Employment Law Advisory Bulletin
Court Invalidates Post-Hire Non-Competition
Agreement
By Harry
J.F. Korrell, Tahl Tyson and Eric B. Martin
[November 2004]
Savvy employers whose stock-in-trade includes
confidential business information, customer relationships and invaluable
goodwill often protect these assets with non-competition or similar
agreements. But constantly evolving court decisions make it challenging
to ensure that an existing agreement will be valid when the time
comes to enforce it. Some employers revise existing agreements so
they are consistent with the most recent court decisions. As one
employer found out recently, this can be perilous if the only thing
offered in exchange for the agreement is continued at-will employment.
A Typical Factual Scenario
The situation faced by the employer in Labriola
v. Pollard Group, Inc. is likely shared by many Washington
employers.
Pollard Group, Inc. is a commercial printing
business. In 1997 it hired Anthony Labriola to work as one of its
print sales staff. At the time Mr. Labriola was hired, he signed
an employment agreement, providing that (1) he could be terminated
at any time without cause (i.e. he was an “at will”
employee), (2) he would be compensated according to a set base salary
and commission structure, and (3) he would not compete against the
employer in the custom printing business for a period of three years
after his employment ended. The parties worked together under this
agreement for several years without incident.
But in April 2002, the Pollard Group had Mr.
Labriola sign a new agreement, titled the “Noncompetition
and Confidentiality Agreement.” While the new document contained
similar provisions regarding Mr. Labriola’s at-will employment
status and compensation structure, it revised some of the terms
of Mr. Labriola’s existing non-competition obligation—presumably
to make the restrictions more reasonable and thus more likely to
be enforced by the courts. For instance, the new agreement provided
that the restriction on Mr. Labriola’s competitive activities
applied to a 75-mile radius from Pollard Group’s Tacoma business.
In contrast, the previous agreement contained no geographical limitation.
Employers should periodically re-assess their
non-competition agreements. The enforceability of any non-competition
agreement is ultimately determined by whether a court thinks its
provisions are reasonable and necessary to protect the customers
or goodwill of a business. Courts have found agreements without
geographical or temporal limitations to be overly restrictive and
unenforceable. However, the Pollard Group’s solution to the
problem—simply having Mr. Labriola sign a new version of the
agreement—created a problem it did not anticipate.
Mr. Labriola finally left the Pollard Group
in November 2002 and sought to work for a competitor. When the Pollard
Group reminded Mr. Labriola of his non-competition obligations and
its intent to enforce the agreement, Mr. Labriola brought suit seeking
a declaration from the court that his 2002 agreement was unenforceable.
Why? Because the Pollard Group never actually gave him anything
of value in exchange for his “new” 2002 promise not
to compete. The Supreme Court of Washington State agreed.
The Court’s Decision
The Court found that the Pollard Group gave
Mr. Labriola no benefit, or “consideration”
in exchange for his 2002 promise not to compete because all it gave
him was continued at-will employment (a “benefit” he
already enjoyed). Since both parties must provide something of value
to the other in order to create a legal contract, the Court found
it could not enforce the agreement. The Court noted that if the
Pollard Group had provided “independent consideration”
in order to obtain Mr. Labriola’s signature, such as “increased
wages, a promotion, a bonus, a fixed term of employment, or perhaps
access to protected information,” it would have sufficed to
create a valid agreement.
The Court’s decision applies only to non-competition
agreements entered after employment has already begun.
Agreements signed at the inception of employment remain valid and
enforceable (provided, of course, that they are substantively reasonable)
because, unlike continued at-will employment, a new job is something
of value which the employee does not already have.
Possible Impact
In light of the court’s decision in this
case, at a minimum, employers should review their existing non-competition
and similar agreements to determine whether they are enforceable.
If the agreements were entered into after the beginning of the employment
relationship and no additional consideration was given in exchange
for the agreement, the agreement is not enforceable. In such cases,
employers should consult with counsel to determine the best method
for obtaining new agreements, including advice on what type of independent
consideration may be necessary to make the agreement enforceable.
Moreover, employers should also alter hiring practices to make sure
that non-competition agreements (if desired) are made a condition
of new employment, and that this requirement is communicated to
potential employees before they begin work. Finally, because
non-competition agreements are subject to a variety of restrictions,
employers should consult with counsel to determine whether the agreements
are substantively enforceable under existing law.
Any questions about this advisory should be directed
to:
This
Employment Law Advisory is a publication of the Employer Services
Department of Davis Wright Tremaine LLP. Our purpose in publishing
this Advisory is to inform our clients and friends of recent developments
in employment law. It is not intended, nor should it be used, as
a substitute for specific legal advice as legal counsel may only
be given in response to inquiries regarding particular situations.
Copyright
© 2004, Davis Wright Tremaine LLP.
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