The various laws, statutes, and policies governing non-compete agreements are nuanced, inconsistent, and sometimes downright contradictory from state-to-state. The issue of consideration is no different. Like other contracts, non-compete and restrictive covenant agreements must be supported by adequate and sufficient consideration at the time of execution. However, what constitutes adequate consideration for a restrictive covenant, especially a non-compete provision, varies from state to state. And, more importantly, the concept of adequate consideration has shifted in recent years reflecting an increasingly strict approach to enforcing non-compete agreements post-employment.
Traditionally, in most states, when a restrictive covenant is executed as part of an employment agreement at the outset of the employment relationship, the offer of initial and continued employment was generally considered adequate consideration for entering into the covenant. However, this issue has become more complicated in recent years, particularly for at-will employees. Additionally, courts have further complicated the consideration issue in situations where employers ask existing employees to sign agreements “midstream” of employment.
This blog discusses the varying state laws regarding sufficient consideration for non-compete agreements signed at both the outset and during employment as well as other recent attacks on non-competes and restrictive covenants generally.
Validity of Non-Competes with At-Will Employees Signed at Outset of Employment
State and federal courts across the country are increasingly scrutinizing non-competes entered into with at-will employees. A recent case out of the Eastern District of Missouri illustrates this quandary and underscores the potential change in tide in this area. In Durrell v. Tech Electronics, Inc., the plaintiff employee sought a declaratory judgment, among other claims, that his non-compete was invalid because continued at-will employment was not sufficient consideration under Missouri law. Tech Electronics moved to dismiss the claim, arguing that at-will employment constituted sufficient consideration for the non-compete and the employee should be held to the agreement’s terms.
The court denied Tech Electronic’s motion as it related to the non-compete and held that “[a]n offer of at-will employment, or the continuation of at-will employment, is simply not a source of consideration under Missouri contract law.” 2016 WL 6696070, at *5 (E.D. Mo. Nov. 15, 2016) (internal citations omitted). In coming to this conclusion, the court relied on a string of Missouri state court cases holding that at-will employment is not valid consideration in the context of arbitration agreements. The court cited Baker v. Bristol Care, Inc.’s holding that with at-will employment, “the employer makes no legally enforceable promise to do or refrain from doing anything that it is not already entitled to do. The employer can still terminate the employee immediately for any reason.” 450 S.W.3d 770, 775 (Mo. 2014). Thus, according to the Durrell court, something other than continued employment is required for a restrictive covenant to be enforceable. Notably, the plaintiff employee was employed for twenty-two years before leaving the company, and, yet, this was still not sufficient.
So, what is sufficient consideration in Missouri? The Durrell court pointed to JumboSack Corp. v. Buyck, 407 S.W.3d 51, 55 (Mo. Ct. App. 2013). In JumboSack, a Missouri Court of Appeals determined, among other things, whether a former employee’s non-compete agreement was supported by adequate consideration. Whether or not continued employment sufficed was not at issue or argued by either side. Instead, the defendant employer argued that access to its customers over a five-year period constituted sufficient consideration for the post-employment non-compete. Importantly, the court stated that “Missouri courts have recognized that continued at-will employment constitutes consideration for a non-compete where the employer allows the employee by virtue of his employment, to have continued access to its protectable assets and relationships.” Id. at 56 (emphasis in original) (internal citations omitted). JumboSack indicates that, at least in Missouri, demonstrable continued access to the company’s protectable assets, such as customers or information, may constitute sufficient consideration for an at-will non-compete.
Missouri courts are not alone in taking the position that initial and continued at-will employment does not constitute sufficient consideration for a non-compete. In 2013, an Illinois Appellate Court decided Fifield v. Premier Dealership Servs., 933 N.E.2d 938 (Ill. App. Ct. 2013). This decision significantly impacted non-competes in Illinois because the court ruled that the promise of “at-will” employment alone is insufficient consideration to support a valid non-compete covenant under Illinois law. The court held that where there is no additional, independent consideration, two or more years of continued employment is required to constitute adequate consideration to support such a covenant, and thus created a “bright-line” rule which has impacted Illinois cases ever since. Fifield served as a blow to employers who rely on initial employment as consideration for entering into post-employment restrictive covenants and generally undermined the enforceability of such agreements. The Illinois Supreme Court has yet to definitively rule on this issue and federal courts continue to issue inconsistent decisions. See, e.g., Montel Aetnastak, Inc. v. Miessen, 998 F. Supp. 2d 694 (N.D. Ill. 2014) (declining to apply Fifield’s two-year rule); Instant Tech., LLC v. Defazio, 40 F. Supp. 3d 989 (N.D. Ill. 2014) (applying Fifield); Bankers Life & Cas. Co. v. Miller, 2015 U.S. Dist. LEXIS 14337 (N.D. Ill. Feb. 6, 2015) (rejecting Fifield in favor of a fact-based analysis).
