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.
• 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:
• 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.”
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 firstname.lastname@example.org
Under Illinois law, corporations and limited liability companies (“LLCs”) are required to file annual registrations with the Illinois Secretary of State in order to maintain their entities in good standing. Pursuant to the Limited Liability Company Act (the “LLC Act”), the Secretary of State may administratively dissolve an LLC if it fails to timely file its annual registration, mirroring the requirement imposed upon corporations in the Business Corporation Act (the “Corporation Act”).
If a company is administratively dissolved, the company will be reinstated upon the filing of the outstanding annual report(s) and an application for reinstatement, along with payment of all outstanding taxes and fees. Upon reinstatement, the actions made by the company during the period of administrative dissolution are “ratified and confirmed” pursuant to the “relation-back” provisions of the LLC Act or the Corporation Act.
Recently, a provision of the LLC Act was examined by the Illinois Appellate Court in CF SBC Pledgor 1 2012-1 Trust v. Clark/School LLC, 2016 IL App (4th) 150568 (Sep. 8, 2016). In this case, the Plaintiff, a Delaware mortgage trust, assumed a mortgage and security interest in an eight-building apartment complex which was owned by the defendant, Clark/School LLC. Under the security agreement, the loan was made on the lender’s reliance of the Defendant mortgagor’s “continued existence” as an LLC, including “all things necessary to preserve and maintain [its] existence and to ensure its continuous right to carry on its business.” The Defendant unfortunately failed to timely file its annual registration with the Illinois Secretary of State, ultimately leading to its administrative dissolution in December 2013.
Due to the Defendant’s administrative dissolution, the Plaintiff initiated a mortgage foreclosure action against the Defendant for failing to “preserve and maintain its existence” as an LLC. The lower court determined, and the Illinois Appellate Court subsequently affirmed, that the Defendant committed an event of default by failing to maintain its status in good standing and held for the Plaintiff. The Defendant unsuccessfully argued that the relation-back provision of the LLC Act prevented the Defendant from liability under the security agreement because it validated any actions that were taken from the date of the Defendant’s dissolution through the date of its reinstatement by the Secretary of State.
The predicament in CF SBC Pledgor was a novel issue under established Illinois LLC law; thus, the Illinois Appellate Court looked to precedent under the Corporation Act. The relation-back application of the Corporation Act only pertained to ratification of the corporation’s actions; however, it did not automatically protect the corporation from possible breaches under third-party contracts. Looking to the Corporation Act, the Court found that the relation-back provision will not “impose a legal fiction that belies actual real world facts.”
In that regard, a company cannot use the relation-back provision of its respective governing law in order to escape liability for committing a breach in a contractual agreement whereby the contracting party is relying upon the company to maintain its “continued existence” as a legal entity in good standing with the Secretary of State.
A company should pay prudent attention to its required filings and its obligations under its third-party contracts so as not to inadvertently breach such contracts. Otherwise, as was the case in CF SBC Pledgor the consequences may be harsh.
For more information on this topic or how you can protect your corporation or limited liability company, please contact:
Pamela Szelung at:
email@example.com or 312-368-0100.