Appellate Court Invalidates Restrictive Covenant

Yesterday, the Illinois Appellate Court affirmed a very important restrictive covenant principle. In Midwest Lending Corporation v. Horton, 2023 IL App (3d) 220132 (May 22, 2023), the Court invalided a non-compete and non-solicitation clause on the basis of inadequate consideration.

Like all contracts, restrictive covenant agreements must be supported by adequate consideration. That is, some form of quid-pro-quo. When an employee signs a non-compete, they often do not receive any benefit from signing the agreement other than continued employment. However, this continued employment is not valuable because employees are usually subject to at-will employment, and thus can be fired as soon as they sign the agreement.

Therefore, if the the employer offers the employee continued consideration to sign a non-compete, Courts have ruled that he or she must actually be employed for a period of two years for the agreement to be supported by adequate consideration. This rule was codified under the Illinois Freedom to Work Act, which requires the employee actually work for the employer for two years to be considered adequate consideration. Employers can offer other forms of consideration, such as a bonus, to support a non-compete without having to rely on continued employment to support consideration.

In Horton (a case that pre-dates the Illinois Freedom to Work Act), the employee signed a non-compete and non-solicitation agreement. The employer terminated the employee after seven months. The Court found that since the agreement lacked adequate consideration, it was not enforceable. Although the employer provided employee an offer letting saying he was receiving a bonus for the non-compete, this language was not in the agreement itself.

This case illustrates why it is incredibly important to have Non-Compete attorneys review your employment agreements. If you are seeking review of a non-compete or non-solicitation agreement, contact us today.