It’s a concrete case. A former employee may be stuck with an agreement that he had signed while working for his former employer, restricting his right to later go to work for a competitor.
In a recent case, Lucht’s Concrete Pumping, Inc. v. Horner,(E1) the Colorado Supreme Court decided whether an employer’s continuation of the employment of an existing employee is adequate “consideration” (quid pro quo) to support a noncompetition agreement. Reversing a lower court, the Colorado Supreme Court held that where an employer “forbears from terminating an existing at-will employee,” the employer forbears from exercising a legal right, and that “such forbearance constitutes adequate consideration for a noncompetition agreement.”
Under this decision, an employer can require an existing employee to sign an agreement not to compete (sometimes called a “non-compete”) without giving the employee a raise, a promotion, a guaranty of employment for a definite time, or some other form of “consideration” in return. Assuming the employee is not under an existing contract and there is no legal restriction on the employer’s right to let the employee go if he or she refuses to sign the non-compete, any good faith continuation of employment may be sufficient as consideration. But the non-compete still must meet other legal requirements to be enforceable.
The non-compete must have been made under circumstances that it is not void by statute. A Colorado statute(E2) states that, “Any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor for any employer shall be void,” with the following four exceptions:
- Any contract for the purchase and sale of a business or the assets of a business;
- Any contract for the protection of trade secrets;
- Any contractual provision providing for recovery of the expense of educating and training an employee who has served an employer for a period of less than two years;
- Executive and management personnel and officers and employees who constitute professional staff to executive and management personnel.
If the covenant promising not to compete is valid under the statute, it must meet additional requirements to be enforced. It must, under the circumstances of the case, be reasonable in duration and geographic scope. It must not be more broad than necessary to protect the promisee’s (e.g., the employer’s) legitimate interests, and it must not impose an undue hardship on the promisor (e.g., the employee).
In the case at issue, Lucht’s Concrete Pumping, Inc. (“Lucht’s”), hired Tracy Horner as its mountain division manager, on an at-will basis. Employment “at-will” means the employer or employee can terminate employment at any time, for any legal reason or no reason at all. Horner was hired as a key person with connections to the industry. He was solely responsible for relationships in the mountain region upon which Lucht’s relied for its concrete pumping business.
Two years after hiring him, Lucht’s asked Horner to sign, and he did sign, a non-disclosure and confidentiality agreement, which included an agreement not to compete. In part, the agreement stated that if he left his position, he would not “directly or indirectly solicit, induce, recruit or encourage any of [Lucht’s] employees or customers to leave [Lucht’s]” for twelve months following his termination. He was not offered any pay increase, promotion or additional benefits at the time he signed the agreement.
About two years after signing the agreement, Horner resigned and began working for another company which had many of the same customers and directly competed with Lucht’s. Lucht’s then sued Horner, asserting various claims, for alleged breach of contract, breach of duty of loyalty, breach of fiduciary duty, and misappropriation of trade value. Lucht’s also sued Horner’s new employer, for alleged intentional interference with contract, aiding and abetting a breach of duty of loyalty, aiding and abetting a breach of fiduciary duty, and misappropriation of trade value.
The trial court granted a motion against Lucht’s on its claims for breach of contract and intentional interference with contract, concluding that the noncompetition agreement was unenforceable due to lack of consideration. Following a trial on the remaining claims, the trial court found in favor of Horner and his new employer on those claims as well.
On appeal, the Colorado Court of Appeals said that continued employment of an at-will employee cannot, by itself, constitute consideration for a noncompetition agreement if the employee had already begun working. But the Colorado Supreme Court disagreed and reversed the decision.
The supreme court treated the noncompetition agreement like other contracts. It said that the court had long held that any benefit to a promisor or any detriment to a promisee – no matter how slight – constitutes adequate consideration. It said, “Except in extreme circumstances, such as those involving allegations of unconscionability, a court should not judge or attempt to assess the adequacy of consideration.”
An employee’s acceptance of an at-will employment arrangement at the time of initial employment is sufficient consideration for a noncompetition agreement. During at-will employment, the employer and employee must decide whether to continue the employment relationship. The Colorado Supreme Court said it has made no distinction between the adequacy of consideration made at the initial hiring and consideration made during the relationship.
In this case, Lucht’s presentation of the noncompetition agreement to Horner was effectively an offer to renegotiate the terms of Horner’s at-will employment, which the court found Horner accepted by continuing to work. The court compared its reasoning in this case to another case, Continental Air Lines, Inc. v. Keenan, where the court held that an at-will employee could enforce the termination procedures specified in an employee manual (which gave employees the right to a hearing) on the theory that the employee’s decision to continue to work constituted “acceptance” and “consideration for those procedures.” By continuing to work, the at-will employee decided to forbear from his right to discontinue working.
The court in Lucht’s rejected an argument that there must be a threat of discharge in order for the continuation of employment to constitute consideration. On the other hand, to the extent that an employer enters into a noncompetition agreement with the intention of terminating the employee immediately afterwards, the court said such an agreement may fail for lack of consideration.
In the end, the Colorado Supreme Court in Lucht’s noted that all noncompetition agreements must be assessed for reasonableness. Because the lower court had declared the noncompetition agreement invalid due to lack of consideration, no reasonableness assessment had been performed. Therefore, the higher court sent the case back to the lower courts to assess whether the agreement was reasonable under the facts of the case. It left to be decided whether the employee could still break free of the non-compete based on arguments that its terms were unreasonable.
Endnotes:
(E1)2011 WL 2139903, —3d— (Colo. May 31, 2011)
(E2)C.R.S. §8-2-113(2).