Summits 7, Inc. v, Kelly
Summits 7, Inc. v, Kelly (2004-242); 178 Vt. 396; 886 A.2d 365
2005 VT 97
[Filed 19-Aug-2005]
NOTICE: This opinion is subject to motions for reargument under
V.R.A.P. 40 as well as formal revision before publication in the Vermont
Reports. Readers are requested to notify the Reporter of Decisions,
Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
any errors in order that corrections may be made before this opinion goes
to press.
2005 VT 97
No. 2004-242
Summits 7, Inc. Supreme Court
On Appeal from
v. Chittenden Superior Court
Staci Kelly March Term, 2005
Matthew I. Katz, J.
Wanda I. Otero-Ziegler of Paul Frank + Collins P.C., Burlington, for
Plaintiff-Appellee.
E. William Leckerling and Christina A. Jensen of Lisman, Webster,
Kirkpatrick & Leckerling, P.C., Burlington, for Defendant-Appellant.
PRESENT: Reiber, C.J., Johnson and Skoglund, JJ., and Crawford, Supr.
J. and Allen, C.J. (Ret.),
Specially Assigned
¶ 1. ALLEN, C.J. (Ret.), Specially Assigned. Defendant Staci
Lasker (FN1) appeals the superior court's order enjoining her from working
for a competitor of her former employer, plaintiff Summits 7, Inc., based
on the terms of a noncompetition agreement entered into by the parties
during Lasker's at-will employment with Summits 7. The principal issue in
dispute is whether there was sufficient consideration to support the
agreement. The superior court ruled that either Lasker's continued
employment or the promotions and increased pay she received during her
employment with Summits 7 was sufficient consideration to support the
agreement. We agree with the superior court that Lasker's continued
employment constituted sufficient consideration. Further, we discern no
basis for granting Lasker's request that we reverse the superior court's
judgment and remand the matter for the court to consider whether the
geographic scope of the agreement's restrictions was unreasonably broad.
¶ 2. Summits 7, which is located in Williston, Vermont, provides
printing, copying, and other related services to its customers. In January
2000, the company hired Lasker, who had an associate's degree in graphic
arts technology, to work in its customer services department for ten
dollars an hour. In April 2000, Lasker became a sales assistant and
received a fifteen percent raise. Within the next three months, she
received another promotion and raise and, in November 2000, she was
assigned to the sales department and given a $30,000 salary plus
commissions. Lasker continued to assume greater and greater
responsibilities with Summits 7, eventually becoming a supervisor. Her pay
increased along with the additional responsibilities, reaching $39,000 in
2001, $49,000 in 2002, and $19,000 for the first three months of 2003
before she left her employment.
¶ 3. In January 2001, one year after Summits 7 hired her, Lasker
signed a noncompetition agreement prohibiting her from working in Vermont,
New Hampshire, or a designated part of New York for any direct or indirect
competitor of Summits 7 for a period of twelve months "following
termination of your employment for cause or a voluntary termination of
employment." Lasker signed a second agreement containing similar language
in October 2002 after Summits 7 purchased another company and expanded the
kinds of services it provided. In April 2003, Lasker voluntarily
terminated her employment with Summits 7. Two months later, in June 2003,
she began working for Offset House, Inc., a competitor of Summits 7 located
in nearby Essex Junction, Vermont.
¶ 4. In October 2003, Summits 7 filed a complaint seeking to
enjoin Lasker from working for Offset House. Following a trial in April
2004, the superior court entered judgment in favor of Summits 7. The court
enjoined Lasker from working for Offset House, extended the effective terms
of the noncompetition agreement until March 30, 2005, and awarded Summits 7
$11,552 in attorney's fees. With respect to the principal point in
dispute, the court opined that Lasker's continued employment with Summits 7
was sufficient consideration to support the noncompetition agreement, but
concluded that it was unnecessary to reach that question because the
substantial promotions and raises that Lasker received during her
employment with Summits 7 were more than reasonable consideration to
support enforcement of the covenant. The court also concluded that it did
not need to determine whether the geographic scope of the agreement was
unduly broad because even a narrow construction of the agreement would
preclude Lasker from accepting work for a direct competitor of Summits 7
located within a short geographic distance from, and in a market served by,
Summits 7.
