Large fines have recently been imposed against public companies due to using confidentiality provisions that violate whistleblower provisions under federal securities law. Many standard confidentiality clauses in employment agreements, severance agreements, release agreements, non-compete agreements and other employment related agreements will violate these whistleblower provisions. Recently, the Office of Compliance Inspections and Examinations at the US Securities and Exchange Commission announced that it is actively reviewing these agreements to determine if there are possible securities law violations.
This webinar will address the whistleblower provisions relevant to employment related agreements, the recent SEC enforcement actions, the compliance issues raised by typical confidentiality clauses and actions for employers to consider for existing and future employment related agreements.
On June 24, 2013, the Appellate Court of Illinois (First District) issued a decision in Fifield v. Premier Dealer Servs., 2013 IL App (1st) 120327, that will make it more difficult for Illinois employers to enforce post-employment non-compete agreements against newly hired employees who are employed for less than two years and leave, for whatever reason, and join a competitor. The issue in Fifield was whether the promise of at-will employment to a new employee, without more, constitutes consideration adequate to support post-employment restrictive covenants. Fifield lost his job after his employer was acquired but was subsequently offered employment with the successor company. As a condition to his employment with the successor company, Fifield signed a two-year post-employment non-compete agreement. The agreement contained a carve-out allowing Fifield to work for a competitor if he was fired without cause within the first year of employment. Three months later, Fifield resigned and joined a competitor. He and his new employer obtained a declaratory judgment that Fifield’s non-compete agreement was not enforceable because Fifield had not received adequate consideration. The Illinois Appellate Court upheld that decision.
Illinois Courts have long since held that the promise of continued “at-will” employment may not be sufficient consideration to support a non-compete agreement signed by a current employee, due to the illusory nature of the promise. In particular, many Illinois Courts have held that if the employee remains employed for less than two years, the non-compete may not be valid unless it is supported by other consideration. The Fifield Court applied that rule to circumstances where a new employee is required to sign a non-compete agreement as a condition of employment.
Unless the Fifield decision is narrowed or reversed, employers in Illinois should evaluate whether they need a post-employment restrictive covenant from a new-hire and, if so, offer additional consideration beyond the job. Employers should also consider the need for post-employment restrictive covenants when making acquisition strategy decisions and calculating acquisition costs. In the deal context, it is common for employees to be terminated by the seller before the deal closes and hired by the buyer after the deal closes. In light of Fifield, buyers should carefully consider which of the seller’s employees have trade secrets or other information such that it is important to restrict that employee from working for a competitor. If that is the case, the buyer should consider offering a fixed-term employment agreement or other consideration such as a signing bonus to avoid the result in Fifield. Alternatively, the buyer may consider structuring the deal so that key employees of the seller are bound by non-compete agreements with the seller that are transferred upon the closing of the transaction.
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