the circumstances" to assess not only whether the covenant is reasonable, but also whether the contract has sufficient consideration. It gave an example from the facts of the case itself. One of the employees apparently had a prior stint with Instant Technology. In the employer's view, this prior employment should be a factor bearing on whether the new contract contains enough consideration.

I find it fairly unconvincing that a court would use the overall reasonableness test to assess the adequacy of consideration because it conflates two separate inquiries. The "totality of the circumstances" approach is a judicial check to weigh the contract terms with the asserted business interest. There's nothing from the Supreme Court's precedent that suggests it's meant to apply to an issue of contract formation. Furthermore, combining the consideration argument in the manner Instant Technology proposes would allow an enforcing party to use the same facts for multiple purposes. This is improper bootstrapping. Put another way, the facts that help an employer illustrate a protectable interest cannot also help it show the contract was formed properly.

Consideration should address what an employer gave up or what an employee gained by signing the contract. Fifield holds that the job itself only sometimes can be consideration because that job can be taken away. Take an example: if an employer agrees the employee only can be terminated for cause (with severance rights for a termination without cause) for a period of two years, then it's giving up a core element of the traditional at-will relationship. That's consideration. Determining whether the employee received access to customers or confidential information is not a consideration issue because it's tied intrinsically to whether the covenant terms are reasonable. Instant Technology's position would meld the two, and I think that's inappropriate.

I have said before that I am no great fan of Fifield, but I don't think we can fix it by creating more confusion in this area of the law.

Will the Seventh Circuit Weigh In On the Fifield Rule?

The body of work following the decision in Fifield v. Premier Dealer Services is somewhat scattered at best. Federal courts are divided on whether it represents the law in Illinois, with courts taking divergent views.

As most readers may know by now, Fifield stands for the proposition that a covenant not to compete signed by an at-will employee requires at least two years of continued employment for that to constitute sufficient consideration. The key aspect of Fifield is that this consideration rule applies even when an employee signs a covenant at the start of employment, rather than during the course of employment. An undecided issue is how Fifield applies to lawsuits outside Illinois' First District (that is, Chicago).

The Seventh Circuit, though, is primed to weigh in. The plaintiff in Instant Technology LLC v. DiFazio has appealed its loss to the circuit court, and one of the central features of the district court's holding was that Fifield barred the non-compete claims. The district court judge discussed Fifield at length in his memorandum opinion. My discussion of the district court ruling is here.

The plaintiff in Instant Technology is due to file its appellate brief in a few weeks. I will look forward to reading how much it attacks the reasoning from Fifield and whether the two-year rule is likely to be a central feature of the appeal.

Supreme Court of Kentucky Finds Continued Employment Is Insufficient Consideration for Non-Compete

The enforcement of non-competes is most troublesome in the at-will employment context. This is a recurring topic on this blog, and countless others. Courts have taken divergent approaches to analyzing the consideration issue.

Generally, the rules concerning enforcement of covenants for at-will employees fall into one of three categories:

(1) Continued employment is sufficient to enforce a covenant not to compete against an at-will employee if she signs it after the start of employment. This may be the majority rule, although I haven't broken it down state-by-state.

(2) Continued employment is insufficient to bind an at-will employee to a newly presented covenant not to compete unless the employee receives some true, real advantage in connection with signing the contract. A substantial minority of states, including Minnesota, adopt some variant of this rule.

(3) Even if an at-will employee signs a non-compete at the start of her employment, continued employment is insufficient unless the employment continues for a substantial period of time. This is Illinois' outlier Fifield rule.

Recently, the Wisconsin Court of Appeals certified a legal question to the state supreme court for review, concluding that existing case law relating to consideration was hopelessly in conflict. And just last week, the Supreme Court of Kentucky weighed in on the "continued employment" rule - with an opinion that seems to be of little value.

The Court held that continued employment was insufficient consideration to enforce a covenant not to compete that an at-will employee signed. The case is Charles T. Creech, Inc. v. Brown. Ultimately, though, the opinion does not seem to provide any rules. Instead, the Court simply found that given the particular facts of the case, the relatively broad non-compete lacked consideration. That in and of itself seemed odd, since the parties didn't conduct must discovery.