¶ 5. On appeal, Lasker argues that the trial court erred by
enforcing the noncompetition agreement because (1) the agreement was not
supported by consideration, and (2) the court failed to consider the
unreasonably broad geographic scope of the agreement. According to Lasker,
in an at-will employment context, continued employment means nothing
because the employer has the right to terminate the employment at any time
for any reason. Lasker further contends that the promotions and raises she
received were not ancillary to the noncompetition agreements that she
signed.
I.
¶ 6. We start by examining the legal backdrop of the case. The
common-law policy against contracts in restraint of trade is longstanding
and firmly established, dating back to the time when the apprenticeship
system ruled. See Lake Land Employment Group of Akron LCC v. Columber, 804
N.E.2d 27, 30 (Ohio 2004); Hopper v. All Pet Animal Clinic, Inc., 861 P.2d
531, 539 (Wyo. 1993); 15 G. Giesel, Corbin on Contracts § 80.4, at 56 (Rev.
ed. 2003). In a relatively immobile society where workers entered skilled
trades by serving in apprenticeships, covenants that prevented those
workers from competing with their former employers had the potential to
destroy a worker's livelihood or to bind that worker to his master for
life. Columber, 804 N.E.2d at 30. With the onset of the industrial
revolution and at-will employment relationships, modern realities have led
courts to allow non-competition agreements as long as they are narrowly
written to protect the employers' legitimate interests. Id. Courts
continue to carefully scrutinize noncompetition agreements, however,
particularly with respect to employment contracts, which often result from
unequal bargaining power between the parties. Id.; 1 H. Specter & M.
Finkin, Individual Employment Law and Litigation § 8.01, at 443 (1989);
Corbin on Contracts, supra, § 80.6, at 67, and § 80.15, at 128.
¶ 7. The modern approach to reviewing restrictive covenants is one
of reasonableness. Courts seek to balance the employer's interest in
protecting its business and investments, the employee's interest in
pursuing a desired occupation, and the public's interest in the free flow
of commerce. See Corbin on Contracts, supra, § 80.4, at 57-58 and § 80.6,
at 63-65; T. Staidl, The Enforceability of Noncompetition Agreements When
Employment is At-Will: Reformulating the Analysis, 2 Employee Rts. & Emp.
Pol'y J. 95, 97 (1998); see also Restatement (Third) of Employment Law,
Preliminary Draft No. 2 (May 17, 2004) § 6.05 cmt. a (rule allowing
reasonably restricted noncompetition agreements balances desire to prevent
anti-competitive effects of restrictive covenants with desire to encourage
employer investments). Courts recognize that while an employer may seek to
protect its legitimate interests through noncompetition agreements, "the
employer is not entitled to protection against ordinary competition."
Hopper, 861 P.2d at 539. Hence, most courts have adopted tests resembling
the one set forth in the Restatement of Contracts, which provides that a
promise to refrain from competition that is ancillary to an otherwise valid
transaction or relationship (such as an employment relationship) is
unreasonable (1) if the restraint is greater than needed to protect the
promisee's legitimate interest, or (2) the promisee's need is outweighed by
hardship to the promisor and likely injury to the public. Restatement
(Second) of Contracts § 188 (1981); see H. Specter & M. Finkin, supra, §
8.01, at 444-45; Corbin on Contracts, supra, § 80.6, at 69-70; see also,
Restatement (Third) of Employment Law, Preliminary Draft No. 2, supra, §
6.05 ("A court will enforce a restrictive covenant in an employment
agreement to the extent that enforcement is reasonably tailored to protect
a legitimate interest of the employer.").
¶ 8. But before examining the reasonableness of a noncompetition
agreement to determine whether it is narrowly tailored in terms of
geographical, temporal, and subject matter restrictions to protect the
employer's legitimate interests, courts first consider whether the
agreement is ancillary (connected and subordinate) to another valid
contract and, if not, whether there is adequate independent consideration
to support the agreement. See Abel v. Fox, 654 N.E.2d 591, 593 (Ill. App.
Ct. 1995). These requirements are intended to ensure that the
noncompetition agreement is not a naked restraint on trade but rather the
result of a bargained-for exchange that furthers legitimate commercial
interests in the context of another transaction or relationship. Id. at
595; T. Staidl, supra, at 97-98. As one commentator has stated,
Even if a covenant is otherwise reasonable, a court will not
enforce it unless it is ancillary to an agreement that has a
purpose other than the restraint of competition. The rationale
for this ancillarity requirement is that only if the restraint
accompanies a valid transaction will there be the possibility of
the unrestrained party having an interest deserving of protection
that would perhaps outweigh the interest of the restrained party
and the public.
