A key issue in the development or enforcement of non-compete agreements—the consideration offered to the employee in exchange for the non-compete—has been a particularly active area for courts recently. In a typical contract case, the issue of consideration is relatively straight-forward: was there an exchange of promises? But in the non-compete context, even in those jurisdictions where the law states that the adequacy of consideration is not for courts to decide, courts routinely do just that. For example, in some states like Minnesota, employers are all but certain to find themselves with an unenforceable agreement if they ask current employees to sign a non-competition agreement in exchange for only the promise of continued employment. In these jurisdictions, courts generally find that if a non-compete is offered after the initial employment offer, the employer must provide some additional promise over and above continued employment.
In Illinois, the issue of continued employment has been a particularly hot issue; there, the state and federal courts cannot seem to make a final decision on whether an employee who is offered employment in exchange for signing a non-compete must also continue to work at the employer for at least two years in order for the non-compete to be supported by adequate consideration, and therefore, enforceable. The roller coaster of decisions following the June 2013 decision, Fifield v. Premier Dealer Services—in which an Illinois appellate court held that an employee must continue to work for an employer for two years if the consideration for the non-compete agreement is the employment itself—indicates that Fifield’s holding continues to be controversial. Some federal courts within Illinois have refused to apply it, or otherwise found that it does not create a bright-line test, and there is at least one dissenting opinion in another Illinois appellate court opinion questioning whether a two-year threshold truly exists.
In Pennsylvania, a different twist on the issue of consideration for non-competes is currently pending before the Pennsylvania Supreme Court. The question in that case, Socko v. Mid-Atlantic Systems of CPA, Inc., is whether the inclusion of language in a non-compete agreement that, under Pennsylvania’s Uniform Written Obligations Act (UWOA), would otherwise prevent a party from challenging consideration, will suffice for consideration if the employee did not receive an additional benefit for signing a non-compete after employment commenced. If the court determines that inclusion of the UWOA language does not create consideration for non-competes, it will be yet another decision limiting an employer’s ability to establish that consideration for a non-compete exists.
But not all jurisdictions are narrowing—or considering narrowing—the range of promises that can constitute consideration for a non-compete. On April 30, 2015, the Wisconsin Supreme Court (mostly) determined that continued employment can constitute adequate consideration for a non-compete agreement. But significantly, the decision doesn’t resolve the question completely—it also states that if an employer terminates an employee shortly after signing a non-compete agreement, the contract still might not be enforceable if the employee could show, for example, that he or she was fraudulently induced into signing the agreement.
What these and other recent cases show is that the issue of what an employer promises in exchange for an employee’s promise not to compete after employment continues to evolve, jurisdiction by jurisdiction. Employers are well advised to ensure that they offer a promise in exchange for a post-employment restrictive covenant that will adequately protect their interests in the future.