Non-Competition Covenants: It Does Not Matter Who Ends The Relationship

         A recently-fired employee was heard to say that the good news of his situation was that his covenant not to compete was unenforceable because he had not resigned but had been fired. He is mistaken about that. The enforceability of a covenant not to compete does not depend on whether the employment relationship is ended by the employer (i.e., a firing) or by the employee (i.e., a voluntary resignation).

           All contracts require consideration to be enforceable. Covenants not to compete are no exception. Promises of employment can be lawful consideration, and a mere offer of employment might suffice for a covenant that is made at the start of an employment relationship (though there is now some doubt about that in Illinois law). But it takes more than a mere offer of continued employment to support a non-competition covenant that is made after the start of the employment relationship. In that case, employment must continue “for a substantial period of time.” As a practical matter, two years of continued employment is deemed the minimum to qualify as a “substantial period of time.” Otherwise there is a risk of illusory consideration: The work-at-will rule would permit an employer to fire an employee immediately after locking the employee into a covenant not to compete. The two-year rule applies whether the employment relationship is terminated by the employer or by the employee. The chap who declared his covenant unenforceable because the employer fired him is mistaken, unless, of course, there is something peculiar to his agreement that so provides (e.g., a clause to the effect that the covenant would be unenforceable if the employee were fired without cause).

             Doubt about the adequacy of consideration can be removed by supplying consideration in a form other than employment itself, for example, money, an extra sum of money specifically earmarked as consideration for a covenant not to compete. The question whether a covenant not to compete is or is not supported by consideration is not the only question relevant to enforceability but only the first question. Or to put it another way, consideration is a necessary but not sufficient for enforceability. The absence of consideration is fatal but its presence is not sufficient of itself to render the covenant enforceable. It must also be reasonable in its terms and reasonably necessary to protect legitimate business interests of the employer lest it be a mere restraint on trade.