Three very recent decisions reflect the irreconcilable division of judicial authority regarding the adequacy of at-will employment as the sole consideration for an otherwise valid non-compete.  Compare (a) Standard Register Co. v. Keala, No. 14-00291 (D. Haw., June 8, 2015) (adequate under Hawaii law) (“majority rule”), with (b) Hunn v. Dan Wilson Homes, Inc., Nos. 13-11297 and 14-10365 (5th Cir., June 15, 2015) (inadequate under Texas law) (“minority rule”), with (c) McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App. (1st) 130097 (June 25, 2015) (2-1 ruling based on the Fifield rule) (“middle ground”).

Status of the Standard Register case Several at-will employees of Standard, a distributor of promotional marketing products, executed non-competes and then resigned and went to work for an alleged competitor.  Standard sued them.  Judge Seabright bifurcated and decided the adequacy-of-consideration issue.  Although the non-competes contained an Ohio choice-of-law provision (Standard is an Ohio corporation), he held that Hawaii had the most significant relationship to the parties and the dispute.  So, Hawaii law applied.

Hawaii’s Supreme Court has not decided whether, under that state’s law, “continuing at-will employment is, by itself, sufficient consideration for an otherwise reasonable non-competition agreement entered into during a term of employment (and not at the beginning of employment).”  Judge Seabright observed that courts in several states hold that consideration in such a situation is insufficient, but “the clear majority position is to the contrary.”  The court concluded that “the Hawaii Supreme Court would not require additional consideration beyond continuing at-will employment.”

Status of the Hunn case Texas Bus. & Com. Code § 15.50(a), provides that “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.”  Lack, an at-will employee of Hunn’s architectural design company, signed a non-compete.  Lack transferred to his home computer from the company’s computer a copy of confidential plans and specifications relating to a project on which Lack was working for a client of Hunn’s (the company permitted employees to take files home to work on them).  Then, Lack resigned, was hired by the client, and allegedly used the files to complete the project.  Hunn sued Lack for breach of the non-compete, violating the Computer Fraud and Abuse Act, and unlawfully disclosing the company’s confidential information to Hunn’s client.

The Fifth Circuit held that a contract for at-will employment does not qualify as “an otherwise enforceable agreement” under the Texas statute “because the promise of continued employment in an at-will contract is illusory — neither the employer or employee is bound in any way.”  Therefore, the non-compete lacked consideration and was unenforceable under Texas law.  That court also rejected Hunn’s other claims (see below).

Status of the McInnis case.  For three years, McInnis was an employee of OAG, selling Harley-Davison motorcycles.  He quit OAG and went to work for a competitor for one day.  He then returned to OAG which required him to sign a non-compete and confidentiality agreement as a condition of his re-employment.  He resigned 18 months later and resumed employment with the competitor.  OAG sued and sought an injunction.  It was denied on the ground that the covenant lacked adequate consideration because he was an at-will employee employed for less than two years.  A scathing dissent challenged the majority’s rationale.

The conflict among the states

The majority position:  According to Judge Seabright in Standard Register, courts in Maryland, Ohio, Vermont, and Wisconsin reason that an employer’s forbearance in exercising a legal right — here, not terminating an at-will employee — is valid consideration for a non-competition covenant and is not illusory.  Further, he referenced the Restatement Third of Employment Law (April 2014 Proposed Final Draft), § 8.06 comment e, and Reporters’ Notes.  Comment e asserts that “Continuing employment of an at-will employee is generally sufficient consideration to support the enforcement of an otherwise valid restrictive covenant.”  The Reporters’ Notes to comment e cite rulings to this effect by courts in more than 20 states.

The minority position:  Citing cases from Minnesota, South Carolina, and Washington, Judge Seabright said that several jurisdictions hold that “continued at-will employment, standing alone, is insufficient consideration for a non-competition agreement entered into during current employment.”  He said that the Restatement Third of Employment Law identifies six jurisdictions, besides those three, that concur with the minority view.

Middle ground:  According to Judge Seabright, the Restatement identifies eight states — including Illinois — that endorse a middle ground, namely, that consideration is sufficient only if the employee is retained for a substantial period after the non-compete is signed.  A leading Illinois case (there is no Supreme Court decision directly on point) is Fifield v. Premier Dealer Services, Inc., 2013 Ill. App. (1st) 120327, holding that continuous employment for two years or more constitutes reasonable consideration for a restrictive covenant.  The majority in McGinnis followed that ruling.

Justice Ellis, dissenting, rejected as indefensible a bright-line two-year rule.  He insisted that a determination of the adequacy of consideration requires a case-by-case analysis in order to protect “at-will employees from the whim of the employer.”  Here, in his view, it was relevant that McGinnis signed the covenant at the time he was hired, that the period of McGinnis’s post-covenant employment (18 months) was substantial, and that he left OAG voluntarily.  The jurist said he could understand the term “additional consideration” in the instance of an existing employee but questioned the logic of requiring “additional compensation” — additional to what? — for a newly hired employee.  He also noted that three of the four federal judges deciding post-Fifield cases predicted that the Illinois Supreme Court would reject the bright-line rule.

Two other issues in Hunn

CFAA.  One count of Hunn’s complaint against Lack accused him of violating the Computer Fraud and Abuse Act.  The appellate tribunal held that since Lack was employed by Hunn when he transferred the files to his home computer, and since employees were permitted to transfer files to their home computers, Lack did not exceed authorized computer access.  Therefore, there was no CFAA violation.

Disclosure of trade secrets and other confidential information.  Hunn accused Lack of post-employment disclosure of Hunn’s confidential plans and specifications.  But the Fifth Circuit disagreed because the plans had been disclosed to the client with Hunn’s consent —  through  its agent, Lack — during Lack’s employment by Hunn.

Takeaways

  1. Consideration. Determination of the sufficiency of consideration for a non-compete executed by an at-will employee may turn on which state’s law applies.  If the relevant facts and circumstances permit, an employer should include a choice-of-law provision designating the law of a state where at-will employment is adequate consideration.  However, as the Hunn case illustrates, choice-of-law clauses are not always honored.
  2. Confidential information. An employer who gives employees access to confidential information should require them to sign written commitments (a) to return or delete the information promptly after termination of employment, and (b) under no circumstances to use or disclose the information other than in furtherance of the employer’s business.