Corbin on Contracts, supra, § 80.7, at 72.
¶ 9. For the most part, courts have generally assumed that the
requirements of ancillarity or consideration are satisfied when the
noncompetition agreement is made at the onset of an employment
relationship, even an at-will relationship. Corbin on Contracts, supra, §
80.7, at 73, and § 80.23, at 169; but see Travel Masters, Inc. v. Star
Tours, Inc., 827 S.W.2d 830, 832-33 (Tex. 1991) (because at-will employment
relationship is not otherwise enforceable agreement, covenant not to
compete executed either at inception of or during at-will employment
relationship cannot be ancillary to otherwise enforceable agreement and
thus is unenforceable as matter of law). The courts are split, however, on
the principal question raised in this appeal-whether continued employment
is sufficient, without additional independent consideration, to support a
covenant not to compete entered into after an at-will relationship has
begun. See Corbin on Contracts, supra, § 80.23, at 170-73; H. Specter & M.
Finkin § 8.02, at 447-49; T. Staidl, supra, at 104-07; Columber, 804 N.E.2d
at 30; Hopper, 861 P.2d at 541.
¶ 10. Many courts hold that continued employment alone is
sufficient consideration to support a covenant not to compete entered into
after the commencement of an at-will employment relationship. E.g.
Columber, 804 N.E.2d at 32; Camco, Inc. v. Baker, 936 P.2d 829, 832 (Nev.
1997); see also Corbin on Contracts supra, § 80.23, at 170 n.4 (citing
cases); Restatement (Third) of Employment Law, Preliminary Draft No. 2,
supra, § 6.05 cmt. d ("Continuing employment of an at-will employee is
enough consideration to support an otherwise valid restrictive covenant.
This means that parties may agree to enforceable restrictive covenants
after the beginning of an employment relationship."). Some of these courts
reason that the presentation of a noncompetition agreement is, in effect, a
proposal to renegotiate the at-will relationship, and that the employee's
acceptance of the agreement is given in exchange for the employer's
forbearance from firing the employee. E.g., Columber, 804 N.E.2d at 32.
Others reason that because employers can fire employees at any time with or
without cause, every day of an at-will employment relationship is a new
day, and thus there should be no distinction in disallowing noncompetition
agreements for lack of consideration based on whether they are entered into
at the beginning or during the relationship. E.g., Copeco, Inc. v. Caley,
632 N.E.2d 1299, 1301 (Ohio Ct. App. 1992).
¶ 11. Commentators have questioned this reasoning, noting that when
a noncompetition agreement is entered into after commencement of the
employment relationship, the employer can still fire the employee without
cause, but the "new day" for the employee has dramatically changed in that
the employee's ability to leave and pursue the same line of work with a new
employer is significantly restricted. E.g., T. Staidl, supra, at 104-05.
In response to criticism citing the illusory nature of the promise of
continued employment in an at-will relationship, some courts have required
that the employment actually continue for a substantial period of time to
suffice as adequate consideration for a noncompetition agreement. See,
e.g., Zellner v. Conrad, 589 N.Y.S.2d 903, 907 (N.Y. App. Div. 1992);
Mid-Town Petroleum, Inc. v. Gowen, 611 N.E.2d 1221, 1226 (Ill. App. Ct.
1993); cf. Mattison v. Johnston, 730 P.2d 286, 290 (Ariz. Ct. App. 1986)
(where employment continued after signing of noncompetition agreement until
employee left her job, implied promise of employment plus continued
employment provided sufficient consideration for agreement).
¶ 12. Other courts hold that continued employment alone is not
adequate consideration to support a noncompetition agreement, but rather
require some additional independent consideration such as increased
compensation, a promotion, or other benefits. E.g., Sanborn Mfg. Co. v.
Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993); Poole v. Incentives
Unlimited, Inc., 525 S.E.2d 898, 900 (S.C. Ct. App. 1999), aff'd by 548
S.E.2d 207 (S.C. 2001); Hopper, 861 P.2d at 541; see Corbin on Contracts,
supra, § 80.23, at 173; T. Staidl, supra, at 106. "This view recognizes
the increasing criticism of the at-will relationship, the usually unequal
bargaining power of the parties, and the reality that the employee rarely
'bargains for' continued employment in exchange for a potentially onerous
restraint on the ability to earn a living." H. Specter & M. Finkin, supra,
§ 8.02, at 450. Courts adhering to this view also require that the
independent consideration be connected directly with the covenant not to
compete. E.g., Currie, 500 N.W.2d at 164 (no evidence that increased
compensation and promotions were attributable to anything other than
employee's performance during employment relationship).
¶ 13. In Vermont, we have not addressed the issue of whether
independent consideration beyond continued employment is necessary to
support a noncompetition agreement entered into after the onset of an
at-will employment relationship. Indeed, although our law on restrictive
covenants is consistent with the reasonableness standard of other modern
courts, it is limited. We have emphasized that we will proceed with
caution when asked to enforce restrictive covenants against competitive
employment because such restraints "run counter to that public policy
favoring the right of individuals to freely engage in desirable commercial
activity." Vt. Elec. Supply Co. v. Andrus, 132 Vt. 195, 198, 315 A.2d 456,
458 (1974) ("Restrictions on doing business or on the exercise of an
individual's trade or talent are subject to scrutiny for reasonableness and
justification."); accord Roy's Orthopedic, Inc. v. Lavigne, 142 Vt. 347,
350, 454 A.2d 1242, 1244 (1982).
¶ 14. Our general rule is that a restrictive covenant in an
employment context will be enforced
unless the agreement is found to be contrary to public policy,
unnecessary for protection of the employer, or unnecessarily
restrictive of the rights of the employee, with due regard being
given to the subject matter of the contract and the circumstances
and conditions under which it is to be performed.
Andrus, 132 Vt. at 198, 315 A.2d at 458. In Andrus, we stated that the
burden of establishing such facts is on the employee, id.; however, we note
that while other courts have recognized that the employee has the burden of
proving a failure of consideration, "the employer has the burden of proving
the reasonable necessity of the restrictive covenant." NBZ, Inc. v.
Pilarski, 520 N.W.2d 93, 97 (Wis. Ct. App. 1994); see Restatement (Third)
of Employment Law, Preliminary Draft No. 2, supra, § 6.05 ("The employer
bears the burden of proving that a restrictive covenant complies with the
requirements of this section."). This makes some sense because the
employer generally would have access to facts that could demonstrate the
necessity of a restrictive covenant.
¶ 15. The primary issue that Lasker raises in this case is whether
the most recent noncompetition agreement she signed was supported by
adequate consideration. We emphasize that Lasker has not challenged the
agreement on the basis that it is unreasonable with respect to the type of
restrictions imposed on her or whether those restrictions are narrowly
tailored to address Summit 7's legitimate interests. Nor has Lasker
contended that the agreement is unreasonable with respect to the length of
time that it imposes restrictions on competition. Lasker does argue that
the superior court erred by not addressing whether the geographic scope of
the agreement was unreasonably broad, but, as we explain later, we need not
consider this issue because Lasker plainly sought and obtained employment
within a reasonably restricted geographic area, and the court may enforce
the agreement to the extent that it is reasonable. Hence, if we conclude
that the agreement was supported by adequate consideration, we will affirm
the superior court's judgment in favor of Summits 7.
¶ 16. As noted, the trial court ruled that continued employment
would be sufficient consideration to support the covenant not to compete,
but that it was unnecessary to even reach that conclusion because the
increased compensation and promotions that Lasker received during her
employment with Summits 7 were adequate consideration to support the
covenant. We disagree with the latter determination. There is no evidence
that Lasker's promotions and raises were connected in any way with the
noncompetition agreements she signed. See Sanborn Mfg. Co. v. Currie, 500
N.W.2d 161, 164 (Minn. Ct. App. 1993) (no evidence that employee's
promotions and salary increases were tied to noncompetition agreement or
were attributable to anything other than performance that was expected of
him under initial employment agreement). We can only assume that she
received these promotions and raises because she performed her job well and
was rewarded for that performance.
¶ 17. We also decline to give controlling weight to the fact that,
by its terms, the noncompetition agreement could be enforced only if Lasker
were fired for cause or left her employment voluntarily. One might argue
that the agreement provided some incentive for Summits 7 not to fire Lasker
without cause, but any such incentive did not constitute a tangible benefit
beyond continued employment in exchange for signing the agreement.
