Adequacy Of Continued Employment
Update: 2014 Court Decision Casting Doubt On Adequacy Of Continued Employment As Consideration For Noncompetition Agreement Entered Into After Start Of Employment Does Not Change Prevailing View In Connecticut That Such Consideration Is Adequate, Where Agreement Is Condition of Continued Employment.
By Hugh W. Cuthbertson
My previous blog article considered the issue of whether continued employment, standing alone, provides adequate consideration to support a covenant not to compete entered into after the employment relationship had begun. I wrote that there are two reasons why the answer is “probably” yes, despite the fact that the issue has not been squarely decided by a Connecticut appellate court and even though there is a split of authority among the Connecticut trial courts on this question. First, the Connecticut Supreme Court explained in the case of Roessler v. Burwell, 119 Conn. 289 (1934), that where the purpose of the employee’s agreement not to compete with his employer is to receive the benefit of continued employment, the noncompetition agreement is supported by adequate consideration. Second, a majority of the Connecticut trial court decisions on this issue cite the Roessler decision in support of this proposition, especially where evidence is presented to demonstrate that the noncompetition agreement is a condition of the employee’s continued employment and that the failure to agree to it would result in the termination of employment.
Recently, the Hartford Superior Court issued an opinion in Dur-A-Flex v. Dy, 2014 WL 3511610 (Conn. Super. Ct. Jun. 5, 2014), denying an employer’s application for a temporary injunction seeking to enforce a two-year noncompetition agreement with a worldwide geographical scope entered into by an employee seven years after his hire. No evidence was apparently introduced by the employer that the noncompetition agreement was a condition of the employee’s continued employment and that he would have been terminated if he failed to enter into the agreement. The court ruled that the noncompetition agreement was unenforceable, because it lacked consideration.
The good news from this decision for any business seeking to enforce such an agreement is that the court found the agreement’s length of time (two years) and its geographical scope (worldwide) to be reasonable as a matter of law. The court said that “a two-year period for non-competition is certainly reasonable.” And, even though the geographical area was worldwide, it was limited to competitors, which allowed the employee to use his job skills either for himself or for others who do not compete with his employer.
The bad news, however, is that the court only added to the uncertainty in Connecticut regarding whether continued employment constitutes adequate consideration for restrictive covenants entered into after the start of employment. This resulted from the court’s oversimplification of the law by saying in sweeping terms that “continued employment is not consideration for a covenant not to compete entered into after the beginning of the employment.” Such, however, is not the law in Connecticut, although it takes some familiarity with the judicial decisions issued on this question and a careful reading of the court’s decision in Dur-A-Flex to understand this.
First, in a footnote in the Dur-A-Flex decision the court sought to distinguish the Connecticut Supreme Court’s opinion in Roessler with the following explanation: “Plaintiff cites Roessler v. Burwell, 119 Conn. 289 (1934), as binding precedent. However, that case is distinguishable. Rosessler’s non-compete agreement was based upon mutual promises. The employer’s promise was to employ the employee ‘indefinitely.’” The court noted in Dur-A-Flex that no promise of continued employment had been extended to the employee in exchange for his promise not to compete.
Thus, if Dur-A-Flex had presented evidence that it had promised continued employment to its employee in return for his agreement not to compete, the court would presumably have found the agreement to have been supported by adequate consideration. Under that circumstance, therefore, the promise of continued employment would in fact have supported the noncompetition agreement, thus undercutting the court’s sweeping comment to the contrary.
In addition, the court’s overbroad statement in Dur-A-Flex, if taken as a general matter, that continued employment is not consideration for a covenant not to compete entered into after the beginning of employment is simply wrong, as it conflicts with the numerous state and federal court decisions in Connecticut holding that continued employment does constitute adequate consideration for a noncompetition agreement entered into after the commencement of employment, where the agreement not to compete is made a condition of that continued employment. See, e.g., RKR Dance Studio, Inc. v. Makowski, 46 Conn. L. Rprt 389 (Conn. Super. Ct. Sept. 12, 2008); MacDermid, Inc. v. Raymond Selle and Cookson Group PLC, 535 F.Supp.2d 308 (D. Conn. 2008); United Rentals, Inc. v. Bastanzi, 2005 WL 5543590 (D. Conn. Dec. 22, 2005); cf. Sartor v. Town of Manchester, 312 F.Supp.2d 238 (D. Conn. 2004).
Because the question of whether the employee’s continued employment was conditioned on his agreement not to compete seems not to have been presented to the court in Dur-A-Flex, the expansive statement of law contained in the court’s opinion needs to be understood in this context. Thus, if continued employment is truly conditioned on an employee’s willingness to agree not to compete, then continued employment would obviously constitute as much consideration for the noncompetition agreement as would an employee’s initialemployment. After all, employment is a powerful benefit, regardless of whether it is initial or continued, and would constitute adequate consideration, regardless of when the noncompetition agreement is entered into.
As cautioned in my prior article, even though continued at-will employment may constitute adequate consideration for a noncompetition agreement, care should be taken that such employment actually continue for some period of time in order to demonstrate the employer’s good faith and to show that the employee actually received what was bargained for (i.e., some amount of continued employment). Moreover, until such time as a Connecticut appellate court has the opportunity to address this issue directly, the safest course to follow is to provide some sort of benefit (e.g., salary increase, one-time bonus, new or enhanced fringe benefits), even though not technically necessary, as separate consideration in addition to continued employment for the employee’s agreement not to compete.
The important point to remember is that, despite the decision in Dur-A-Flex, the majority view among the trial courts in Connecticut remains that continued employment will provide adequate consideration for an otherwise reasonable noncompetition agreement, where agreement to it is made a condition of continued employment. The real difficulty any employer faces under this circumstance is that in order to show that an employee’s continued employment is in fact conditioned on agreement to a covenant not to compete, the employer must be prepared to terminate the employment of any employee who refuses to agree. As a matter of workplace reality, employers may find it easier not to hire a prospective employee who refuses to enter into a noncompetition agreement, than it is to terminate the employment of a current employee for the same reason.