In light of the unsettled nature of the at-will consideration issue, Illinois employers should consider providing additional consideration for non-competes for at-will employees, such as a signing bonus, to strengthen the enforceability of the agreement overall. It is unclear whether access to confidential information, customer relationships or other protectable interests would constitute sufficient consideration under post-Fifield law in Illinois, as in Missouri under JumboSack.
Interestingly, the Fifield court’s reasoning may well have saved the non-compete in Durrell as the employee was employed for well over two years, if the case had been heard in Illinois. Yet, in Missouri, the employee’s tenure apparently had no impact on the court’s analysis. These two cases illustrate the nuanced differences from state to state as it relates to non-competes and restrictive covenants generally.
Consideration Required for Existing Employees
Even though many states will consider continued employment at the outset of the employment relationship sufficient consideration for an at-will non-compete, some states require additional consideration beyond continued employment for non-competes entered into after the employment relationship has started. Specifically, courts in North Carolina, Montana, South Carolina, Oregon, Texas, Washington, and Wyoming have expressly held that continued employment is insufficient consideration to support a non-compete entered into midstream of employment. Additional consideration, such as a raise, a change in duties, a promotion, or a bonus, must be provided with the new non-compete.
For example, in 2008, the Montana Supreme Court held that “past consideration cannot serve as good consideration for a present agreement.” Access Organics, Inc. v. Hernandez, 175 P.3d 899, 904 (Mont. 2008). Similarly, in North Carolina, “a covenant entered into after an employment relationship already exists must be supported by new consideration, such as a raise in pay or a new job assignment.” Reynolds & Reynolds Co. v. Tart, 955 F. Supp. 547, 553 (W.D.N.C. 1997). Yet in both these states, initial continued employment is generally sufficient for non-competes entered into at the outset of the relationship. Such differing law is particularly challenging for a company reviewing existing restrictive covenant agreements and considering issuance of a revised agreement to both new and existing employees. To ensure maximum enforceability, the company must determine whether some form of additional consideration is required for existing employees and/or new hires.
In other states, such as Massachusetts, New Mexico and West Virginia, this issue has not been decided and employers are left with little definitive guidance. Other jurisdictions, such as Kentucky and the District of Columbia, confuse the issue even more where case law suggests continued employment may be sufficient consideration for mid-stream non-competes if the employee remains employed for a significant amount of time or the at-will relationship is otherwise altered in some way. See Charles T. Creech, Inc. v. Brown, 433 S.W.3d 345, 354 (Ky. 2014); Ellis v. James V. Hurson Assocs., 565 A.2d 615, 4 IER Cases 1505 (D.C. Ct. App. 1989).
In short, whether or not continued employment constitutes adequate and sufficient consideration for non-competes varies from state to state and even court to court. It is critical to carefully evaluate both the consideration provided to employees as a basis for non-compete agreements and the law of the jurisdiction governing the agreement to ensure the agreement is valid and enforceable.
Other Attacks on Non-Competes
Heightened consideration requirements are not the only way states and courts are cracking down on non-competes across the country. California, North Dakota, and Oklahoma already generally prohibit non-competes. Illinois recently passed the Freedom to Work Act, which prohibits employers from entering into non-compete agreements with “low-wage employees.” See our previous blog post on this subject here. In 2016, the White House commissioned a study of non-compete agreements and recommended limitations such as banning non-competes for low-wage workers, requiring consideration beyond continued employment, and prohibiting enforcement of non-competes for employees who are laid-off or terminated without cause. It is unclear how the new administration will view non-compete and restrictive covenant issues. Additionally, a new bill recently introduced in the Nevada legislature proposes to severely restrict non-competes by limiting the term to no more than three months and imposing fines and penalties (including potential misdemeanors) on companies for non-compliance with the proposed statutory terms. The bill can be found here.
Stay tuned as courts and legislatures continue to closely scrutinize restrictive covenants across the country. While it is difficult to balance the ever-changing and often disparate landscape of non-competes and restrictive covenants from state to state and court to court, companies should carefully audit their use of such agreements. Sheppard Mullin attorneys are extremely experienced on these matters and can help companies navigate these minefields in multiple jurisdictions.