The legal canvas is changing for restrictive covenants imposed on existing employees, with courts in several jurisdictions requiring something beyond continued employment as adequate consideration for a binding noncompete agreement.
States requiring something extra—beyond continued at-will employment—include Hawaii, Kentucky, Minnesota, Missouri, Montana, New Hampshire, North Carolina, Oregon, Pennsylvania, South Carolina, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. The consideration needed to satisfy this requirement can take various forms, such as a cash bonus, specialized training, a promotion, or a raise at the time the employee is asked to sign the noncompete agreement.
More Is Needed
In Missouri, for example, a federal district court held that at-will employment alone, or the continuation thereof, is insufficient consideration for a noncompete agreement in that state, as the employer makes no “legally enforceable promise to do or refrain from doing anything that it is not already entitled to do” (Durrell v. Tech Elecs. Inc., No. 4:16 CV 1367 CDP, 2016 BL 380008 (E.D. Mo. 2016)).
For midstream noncompete agreements to be enforceable in Pennsylvania, courts have specified that employers must provide “new” and valuable consideration. Examples listed by one court included “a promotion, a change from part-time to full-time employment, or even a change to a compensation package of bonuses, insurance benefits, and severance benefits” (Socko v. Mid-Atl. Sys. of CPA Inc., 633 Pa. 555, 126 A.3d 1266, 40 IER Cases 1568 (2015)).
The New York Supreme Court, interpreting Delaware Law, refused to enforce a noncompete clause that was incorporated into a stock option agreement because it lacked adequate consideration. The court found that the agreement’s promise of continued employment was illusory and thus no right was ever conferred upon the employee (NBTY Inc. v. Vigliante, 49 Misc. 3d 1216(A), 26 N.Y.S.3d 725 (Sup. Ct. 2015)).
Meanwhile, a state appeals court in Illinois said continued employment could qualify as adequate consideration, but only if an individual being asked to enter into a noncompete agreement had already been employed for at least two years (Fifield v. Premier Dealer Servs. Inc., 2013 IL App (1st) 120327, 373 Ill. Dec. 379, 993 N.E.2d 938, 35 IER Cases 1826 (2013)).
That decision from the Appellate Court for the First District hasn’t led to a bright-line two-year rule throughout Illinois, as other courts have focused on different factors in determining whether sufficient consideration was given to enforce a restrictive covenant (see, for example, R.J. O'Brien & Assocs. v. Williamson, 2016 IER Cases 76624, 2016 BL 76624 (N.D. Ill. 2016)).
Here’s another important side note with respect to Illinois: the state’s Freedom to Work Act has barred noncompete agreements for “low-wage workers” since Jan. 1, 2017. Under the pay threshold contained in the law, noncompetes are permitted if employees earn more than $13 an hour or a higher minimum wage rate that applies to them under federal, state, or local law.
Caution in California
When it comes to restrictive covenants, California doesn’t just limit enforceability. The state prohibits noncompete agreements altogether, and, with recent law changes, it allows employees to sue an employer that tries to enforce a noncompete agreement against them.
California also scrutinizes choice of law and forum selection provisions found within restrictive covenants. Under Section 925 of the California Labor Code, which went into effect Jan. 1, 2017, employers can’t impose contractual provisions on employees “who primarily reside in the state of California” that would either: (a) require them to adjudicate a claim outside the state of California, when the claim itself arose inside of the state; or (b) deprive them of the protections of California law when the claim itself arose inside the state of California.
The only way these types of contractual provisions may be enforced is if the parties to the agreement, represented by counsel, stipulate that Section 925 doesn’t apply.
How Midstream Agreements Differ
Noncompetes for new hires are a different story, since the initial offer of a job, replete with salary and benefits, typically satisfies the requirement for providing consideration in return for the individual’s promise not to take company information or customers to a competing business.
But for midstream noncompetes, employers and their counsel must pay close attention to the issue of what constitutes sufficient consideration in certain states, or they may find themselves unable to enforce an agreement that was supposed to provide protection against competitive threats posed by a departing employee.
For more information on relevant state laws, see Bloomberg Law’s Noncompetition Chart Builder (subscription required).
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