Although the opinion has flaws, it's still useful for what the Court determined to be significant in regards to the consideration inquiry. It honed in on the following factors:

(1) The employer undertook no new obligations in the contract.
(2) The contract lacked any indicia of an employment agreement, such as provisions relating to salary, benefits, and conditions of discharge.
(3) Brown, the employee, was a 16-year employee with pre-existing experience in the industry, meaning he didn't receive specialized training in response to signing the non-compete.
(4) Brown was not promoted and did not sign the agreement in connection with any real new advantages, such as a bump in pay or some access to new training or new information. The employer seemed to demote him.
(5) Most unusually, the employer did not threaten Brown with termination if he refused to sign the agreement. (It's hard to see how a counterfactual would be more persuasive evidence of consideration.)

While the result in the employee's favor may be appropriate given the other problems with the non-compete, the opinion does nothing more than leave a murky area of the law even cloudier. The Court gave no rule - and only hinted at a standard. Therefore, employers still don't have clarification on what they would need to provide at-will employees in the way of proper consideration to support a non-compete covenant.

The best practice still is to afford an at-will employee with some real, tangible advantage that a court will be able to grasp. The concept of continued employment is somewhat nebulous and in certain circumstances illusory. It makes enforcement difficult, particularly with long-term employees. Potential benefits could include:

(1) A raise, bonus, or promotion.
(2) The ability to terminate only for cause.
(3) Severance if the employer must terminate without cause.

In many states, any one of these would vest a non-compete with consideration. In my view, it also is beneficial to include the covenants in a more robust contract of employment, as opposed to a stand-alone document.

An Illinois Federal Court Now Pivots Towards Supporting Fifield

I wrote previously about the hostile reception Fifield v. Premier Dealer Services, Inc. had received in Illinois federal courts, which is set forth in my March 6 post "Fifield, Federal Style." Since that time, I have presented at two seminars in which I predicted that a fissure between how state and federal courts perceived the Fifield consideration rule may encourage the Supreme Court of Illinois to take the issue up when it inevitably resurfaces.

Perhaps, I am wrong.

One federal judge in Chicago has disagreed with his federal court counterparts and endorsed Fifield. The case is Instant Technology, LLC v. DeFazio, No. 12-cv-491. Judge Holderman declined to follow the lead of Chief Judge Castillo in Montel Aetnastak, Inc. v. Miessen (and Judge Feinerman in another case) and found that the Supreme Court of Illinois would, indeed, follow the two-year consideration rule from Fifield.

As readers of this blog know all too well by now, Fifield holds that for at-will employees new or continued employment must last at least two years for the employment to serve as consideration supporting a non-compete agreement. It's clear from Fifield that this two-year rule applies to both non-compete and non-solicit covenants, but it almost certainly does not extend to confidentiality restrictions.

Judge Holderman relied on Judge Posner's opinion in Curtis 1000, Inc. v. Suess to justify why Fifield represents the law in Illinois. That case discussed the fact that employment in the at-will context often is illusory because the employer retains full discretion to take away the consideration without fear of liability. Also important to Judge Holderman's analysis were two recent Illinois circuit court decisions that appeared to endorse Fifield. It's rather unusual to see a federal court rely on and cite to unreported trial court cases as support for a ruling. But such is the terra (in)firma that Fifield graced us with.

As I recently wrote, the Supreme Court of Wisconsin is addressing an important question of law concerning consideration for non-competes in the at-will employee context.

Supreme Court of Wisconsin to Address Key Consideration Issue

The Court of Appeals of Wisconsin certified an important question to the state Supreme Court concerning restrictive covenant law:

Is consideration in addition to continued employment required to support a covenant not to compete entered into by an at-will employee?

The case is Runzheimer Int'l Ltd. v. Friedlin, 2014 Wisc. App. LEXIS 342 (Ct. App. Apr. 15, 2014). The question, to be sure, is a recurring one across the states. This is for a few reasons.

The policy rationales for and against a consideration rule lie in tension with one another. On the enforcement side, employers say that because they can terminate at-will employees without liability, there's no true distinction between a covenant signed at the start of employment and those signed mid-stream (or, as an afterthought). Conversely, employees legitimately can argue they face a disparity in bargaining power and feel serious economic pressure to sign a contract just to keep their job.

