CBA Record July-August 2021

Y O U N G L A W Y E R S J O U R N A L

Restrictive Covenants: Isn’t it TimeWe Consider Consideration? By Jacob A. Chodash

M ost young corporate lawyers come across restrictive covenant clauses or agreements in some way, shape, or form within the first several months on the job. Whether hidden in an asset purchase agreement, an employment agreement, or a standalone restrictive covenant agreement, these provisions slide across most desks of young lawyers at some point. In fact, restrictive covenants are so ubiquitous that they may almost feel as if they are boilerplate provisions. All too often, this results in a lack of attention paid to one of the most important aspects of any restrictive covenant: consideration. Why don’t lawyers ensure that adequate consideration is provided for noncom- petition agreements, particularly in the employment context? There are three main types of restric- tive covenants: covenants not to disclose confidential information, covenants not to solicit employees or customers of a business, and covenants not to compete. While this article discusses covenants not to compete, the term “restrictive covenant” refers to all three. Illinois courts treat restrictive covenants, including covenants not to compete, as restraints on trade. Accordingly, Illinois dis- favors such restrictions. This does not mean they are unenforceable. Rather, Illinois courts uphold restrictive covenants so long as, among other things, their constraints: (1) are necessary to protect an employer’s legitimate business interests, (2) are reason- able in scope and duration, (3) are narrowly tailored to protect the employer’s legitimate business interest, (4) do not impose an undue hardship upon the employee, and (5) are supported by adequate consideration [emphasis added]. For many young attorneys, thinking about consideration ended after they passed the bar exam. Most contracts either include obvious consideration or rely on the principle that courts generally do not inquire into the adequacy of the consider-

ment is deemed inadequate consideration to enforce the covenant as a matter of law under the two-year rule. This remains true even if the employee voluntarily resigns. The Illinois General Assembly recently passed amendments to the Illinois Free- dom to Work Act, S.B. 672, 102d Gen. Assemb., Reg. Sess. (Ill. 2021), which – among other things – codified the two-year continued employment rule. At the time this article was published, the amend- ments were awaiting Governor Pritzker’s signature. Covenants not to compete can only be used to protect an employer’s legitimate business interest, such as the employer’s client relationships where the employer has a near-permanent relationship with such clients. Recently, however, the Illinois Gen- eral Assembly has increasingly scrutinized the presence of that interest specifically, and the enforceability of a covenant not to compete for low-wage workers generally. Around 2016, the Illinois Attorney General discovered that Jimmy John’s had low wage sandwich makers sign agreements that included a covenant not to compete restricting their ability to work at other restaurants that earn more than 10% of

ation provided. However, when drafting a covenant not to compete, consideration must be a principal concern. Employment Context When drafting a restrictive covenant in a transactional context, such as in an asset purchase agreement, consideration for the covenant is relatively easy to identify: it is, essentially, the purchase price for the equity interest or assets being sold. However, when drafting a restrictive covenant in an employment context, consideration merits special attention. For at-will employees, most employers use continued employment as the only consideration. Simply, an employer will not terminate an employee’s employment in exchange for the employee’s promise not to compete post-employment. In Fifield v. Premier Dealer Servs., Inc. , 2013 IL App (1st) 120327, the court held that continued employment was adequate consideration only if the employee remained employed by the employer for at least two years after accepting the covenant not to com- pete (the “2-year rule”). If the employee leaves employment prior to that two-year period’s expiration, continued employ-

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