As the economy picks up and employees are increasingly courted by competitors, companies need to take a fresh look at how to protect their hard-won confidential information, trade secrets, customer relationships, and goodwill when employees depart. A well-crafted non-competition agreement can be a powerful tool for protecting vital assets. The challenge is that non-compete law differs dramatically from one jurisdiction to the next, and it is always changing.
One key question is whether continued employment counts as sufficient consideration to support a post-employment non-competition agreement. In other words, where an employee is already on the payroll and the employer asks the employee to sign a non-compete, must the employer grant some additional value or benefit—such as a bonus, a pay raise, or specialized training for the non-compete to be enforceable after the employee departs?
In a number of states, such as Michigan and Colorado, continued employment alone is generally sufficient, at least for at-will employees. In other states, such as Illinois and Tennessee, the employment relationship must continue for a substantial period of time after execution of the non-compete. Still, other states require the employer to confer some further benefit on the employee for a post-employment non-compete to be enforceable—although standards differ by state. For example, Oregon requires a “bona fide advancement,” while in Texas, providing new confidential information to the employee may be sufficient. To be enforceable, a non-compete agreement must be tailored to the state where the employee is located, and the challenge is compounded when a company has employees in multiple states.
The shifting legal landscape for employers
Courts are revisiting the “continued employment” question. As discussed below, noteworthy opinions were issued by courts in Kentucky and Hawaii in 2014, both of which present new challenges for employers. Furthermore, the Supreme Courts of Wisconsin and Pennsylvania are both expected to hand down rulings on the question in 2015.
Kentucky: Consideration required, but subsequent benefits may be enough
In Charles T. Creech, Inc. v. Donald E. Brown and Standlee Hay Company, Inc., the employee defendant had worked for the employer for 16 years before being presented with a non-competition agreement. The employee received no monetary compensation for signing the agreement and was not told that his continued employment was contingent on signing. Two years later, the employee resigned and went to work for a competitor. The employer sued, but the trial court granted summary judgment in favor of the employee. Following a reversal by the appeals court, the Kentucky Supreme Court (the Court) reinstated the grant of summary judgment, reasoning that the non-compete was unenforceable because the employee had received no consideration “in exchange for signing the Agreement or after he signed the Agreement.”
Notably, the Court distinguished two earlier cases holding post-employment non-competes to be enforceable by noting that: in each case, the employment relationship changed after the agreement was signed. In one case, the employee became more than an at-will employee; in the other, the employees received specialized training, promotions, and increased wages. Accordingly, though the Court emphasized that consideration is required, the opinion also seems to suggest that changes in the employment relationship subsequent to execution of the non-compete may be sufficient even if no consideration was explicitly provided at the time of execution.
Hawaii: Federal court follows other states requiring consideration
Hawaii state courts have not resolved whether continued employment is sufficient to support a restrictive covenant entered into after employment commences, but in The Standard Register and WorkflowOne, LLC v. Keala et al., the United States District Court for the District of Hawaii (the Court) weighed in on the question. After being employed for a time, several employees of WorkflowOne signed an agreement not to solicit or accept business from the company’s customers for 12 months following termination. The Court denied the plaintiffs’ request for a temporary restraining order in part because there was no evidence regarding any consideration provided to the employees.
The Court cited cases from Minnesota, Texas, and other states holding that “continued at-will employment, standing alone, is insufficient consideration for a non-competition agreement.” Importantly, the Court also distinguished a Hawaii Supreme Court case holding that a non-compete was enforceable where the employee received a promotion and pay raise at the time of signing. The Court declined to issue a temporary restraining order, reasoning in part that “the parties have not presented any facts regarding the benefit [the employees] received in exchange for signing these agreements, and whether, under Hawaii law, such benefit is adequate consideration.”
Wisconsin: Supreme Court to address unresolved question of consideration
The Wisconsin Supreme Court is soon expected to address, and presumably resolve, whether continued employment is sufficient to support a post-employment restrictive covenant. In Runzheimer International, Ltd. V. Friedlen, an at-will employee was required to sign a restrictive covenant agreement after 20 years of employment. No additional benefit beyond continued employment was provided as part of the agreement. Two years later, the employee was fired and went to work for a competitor. The trial court held that continued employment did not constitute sufficient consideration, and granted summary judgment in favor of the employee.
Interestingly, the Court of Appeals surveyed Wisconsin law on the issue and concluded that the law was unclear. Specifically, whereas one important case stated that “employers may not compel their existing employees to sign restrictive covenants without additional consideration,” another implied that “if the employer had conditioned continued employment on the employee’s signing of the agreement, there may have been sufficient consideration.” The Court of Appeals noted that both cases presented different facts from those in Runzheimer, and also remarked that “if we look to what occurred after the agreement was signed to discern whether there was in fact valid consideration, we necessarily create an exception to Wisconsin law.” For these reasons, the Court of Appeals certified the question to the Wisconsin Supreme Court. The Wisconsin Supreme Court has heard oral argument and should rule in 2015.
Pennsylvania: Supreme Court to address impact of Uniform Written Obligations Act
The Pennsylvania Supreme Court will also address the “continued employment” issue, but with a twist. In Socko v. Mid-Atlantic Systems of CPA, Inc., the employee resigned and accepted a position with a competitor after having signed a post-employment non-compete agreement. In a declaratory judgment action brought by the employee, the former employer invoked Pennsylvania’s Uniform Written Obligations Act, which provides that a written agreement is not unenforceable for lack of consideration if it “contains an additional express statement, in any form of language that the signer intends to be legally bound.” However, the former employer argued that because the non-compete contained such language, the employee could not avoid the agreement for lack of consideration.
The trial court rejected the argument and granted partial summary judgment in favor of the employee. The Superior Court of Pennsylvania affirmed the trial court’s ruling, emphasizing a string of prior decisions that required additional consideration to support a post-employment, non-compete. The Superior Court held:
When the restrictive covenant is contained in the initial contract of employment, the consideration is the job itself. But when the restrictive covenant is added to an existing employment relationship, however, to restrict himself the employee must receive a corresponding benefit or change in job status. Contractual language satisfying the UWOA does not provide the employee with any actual benefit, and thus cannot suffice as a form of consideration that is adequate to support the later enforcement of the covenant not to compete against the employee.
On Dec. 11, 2014, the Supreme Court of Pennsylvania granted the employer’s Petition for Allowance of Appeal. It will consider, among other things, whether the Uniform Written Obligations Act may “rectify a lack of consideration.”
Takeaways for employers
With employee mobility on the rise, non-competition and non-solicitation agreements are increasingly important tools for protecting a business’s confidential and proprietary information, trade secrets, customer relationships, and goodwill. In view of the ever-shifting legal landscape—on the “continued employment” issue and a host of other issues in the restrictive covenant arena—employers should review and update their employment agreements and policies to ensure that their assets are protected. We will continue to monitor legal developments in Wisconsin and Pennsylvania, and throughout the country.
For more information, please contact one of the attorneys listed below.