Consideration for Restrictive Covenant

Before suing to enforce a restrictive covenant, i.e., a non-competition/non-solicitation agreement, a plaintiff must anticipate the frequently asserted defense that the covenant lacks adequate “consideration,” and is therefore an unenforceable contract.

Contracts require consideration to be enforceable. Consideration is sufficient when one person or business offers another person or business something of value in exchange for something else of value from the other, and the other person or business then accepts that offer. Value that suffices as consideration can be cash, services, good, property, or a promise to do or not do something.

The form of value that best describes consideration in restrictive covenants is that an employer offers to employ and pay a person for their service, and the employee promises not to compete or solicit the employer’s employees or customers for a stated time period in a stated geographic region. That is the essence of consideration for a restrictive covenant.

The issue that arises in restrictive covenant litigation is the adequacy of the consideration. The defendant (the party against whom the plaintiff seeks enforcement of the covenant) will frequently argue that he or she did not receive enough, sufficient or any consideration to be adequate to support enforcement of the covenant.

Generally, under Illinois law, continued employment suffices as consideration to enforce restrictive covenants in employment agreements. The only qualification to this general rule is the employment continues for a “substantial period of time” to be sufficient consideration.

The rationale for the “substantial period” qualification is to prevent an employer from getting an employee to enter a restrictive covenant while intending to fire him the minute he signed. In other words, to make sure that the person would not then work for a competitor.

As with most subjective legal standards, there is no fixed numerical formula to determine what constitutes a “substantial period” in all cases. But Illinois courts have said the law should no require a rigid numerical formula. Factors other than the time period of the continued employment must be considered, such as whether the employee or the employer terminated employment.

Generally, Illinois courts have held that continued employment for a minimum of two years or more constitutes an adequate consideration. But this maxim cannot be applied in a vacuum with disregard for other factors, especially if the employee against whom the covenant is sought to be enforced acted inequitably or in bad faith. The two-year period cannot be used like a sword. A classic example is an employee who voluntarily resigns exactly two days before the two-year anniversary of signing the employment agreement; yet, in the days and weeks before his resignation he was secretly planning and setting up a competitive business while also reassuring his employer, he intended to remain an employee, knowing if he remained employed for another two days, the restrictive covenants would definitely become enforceable.

Each case will be decided on its facts. Our discussions of Illinois cases that address adequacy of consideration in restrictive covenants are here.

The attorneys at Lubin Austermuehle have over thirty years of experience defending and prosecuting non-compete, trade secret and restrictive covenant lawsuits. We are committed to fighting for our clients’ rights in the courtroom and at the negotiating table. Conveniently located in Chicago and Elmhurst, Illinois, we have successfully litigated non-compete and trade secret and covenant not to compete cases for clients all over the Chicago area. To schedule a consultation with one of our skilled attorneys, you can contact us online or give us a call at 630-333-0333.