Ongoing Employment Is Not Sufficient Consideration for the Enforcement of a Non-compete

Posted on June 28, 2009 by Dan Warden

Uncertainty existed when we entered our blog post in April which discussed the consideration required for the enforcement of a non-compete. On June 11, the Colorado Court of Appeals ruled, however, that continued employment is not sufficient consideration for the enforcement of a non-compete.

In Lucht's Concrete Plumbing v. Horner, the employee executed a non-compete agreement after working for the company for two years. The employee was not given a pay increase, promotion or additional benefits in consideration for the new commitment. Later, the employee went to work for a competitor in violation of the non-compete and the employer sought to enforce the non-compete.

For a contract to be enforced, each party to the agreement must provide the other with something of value. That "something of value" is called the consideration for the contract. In Lucht's Concrete Plumbing, the issue was whether continued employment of the employee was sufficient consideration for the enforcement of the non-compete. The employer in Lucht's Concrete Plumbing argued that that an employer's forbearance of its right to discharge an at-will employee is sufficient consideration.

The Court of Appeals rejected the employer's arguments and held that continued employment does not create consideration for a non-compete once an employee begins working for an employer. The court reasoned that an employer might agree to continue the employment of the employee if he agrees to sign the non-compete but nothing prevents the employer from discharging the employee at a future date. Accordingly, the employer's promise "requires nothing more than was already promised in the at-will agreement". 

Lucht's Concrete Plumbing is a favorable decision for employees and, under the right circumstances, may mean that non-competes signed by existing employees are not enforceable. it is important to remember, however, that most non-competes are signed when employees are initially hired and are a condition of employment. In those cases, employers will argue that consideration did exist (that is, the job)  for the non-compete regardless of this new decision. It is also important to remember that this is a decision from the Colorado Court of Appeals. The decision could be appealed to the Colorado Supreme Court.

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Non-compete rules vary by state: Don't Assume that Colorado will follow decisions from other states

Posted on April 9, 2009 by Dan Warden

We are often contacted by potential clients who have already researched the non-compete or other issue in dispute. These potential clients already understand, for example,  that Colorado has adopted a statute that sets forth when a non-compete may be enforced. In addition, they have used the internet to look at recent decisions from Colorado and other states.  

Sometimes, however, a little information can be a dangerous thing. A recent post in another blog is a good example. In that blog post, the author reported that, at least in South Carolina, a non-compete could not be enforced when the only consideration provided for the execution of the non-compete was continuing at-will employment. That is, that a non-compete, signed by an employee after he had started his job, was not enforceable unless the employer provided the employee with some benefit ( e.g. a bonus, a promotion) other than continuing employment.

That may be the law in South Carolina. We don't practice there and we wouldn't profess to know. But this issue is not so easily resolved in Colorado. 

In Colorado, a non-compete, like any other contractual obligation, must be supported by consideration. The employer, in other words, must provide the employee with some benefit. It isn't as clear, however, whether an employee's continuing employment is sufficient to support the non-compete obligation (that is, an explicit or implicit threat that the employee would be terminated unless he signs the non-compete). Colorado courts have held, for example, that continuing employment can be sufficient consideration to bind an employer to a promise in a employee handbook. Those cases imply that continuing employment is sufficient to support a non-compete obligation. 

As a practical matter, cautious employers will combine any request to sign a non-compete with a bonus or some other benefit. That added benefit will assist the employer in showing that consideration existed for the non-compete.

More importantly, however, an employee should not rely on a blog post about the law in another state in making a decision about whether his non-compete in Colorado is enforceable. The law on non-competes varies widely across the United States. Do not assume that Colorado will follow the approach adopted in other states. 

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