Indeed, the agreement explicitly states that it neither creates a contract
of employment nor alters in any way Lasker's status as an at-will employee.
¶ 18. Nevertheless, we agree with the superior court, the majority
of other courts, and the recent Restatement draft that continued employment
alone is sufficient consideration to support a covenant not to compete
entered into during an at-will employment relationship. See Mattison, 730
P.2d at 288 (although there is authority to contrary, most jurisdictions
have found that continued employment is sufficient consideration to support
restrictive covenant executed after at-will employment has begun);
Restatement (Third) of Employment Law, Preliminary Draft No. 2, supra, §
6.05 cmt. d ("Continuing employment of an at-will employee is enough
consideration to support an otherwise valid restrictive covenant. This
means that parties may agree to enforceable restrictive covenants after the
beginning of an employment relationship."). A noncompetition agreement
presented to an employee at any time during the employment relationship is
ancillary to that relationship and thus requires no additional
consideration other than continued employment. See H. Specter & M. Finkin,
supra § 8.02, at 447 (majority of jurisdictions hold that restrictive
covenant executed at any time during bilateral employment agreement is
considered ancillary to agreement and therefore enforceable without
additional consideration).
¶ 19. Moreover, because an at-will employee can be fired without
cause at any time after the initial hire, the consideration is the same
regardless of what point during the employment relationship the employee
signs the covenant not to compete. See Caley, 632 N.E.2d at 1301 (there is
no substantive difference between promise of employment upon initial hire
and promise of continued employment during employment relationship); Baker,
936 P.2d at 832 (accord). As one commentator has noted,
it is not logical for a court to treat differently a covenant
presented on the first day of work and one presented one week
after the first day in the at-will employment setting. While the
contemporaneous nature of the exchange differs, both employees
will be faced with the threat of not having a job if they choose
not to sign.
T. Staidl, supra, at 103. Indeed, "the only effect of drawing a
distinction between pre-hire and post-hire covenants would be to induce
employers . . . to fire those employees and rehire them the following day
with a fresh covenant not to compete." see Curtis 1000, Inc. v. Suess, 24
F.3d 941, 947 (7th Cir. 1994).
¶ 20. In either case, the employee is, in effect, agreeing not to
compete for a given period following employment in exchange for either
initial or continued employment. Looked at another way, in either case the
consideration is the employer's forbearance from terminating the at-will
employment relationship. See Columber, 804 N.E.2d at 32 (employer's
presentation of covenant not to compete to employee during at-will
employment relationship, in effect, proposes to renegotiate terms of
relationship; employee's assent to covenant is given in exchange for
employer's forbearance from ending relationship). Regardless of what point
during the employment relationship the parties agree to a covenant not to
compete, legitimate consideration for the covenant exists as long as the
employer does not act in bad faith by terminating the employee shortly
after the employee signs the covenant. See Zellner, 589 N.Y.S.2d at 907
(forbearance of right to terminate at-will employee is legal detriment that
can stand as consideration for restrictive covenant; where employment
relationship continues for substantial period after covenant is signed,
that forbearance is real, and not illusory).
¶ 21. Of course, the fact that a covenant not to compete is
supported by consideration in no way deters the employee from later
challenging the covenant as unnecessary to protect the employer's
legitimate interests or as unreasonable with respect to its temporal or
geographic scope. For the most part, Lasker has failed to mount any such
challenge to the instant noncompetition agreement, which is enforceable
under its terms because Lasker voluntarily left her position with Summits 7
and shortly thereafter accepted a job with a nearby direct competitor. See
T. Staidl, supra, at 120 ("[I]f an employee resigns voluntarily, no
improper discharge is involved. Accordingly, enforcement of the covenant
is fair because the employee knew that the covenant would restrict his
employment opportunities elsewhere and he chose to depart nonetheless.");
cf. Andrus, 132 Vt. at 199, 315 A.2d at 458 (noting that employee was not
placed in double bind of being fired and of being subject to restrictive
covenant because he voluntarily left his employer for very purpose of going
into business competitively in same special field).
II.