Wisconsin courts haven't really addressed this issue head-on, which is surprising given that state's volume of non-compete disputes and its well-known pro-employee bent. The few cases - none directly on point - push courts in opposite directions, which is reflective of the policy tension I just discussed. Decisions from other states aren't helpful, because there's no uniform rule. The pro-employee cases make just as much sense as the pro-employer cases. (Not surprisingly, the Court of Appeals did not discuss the analysis from Illinois' much-maligned Fifield decision, probably since there is no analysis in that case to rely on.)

From my perspective, it's a bit myopic to say no consideration is required simply because the at-will relationship is fluid and starts anew each day. This is a theoretical argument and ignores a couple of realities.

First, it assumes freely terminate people when they view them as valuable. There's no empirical support for this. I am not aware of employers firing employees en masse only to rehire them with a non-compete. Not only would such a practice impair goodwill, but it actually would raise the specter of liability for unemployment costs. The pro-employer theory neglects to consider marketplace realities and the intangible harm to reputation that could arise.

Second, an employee may accept a job with Company X in reliance on the fact X never asked him to sign a restrictive covenant. Presumably, that impacted his decision to forego other jobs. Those lost (irretrievably) opportunities should be accounted for at least to the same degree as the theoretical "fire-rehire" justification.

In the final analysis, I'm not a huge fan of "continued employment" as a consideration theory. It seems wishy to me, and employers ought to come up with something better - a promotion, a new commission opportunity, a bonus - to justify binding an employee to a significant work restriction.

Fifield, Federal Style

"The law is an ass. But it's not that big of an ass..."

U.S. District Court Judge - Northern District of Illinois on March 5, 2014, discussing holding of Fifield v. Premier Dealer Services.

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In the past several weeks, two federal district court judges have declined to follow Fifield's bright-line, 2-year continued employment rule for enforcement of non-compete agreements. As readers of this blog know, Fifield generated enough controversy that - at least among lawyers in Illinois - it's now a noun ("I have a Fifield hearing at 2 pm"), a verb ("The judge just Fifield-ed me."), and an adjective ("That ruling had a crummy, Fifield-ish quality to it.").

Surprisingly, neither judge in the Northern District of Illinois cited my dissenting opinion in Fifield (available here). But the gist of both rulings is the same and, remarkably, somewhat similar to what I laid out last year in my beer-induced missiv:

(1) There has to be some latitude in the consideration rule for a particular employee's position within the company;

(2) The closer the employee bumps against the 2-year window, the less relevance the rule has;

(3) The method of termination - voluntary or involuntary - has to be relevant (if not dispositive).

The Fifield decision has caused a fairly wide rift. It's now a federalism issue. Federal courts, under the Erie doctrine, must determine how the Supreme Court of Illinois would look at the issue of consideration. The court yesterday in my case found that the Supreme Court would not adopt Fifield and that under Erie, the two-year rule was not in fact the law in Illinois.

We continue to see a proliferation of trade secrets and non-compete disputes make their way into federal court under diversity rules or as adjuncts to Computer Fraud and Abuse Act claims. This only will continue in light of recent rulings, and it may spur on plaintiffs to add CFAA claims where they otherwise wouldn't.

It's also only a matter of time until another district within the Appellate Court of Illinois (there are five) confronts a Fifield issue, which may give the Supreme Court a second chance to clarify this unacceptably confusing area of the law.

All the while, lawyers will continue hedging their advice with multiple disclaimers. Which, of course, clients love.

Alabama and Washington Experiences Show Difficulty With Contract Formation Questions

One of the more difficult problems for employers to address is one of simple practicality:

How and when do I notify someone that she has to sign a non-compete agreement?

This sounds simple, but it's not an easy question to answer. Particularly with closely-held companies, a business may not have robust or sophisticated human resources help. They may hire infrequently. And they may not want to deal with their outside counsel to keep costs down. They may think of a non-compete at the 11th hour, before an employee has started but after she has committed to the relationship.

Or, just as frequently, the employer may decide to have her sign a non-compete after the employer has begun work. Because of the perceived "need to please," an employee may feel compelled to sign the agreement without a second thought.

These scenarios raise complicated issues of contract formation: when exactly do you have a contract and is there consideration for it?

