If you’ve ever purchased an automobile, you know that haggling for a good deal is either the best, or the worst, part of the car-buying experience. That new car smell is pretty memorable too. No matter the aroma or the final purchase price, however, in order to drive home in that shiny new vehicle, you ultimately must agree to give the dealership a certain amount of money, known in legal terms as “consideration.” This concept of consideration is equally important in the non-compete world, as explored in this twelfth article in The Restricting Covenant Series, through the lens of a hypothetical car salesman.
At the Start of Employment – I’ll Sign Anything, Please Hire Me
Post-employment restrictive covenants are private contracts that can restrict individuals’ business activities when they later leave their employment in return for wages, access to information, or some other type of tangible benefit. They often are presented to prospective employees in an offer letter or employment agreement as “a condition of employment” without any additional consideration beyond normal base wages and benefits.
Automobile dealerships and their sales staff are no strangers to restrictive covenants. An automobile dealership might ask its finance, sales staff, or general managers to sign a post-employment non-disclosure, non-competition or non-solicitation agreement because they are granted access to important customer information, dealership vehicle pricing, margins and inventory, or other legitimate protectable business interests. See, e.g., Autonation, Inc. v. O’Brien (S.D. Fla. 2004); Brentlinger Enterprises v. Curran (Ohio Ct. App. 2001); Boch Toyota, Inc. v. Klimoski (Mass. Super. Ct. 2004); In re Autonation, Inc. (Texas 2007); Asbury MS Gray-Daniels LLC v. Daniels (S.D. Miss. 2011); Granite Buick GMC, Inc. v. Ray (S.D. 2015); Sonic Automotive, Inc. v. Younis (C.D. Cal. 2015); Navarre Chevrolet, Inc. v. Begnaud (La. Ct. App. 2016); Autonation, Inc. v. Peters (S.D. Fla. 2016); and McKie Ford Lincoln, Inc. v. Hanna (S.D. 2018).
In many states (including Delaware, Massachusetts, New Jersey, New York and Pennsylvania), an offer of “at-will” employment (i.e., the employment relationship can be terminated by employer or employee at any time, for any lawful reason, with or without notice) at the beginning of the employment relationship is considered “adequate consideration” for entering into a legally binding restrictive covenant. So, that same car salesman who sold you your vehicle, might have been asked to sign a non-compete agreement on a take-it-or-leave-it basis, with no haggling as an option with his or her employer. Ironic? Fair? Reasonable?
Not all states agree with this approach. For example, in Illinois, a restrictive covenant is supported by adequate consideration only if, after signing the covenant, the employee remains employed for a “substantial period” of time beyond the threat of discharge. Some Illinois courts have determined that two years is a substantial period. These courts find that the employee’s continued employment is evidence that the employer’s forbearance from firing the employee was not illusory when the covenant was signed.
Continued Employment – You Want Me to Sign What?
What if the car salesman was not asked to sign a non-compete at the inception of employment, but rather after two years of employment? One of the more frequently litigated non-compete issues is whether continued at-will employment, alone, with no additional promises or money, is adequate consideration. This is where states, and even courts within the same state, diverge in opinion and outcome. See Jordan Liebman & Richard Nathan, The Enforceability of Post–Employment Noncompetition Agreements Formed After At–Will Employment Has Commenced: The “Afterthought” Agreement, 60 S. Cal. L. Rev. 1465 (1987).
Some states, such as Missouri, find that an employer’s promise of continued at-will employment, standing alone, is adequate consideration to support a post-employment restrictive covenant. JumboSack Corp. v. Buyck (Mo. Ct. App. 2013) (“Missouri courts have recognized that continued at-will employment constitutes consideration for a non-compete agreement where the employer allows the employee by virtue of the employment to have continued access to its protectable assets and relationships.”). A few years ago, in Runzheimer Int’l v. Friedlen (2015), the Wisconsin Supreme Court held that a former employer’s promise not to fire an at-will employee immediately if he signed a restrictive covenant constituted lawful consideration, even though this employee had worked at the company for 15 years.
In contrast, other courts, like in North Carolina, have found that keeping one’s existing job is not sufficient consideration for the signing of a covenant not to compete. Same in Washington and Colorado. Likewise, in Pennsylvania, if the restrictive covenant is requested during employment, it is enforceable only if the employee receives new and valuable consideration beyond simply a promise of continued at-will employment. There are many interesting variations on what courts have found constitutes “adequate” consideration during midstream of employment. Some examples of what may suffice as sufficient additional consideration in states that require it include increased wages, a promotion, additional training, a bonus, a fixed term of employment, or perhaps new access to proprietary business information.
Forfeiture for Competition and Garden Leave Provisions – Show Me the Money!
What if the car salesman was the top seller at the dealership for three years straight, and the dealership wanted to discourage him or her from jumping ship to another competitor? Subject to the state law applicable to this situation, two potential options for the employer might be a “garden leave” provision or a “forfeiture-for-competition” clause.
Garden leave is where an employer places an employee on paid leave, typically for a period of thirty to ninety days, during which the employee continues to receive full compensation but is relieved of their day-to-day job duties. In some situations, the dealership might allow the salesman to continue to participate in commission, bonus or stock option programs, particularly if it constitutes a significant part of their overall compensation package. Salesman on garden leave continue to owe a duty of loyalty to the dealership and therefore cannot join or assist a competitor during this period without significant risk of legal exposure.
Another option that might dissuade a salesman from leaving and increase the dealership’s likelihood of enforcing post-employment restrictions is a forfeiture-for-competition clause. As one federal judge in Connecticut recently described it, “[a] non-compete agreement outright bars an employee from going to work for the competition. Sometimes employers use a less restrictive alternative: to allow an employee to jump ship to the competition but discourage this by docking them with a loss of certain company benefits.” Datto, Inc. v. Falk (D. Conn. Mar. 13, 2018). In New York, this type of agreement is referred to as the “employee choice doctrine.” See, e.g., Lucente v. Int’l Bus. Machines Corp. (S.D.N.Y. 1999) (“New York has long recognized what has become known as the ‘employee choice doctrine,’ which provides that ‘an employee who receives benefits conditioned on not competing with the conferring employer has the choice of preserving his benefits by refraining from competition or risking forfeiture of such benefits by exercising his right to compete.’”); see also Fraser v. Nationwide Mut. Ins. Co. (E.D. Pa. 2004) (holding forfeiture-for-competition provision in insurance agent’s employment agreement, which called for forfeiture of deferred compensation if agent entered into competition with employer within 25-mile radius within one year of termination, was valid and enforceable under Pennsylvania law). Courts typically do not scrutinize closely forfeiture-for-compensation clauses for “reasonableness” because such agreements leave it up to the employee on whether to join a competitor and “forfeit” the compensation offered by the former employer.
As courts and legislatures around the country continue to scrutinize and challenge the viability of restrictive covenants, employers with valid legitimate business interests to protect should consider creative ways to enhance the likelihood that necessary, reasonable restrictive covenants will be honored and enforced.
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The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants. It is not intended to provide and should not be construed as providing legal advice. Each situation is different including the governing state law, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.