Inside: Contemplating Consideration for Non-Compete Agreements

Inside Counsel

December 9, 2013

Like all other contracts, restrictive covenants (including non-compete agreements) must be supported by adequate consideration at the time they are executed. What constitutes adequate consideration for a restrictive covenant, however, varies from state to state. As a result, understanding in which state a particular non-compete may need to be enforced and ensuring at the outset that adequate consideration has been provided to the employee under the law of that state are key to having enforceable restrictive covenants.

Where a restrictive covenant is executed as part of an original employment agreement at the time employment is accepted, the offer of employment is generally considered adequate consideration for the covenant. Nonetheless, explicitly identifying a specific portion of the employee’s compensation or other benefits as consideration for the restrictive covenant can remove any questions about the adequacy of consideration for a non-compete with a new employee.

The question of whether there is adequate consideration becomes more complicated when a company enters into a restrictive covenant with an existing employee rather than a new employee. In some states — including Colorado, Florida, Georgia and New York — continued employment of an at will employee alone likely will constitute sufficient consideration when an existing employee enters into a new agreement containing restrictive covenants. The rationale is that in an at will employment relationship, the employer has the right to terminate the employee at any time, and the employer’s restraint in exercising that right to terminate and allowing the employee to continue to work is a legal detriment that constitutes consideration sufficient to support a restrictive covenant.

Even in states that recognize that continued employment of an at will employee can be adequate consideration for a non-compete; however, there may be questions about how long that employment must continue to constitute sufficient consideration. In Illinois, for example, courts have recently held that an employee must be employed for at least two more years for continued employment to constitute adequate consideration for a restrictive covenant. Illinois courts have stated that this two-year requirement applies not only to non-competes with existing employees, but also to non-competes that are entered into at the time of initial employment.

In other states like Pennsylvania and Washington, continued employment — regardless of the length of that employment — probably will not constitute adequate consideration for a non-compete with an existing employee. Minnesota has a similar rule that continued employment alone is not adequate consideration for a non-compete, but it also has a general statute that an agreement will not fail for lack of adequate consideration if the agreement contains a statement that the parties intend to be legally bound by the agreement. Minnesota courts have recently held that this statute applies to restrictive covenants, so restrictive covenants that contain the statutory language may still be enforceable even if they otherwise lack separate consideration.

Given the variations in state laws and the continuing evolution of what courts consider adequate consideration for non-compete agreements, particularly with existing employees, companies can take additional steps when entering into non-compete agreements to ensure that a lack of consideration does not derail subsequent efforts to enforce their non-competes. This is particularly important for companies with employees in more than one state who may have to try to enforce similar restrictive covenants in several different states that approach consideration differently.

One potential solution is not to rely on continued employment alone as consideration. Instead, a company seeking to minimize consideration issues can provide an existing employee additional, material consideration directly related to the non-compete. This additional consideration can often come in the form of increased compensation, such as a raise and increased base salary, a signing bonus, or eligibility for annual performance or other bonuses. Consideration for restrictive covenants, however, does not need to be monetary. Additional, non-monetary consideration can include a promotion or new title, access to confidential or trade secret information, additional job training, continued or new access to customer relationships, or (for an at will employee) a fixed term of employment. Thus, depending on the interest of the employer to be served by having an existing employee enter into a restrictive covenant, there are a number of possible monetary or non-monetary benefits that  may serve as consideration for the restrictive covenant. Careful planning before executing restrictive covenants can ensure that consideration issues do not undermine the enforceability of the covenants down the road.

About the Author

 Jeffrey S. Boxer

Jeff Boxer is a partner at Carter Ledyard & Milburn LLP. Mr. Boxer is a member of the firm’s Litigation Department and Trade Secrets, Business Torts and Restrictive Covenants Practice Group.

About the Author

 Emily Milligan

Emily Milligan is counsel at Carter Ledyard & Milburn LLP in New York. She is a commercial litigator whose practice focuses on restrictive covenants and the protection of trade secrets.

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