¶ 22. Lasker argues, however, that even if we determine that the
noncompetition agreement is supported by adequate consideration, the case
nonetheless must be reversed and remanded either (1) for a new trial so
that the court can examine and limit the geographic scope of the agreement,
or (2) with instructions for the trial court to limit the scope of the
order to cover only her employment with Offset House. In support of this
argument, Lasker cites Lavigne, 142 Vt. at 350-51, 454 A.2d at 1244, a case
in which this Court reversed the superior court's conclusion that a
noncompetition agreement was reasonably limited with regard to time and
place and remanded the matter for a new trial because the court failed to
make findings on the extent of the geographic area covered by the
agreement. We discern no basis for remanding this case to the superior
court to reconsider the reasonableness of the geographic scope of the
restrictions imposed by the noncompetition agreement at issue.
¶ 23. Most modern courts agree that a trial court can enforce
restrictive covenants to the extent that they are reasonable. Corbin on
Contracts, supra, § 80.26, at 179, 189 ("The rule for partial enforcement
is the better rule, and courts should apply it in any case in which nothing
is wrong with the agreement except that the parties have agreed upon a
restraint that is somewhat in excess of what protection of the good will or
other protectable interest requires."); see A.N. Deringer, Inc. v. Strough,
103 F.3d 243, 247-48 (2d Cir. 1996) (noting "modern trend" away from
all-or-nothing rule and predicting that Vermont would permit enforcement of
defective restrictive covenant to limit of its validity); Hopper, 861 P.2d
at 545-46 (noting that "in the best considered modern cases," courts have
enforced covenants not to compete against defendants whose breach occurred
within plainly reasonable restricted area, even though terms of agreement
imposed larger and unreasonable restraint). Thus, it may not be necessary
for a court to determine the exact limiting boundary of a restriction so
long as the employer can show that the employee breached a reasonable
restriction. See Corbin on Contracts, supra, § 80.26, at 182-83.
¶ 24. In this case, the superior court found that Lasker "pursued
employment with a direct competitor, within a short geographic distance and
in precisely the market served by plaintiff." Based on this and other
findings, the court enjoined Lasker from working for "Offset House or any
other direct competitor of Summits 7." Lasker has not challenged the
superior court's findings or argued, either here or before the trial court,
that restricting her from working for Offset House or any other nearby
direct competitor of Summits 7 was unreasonable or unnecessary. Further,
to the extent that Lasker wants the superior court to establish a
reasonable geographic limit so that she can know where she might work in
the trade, that point is moot because the effective term of the
noncompetition agreement has expired.
Affirmed.
FOR THE COURT:
_______________________________________
Chief Justice (Ret.), Specially Assigned
------------------------------------------------------------------------------
Dissenting
¶ 25. JOHNSON, J., dissenting. The majority emphasizes the close
scrutiny that we must give to noncompetition agreements, but nonetheless
enforces the present agreement based on illusory consideration and absent
any assurance that the agreement is reasonable or is protecting any
legitimate interest of the employer. Long after Staci Lasker began working
for Summits 7, the company required her to sign an extremely broad
noncompetition agreement forbidding her from directly or indirectly
participating in any enterprise providing services related to those offered
by Summits 7. The restriction on her employment was for one year following
her termination for cause or voluntary resignation and covered all of
Vermont and New Hampshire and part of New York. For signing this highly
restrictive agreement, Lasker received nothing other than the right to
continue the job that she already had. The majority holds that Summit 7's
forbearance from firing her was sufficient consideration for requiring
Lasker to sign the covenant not to compete. By finding consideration under
these circumstances, the majority has eviscerated the public policy
concerns requiring consideration for-and close scrutiny of-covenants not to
compete in employment relationships. Accordingly, I respectfully dissent.
¶ 26. A brief examination of the facts demonstrates that Lasker's
continued employment is illusory consideration for her signing the
noncompetition agreement. The day before Summits 7 presented the agreement
to Lasker, she was an at-will employee who could be fired at any time with
or without cause, but who was free to leave her employ at any time and seek
any other job. The day after she signed the agreement, she was still an
at-will employee who could be fired at any time for any or no reason, but
she had lost her right to seek any other job after leaving her employ.
Indeed, extremely broad restrictions were imposed on her ability to obtain
work for which she was qualified anywhere near her home. The agreement
created both a benefit to Summits 7 and a detriment to Lasker, but neither
a benefit to Lasker, the promisor, nor a detriment to Summits 7, the
promisee-less than a peppercorn! See Bergeron v. Boyle, 2003 VT 89, ¶ 19,
176 Vt. 78, 838 A.2d 918 (either benefit to promisor or detriment to
promisee is sufficient consideration).
