Posts from: September 2018

Will 2 Years of Continued Employment Be Enough in Illinois to Enforce a Non-Compete?

The Answer: It’s Complicated.

In 2013, an Illinois Appellate Court in Fifield v. Premier Dealer Services, Inc., decided that absent additional consideration, continued employment for less than 2 years after the restrictive covenant was signed, would not be sufficient to enforce a restrictive covenant. The Fifield decision was unusual because courts often do not consider the adequacy of the consideration ̶ only that there was consideration to support a contract. Often, the promise of continued employment was acceptable. This decision sent shock waves throughout Illinois and required employers to reevaluate the value they were giving employees when entering into restrictive covenants.

Since that decision, Illinois state courts have routinely followed Fifield and applied its bright line test in cases where there is no additional consideration given to the employee except continued employment.

For example:

• October 31, 2017 – Employee signed a restrictive covenant after working for his employer for nearly 12 years and also served on the company’s board of directors. He announced his resignation and left 6 months later. He was finally removed from the Board a year after signing the restrictive covenant. Upon leaving he started a new business that directly competed with his employer. The Court found that the restrictive covenant was not enforceable because he did not work for at least two years after signing the restrictive covenant.
• June 25, 2015 – Employee worked for employer for more than three years and left. After working for the new employer for one day, the employee asked to come back. As a condition of his return, the employer requested he sign a restrictive covenant. The employee quit 18-months later. The Court held that because he did not work at least two years after executing the restrictive there was not sufficient consideration to support the restrictive covenants.

Complicating matters, however, Federal Courts in Illinois have consistently rejected Fifield’s bright line test and adhered to a more comprehensive fact specific analysis. The Federal Court’s decisions believe that the Illinois Supreme Court would not adopt Fifield’s rigid and bright line test and continue to a support a “totality of the circumstances” review. As a result, it has led to decisions that are at odds with the State courts:

For example:

• October 20, 2017 – Employees left after 13-months of employment, took confidential information, and started working for a competitor. Employees argued that Fifield governed and therefore the restrictive covenants were not enforceable. The Court disagreed and rejected Fifield’s bright line test.

• July 24, 2017 – Employee left after working for employer for nearly ten years. He signed a restrictive covenant 16 months prior to leaving. The Court rejected Fifield’s bright line rule. The Court noted that “[f]ive federal courts in the Northern District of Illinois and one federal court in the Central District of Illinois have predicted that the Illinois Supreme Court will reject the Illinois appellate court’s bright-line rule in favor of a more fact-specific approach.”

What does this mean for employers?

Because all Illinois employers should expect that they will have to enforce these agreements in a state court, the Fifield holding must continue to be respected. Employers should review their restrictive covenants to ensure the agreements are carefully drafted to improve enforceability.

Levin Ginsburg has been working with employers for approximately 40 years to help them protect their businesses. If you have any employment or other business related issues, please contact us at 312-368-0100 or email Walker Lawrence at wlawrence@lgattorneys.com

Have You Looked At Your Buy-Sell Agreement Lately? Business Succession Planning

John, Alexandria, Mary, Martin, and Yvette, formed the Jammy Sleepwear Company over thirty-five (35) years ago.  They were equal partners and formed a corporation.  On the advice of their attorneys, the entered into a shareholders’ agreement that contained buy-sell provisions.  This type of agreement is sometimes referred to as a “buy-sell agreement”.

Their buy-sell agreement contained various provisions, including under what circumstances a departing shareholder’s shares would be purchased, what the purchase price of those shares would be, and the terms of payment.  Since the business was in its infancy, they agreed it would be valued at its “book value”, meaning that the value of the assets on its financial statements, less all obligations, would be the business’s value.  There was no adjustment for good will or other intangible assets.  Also, the increase in value of any assets would not be taken into consideration.  The purchase price to a departing shareholder was to be paid in twelve (12) months, in equal monthly payments.  The business was required to purchase a departing shareholders shares.

Since they formed the business in 1980, they acquired other businesses and purchased real estate through a separate LLC.  They did not think to have a buy-sell for the LLC.

John has announced he would like to retire, but he has objected to the purchase price as being “unfairly” low.  He has advised the other owners that he will keep his interest in the real estate, since it will provide him with a “good stipend” during his retirement.  Shortly thereafter, Mary announced her retirement.

The remaining owners are concerned that the business will not be able to support payments to John and to Mary.  Also, the remaining owners would prefer that John and Mary also sell their interests in the LLC.

Unfortunately, the shareholders (and LLC members) did not regularly review their buy-sell agreement.  As the value of the business grew, the amount of the payments increased and would put a strain on the cash flow of the business.  If more than one owner were to retire, it would cause a bigger strain.  Either the business would have to borrow money, the owners would have to make capital infusions, new investors would be needed, or the business would need to be sold.

Some buy-sell agreements address these types of situations, by limiting the amounts that must be paid out to departing owners on an annual basis.  For example, the payments cannot exceed a specific dollar amount or a percentage of gross profits.  Also, when the owners buy real estate to be used by the business, they might consider including the real estate as a part of the buy-sell process.

Buy-sell agreements should be reviewed periodically to ensure they continue to meet the needs of the business and its owners.  Levin Ginsburg has been advising business owners regarding legal aspects of their businesses, including buy-sell agreements for almost forty  years.

Please contact us with any questions you have regarding your business (including any buy-sell issues) at 312-368-0100 or Morris Saunders at msaunders@lgattorneys.com.

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