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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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