The recent experiences of two states - Alabama and Washington - illustrate the challenges posed.


Alabama has a strange contract formation rule. It has a statute that courts have interpreted to validate non-compete arrangements only if they are "signed by an employee." That requirement is somewhat anamolous because a prospective employee who has been offered employment but who has yet to start is not "an employee" able to sign an enforceable contract. This very paradigm rendered a non-compete unenforceable in Dawson v. Ameritox, Ltd., 2014 U.S. Dist. LEXIS 801 (S.D. Ala. Jan. 6, 2014). This somewhat runs counter to advice that attorneys often dispense, which is to tell an employee beforehand of the non-compete to give that person adequate time to consider it.


Contrast this with a jurisdiction like Washington which has a fairly strong consideration rule. Like many states, Washington states that an employee may sign a noncompete when hired (such that the employment itself is consideration). But if she signs it at some time after hire, then the employer must provide fresh, independent consideration. The Court of Appeals of Washington reaffirmed this rule in McKasson v. Johnson, 2013 Wash. App. LEXIS 2848 (Wash. Ct. App. Dec. 17, 2013). The key point here is preparedness; the employer must ensure the agreement is signed at the start of the relationship.

So, what to do? The most important task for any corporate counsel or in-house attorney to do is to determine what kind of consideration rules a particular state has concerning non-competes. The Alabama rule, to be sure, is odd. The rule in Washington is far more common. And then there are plenty of states where continued employment will suffice, in which case the concerns about contract formation are not quite as paramount.

These rules are important because they override any issues pertaining to a contract's scope or whether an employee even committed a breach. They determine whether there is a contract to begin with.

2013: The Top 10 List (Part II)

I hate to see 2013 leave, so I stretched my annual year-end review into two parts. Yesterday, I discussed the first half of my top 10 developments in non-compete and trade secret law. And today, I conclude the year with numbers one through five.

Here we go....

5. Aleynikov's Advancement Victory Highlights Oft-Overlooked Issue in Competition Suits. Former Goldman Sachs code developer has the distinction of making the Top 10 list in back-to-back years. (He is, in essence, the Arcade Fire of trade secrets litigants.) In last year's post, I summarized his legal high-wire act and predicted that he just might win his indemnification and advancement suit against Goldman Sachs. Well, he prevailed at least in part, with a federal district court finding that Aleynikov is entitled to have Goldman advance his legal expenses to fight the ongoing state criminal case in Manhattan. This development is significant because advancement and indemnification rights are the soft underbelly of many competition cases and often can throw a wrench into a company's plans to fight unfair competition. States recognize the broad policy goals of advancement and indemnity and will apply these statutes liberally to further those goals. Aleynikov's case, and others like it, should teach plaintiff's counsel to carefully consider how to plead and pursue competition claims. For a recap of Aleynikov's win in New Jersey, read my post from last month.

4. Federal Court Convicts David Nosal of Computer Fraud. The Computer Fraud and Abuse Act continued to wreak havoc on logic and reason (and more than a few lives) in 2013, and the case of David Nosal is one such example. The former Korn/Ferry search executive was convicted for violating the CFAA and the general federal conspiracy laws in California federal court. Nosal's plight (he will again appeal) indicates that conduct often giving rise to civil claims for unfair competition can actually result in criminal charges. Nosal's conviction generated a fair amount of controversy and demonstrates the broad applicability of the CFAA. For a discussion of the Nosal conviction, listen to the Fairly Competing podcast that John Marsh, Russell Beck, and I produced and posted back on May 28.

3. Illinois Appellate Court Issues Controversial Fifield Decision. No single non-compete has generated more buzz than the Appellate Court of Illinois' opinion in Fifield v. Premier Dealer Services. The case holds that a non-compete given in exchange for employment is not sufficient consideration unless the employment continues for at least two years. (To those unfamiliar: this is a case not legislation. I know it's confusing.) The rule broadly impacts at-will employees and has caused business counsel to lose sleep and wring their hands over just how to draft employment contracts. The Supreme Court of Illinois tacitly approved of the holding, declining to take the petition for leave to appeal. They were not persuaded, apparently, by my "dissenting opinion" in Fifield as the phantom Fourth Justice. (For those of you interested in assessing blogging metrics, this post - by a factor I can't even count - generated the most hits, the most e-mails, two news magazine interviews, and three citations in opposing counsel's legal briefs.) For my follow-up take, you can read more on Fifield here. (And if you want even more, just Google "Fifield." You'll find plenty.)

2. Seventh Circuit Decides Tradesmen Int'l v. Black. My case. Navel-gazing. Can say no more. Read here and here.

1. Federal Legislation to Protect Trade Secrets on the Horizon? Number one is a runaway. Not even close. It is difficult to overstate the importance of many proposed bills that are currently working their way through committee or that could be reintroduced in some form or fashion. Of particular note in 2013 was "Aaron's Law", which Zoe Lofgren introduced to cut back on the perceived unfairness and breadth of the CFAA. John, Russell, and I discussed the CFAA prosecution of activist Aaron Swartz on our Fairly Competing podcast early this year. Rep. Lofgren also introduced the Private Right of Action Against Theft of Trade Secrets Act, which would create a private civil cause of action at the federal level. Other legislative activity at the federal level included introduction of the Deter Cyber Theft Act, which would establish a "watch list" of countries that engage in cyber theft and require border patrol to bar imports from those countries. My June 4 discussion of the Act can be found here. Finally, and most recently, Senator Flake introduced the Future of American Innovation and Research Act. This legislation would provide a federal trade secrets remedy against those acting outside the U.S. or for the benefit of a foreign actor. It also provides for an ex parte seizure order, subject to some limitations. And finally, if you're interested in listening to further discussion about the federalization of trade secrets law, listen to the podcast John, Russell, and I produced on May 17.

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That's a wrap on 2013. Again, many thanks to my readers and those who are kind and thoughtful enough to e-mail me. You have made this a truly enjoyable experience once again. A less warm farewell for the year to those spammers who have ruined the commenting portion of this blog permanently. Such is life on the internet.

I am looking forward to starting Year 6 and reaching that milestone of post number 500. See you in 2014!

Illinois Supreme Court: Fifield Stands

When the Appellate Court of Illinois ruled in Fifield v. Premier Dealer Services, Inc. that an
employer needed to provide consideration beyond mere employment itself to validate a non-compete, most business (read: management-side) attorneys thought this decision was a misread that was inevitably headed for reversal.

Not so.

The Supreme Court of Illinois has denied the Petition for Leave to Appeal that Premier Dealer Services filed after Fifield prevailed on his consideration argument. Anyone following this blog knows I have been critical of the Fifield holding to the extent it applies broadly to employees who choose to leave their employment voluntarily and in its rather arbitrary setting of a two-year period in which an employee must remain employed for the employment itself to constitute sufficient consideration for the non-compete.

But now that Fifield stands, what impact will this have? Here's several implications:

(1) Venue fights are inevitable. The Appellate Court has five districts. The First (from which Fifield hath sprung) is by far the largest and includes Cook County. However, many employers operate in other counties that are both nearby and outside the First District. Look for employers to enforce covenants outside Cook County and include choice-of-venue clauses in contracts that get them out of the First District.

(2) A potential conflict may be looming. I have heard stories of employers in other districts (namely, the Fourth - generally viewed as the most friendly towards enforcement) setting up lawsuits to create a conflict with Fifield. It will be worth watching if an employer has a suit disposed of quickly to get it to the appellate court and potentially create a district split. This would enhance the chances for the Supreme Court to take a case, much like it had to do with Reliable Fire Equipment Co. v. Arredondo a few years back.

(3) Employers will look to rewrite their agreements. Now that the consideration rule effectively grants at-will employees the opportunity to void their non-competes for a two-year period after the start of employment, employers are scrambling to fix contracts. My experience is that this new decision may mean employers will create contracts that contain consideration in the form of: (a) a guaranteed term of employment; (b) a severance or garden-leave option triggered post-termination; or (c) a signing bonus that is irrevocable.

(4) Some legislator will introduce something in January that addresses this. (Note: This is not a real implication because most proposed legislation never goes through committee, and this wouldn't generate any attention at all. At least that's my opinion.)

For several years, the playing field in non-compete suits was whether the employer had a legitimate business interest to protect. Now, it will be the question of contract formation entirely - whether the employer ever provided enough consideration to make the non-compete enforced at all.