¶ 27. Because Summits 7 relinquished nothing, and Lasker gained
nothing, any consideration was illusory. See Gagliardi Bros., Inc. v.
Caputo, 538 F. Supp. 525, 528 (E.D. Penn. 1982) (continued employment was
not adequate consideration to support noncompetition agreement because
restricted employee received no corresponding benefit or change in status);
Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161, 164 (Minn. Ct. App. 1993) (no
independent consideration exists unless employer provides real benefits
beyond those already obtained by employee); Lake Land Employment Group of
Akron v. Columber, 804 N.E.2d 27, 34 (Ohio 2004) (Resnick, J., dissenting)
(continued employment is illusory consideration for signing noncompetition
agreement in at-will employment relationship because employee has gained
nothing while employer retains same right it always had to discharge
employee at any time for any reason); Poole v. Incentives Unlimited, 525
S.E.2d 898, 900 (S.C. Ct. App. 2000) (promise of continued employment to
at-will employee is illusory because employer retains right to fire
employee at any time).
¶ 28. The majority obscures the illusory nature of the consideration
it finds here by suggesting that continued employment is sufficient
consideration as long as the employer does not terminate the employment
relationship in bad faith shortly after the agreement is reached. I find
this reasoning illogical and unpersuasive. Whether there is adequate
consideration should be judged based on the expectations of the parties at
the time they enter into the agreement. Applying a retrospective analysis
to determine whether there was consideration gets us away from traditional
notions of consideration and instead transforms an illusory promise into
enforceable consideration through performance. T. Staidl, The
Enforceability of Noncompetition Agreements when Employment is At-Will:
Reformulating the Analysis, 2 Employee Rts. & Emp. Pol'y J. 95, 106 (1998);
see 15 G. Giesel, Corbin on Contracts § 80.23, at 173 (Rev. ed. 2003)
(backward-looking analysis applies form of doctrine of promissory estoppel
rather than traditional notion of consideration). In any event, the
analysis does not work because, in the end, the employee still gained
nothing but continued employment, a legally unenforceable promise, while
the employer gained the benefit of the legally enforceable agreement
without suffering any detriment. T. Staidl, supra, at 106.
¶ 29. As the majority recognizes, historically courts have closely
scrutinized post-employment covenants not to compete. 1 H. Specter & M.
Finkin, Individual Employment Law and Litigation § 8.01, at 443 (1989).
Judicial scrutiny is necessary because such covenants are often the result
of unequal bargaining power between the parties. Id. Employers may take
advantage of that unequal bargaining power by imposing restrictions
intended to ensure that their employees will not compete with them after
they leave their employ. On the other side, employees interested in
obtaining or keeping their jobs are likely to give scant attention to the
hardship that they may suffer later through the loss of their livelihood as
the result of the restriction on their future employment. Id. § 8.08, at
485. In the interests of free commerce and freedom to choose one's
employment, courts have felt obligated to assure that restrictive covenants
are aimed at protecting legitimate employer interests rather than
restricting trade or competition.
¶ 30. Although these public policy concerns are ultimately addressed
by determining whether the covenant in dispute is reasonably related to a
legitimate employer interest and has reasonable geographic and temporal
restrictions, the issue of whether adequate consideration exists for such
covenants has become a flashpoint for those same concerns. In light of the
increasing criticism of and restrictions upon at-will employment
relationships, and the lack of any real bargaining between employer and
employee when continued at-will employment is exchanged for restrictions on
future employment, the "better view" is to require additional consideration
beyond continued employment to support a restrictive covenant entered into
during the employment relationship. Id. § 8.02, at 450; Hopper v. All Pet
Animal Clinic, Inc., 861 P.2d 531, 541 (Wyo. 1993); see Currie, 500 N.W.2d
at 164 (when employer requires employee to sign covenant not to compete
after employee has commenced employment, without giving employee any
consideration beyond continued employment for signing the agreement,
employer takes undue advantage of unequal bargaining power between
parties). In short, the critical public policy concerns underlying close
scrutiny of noncompetition agreements require us to "examine the extent and
character of the consideration received by the [employee] to a degree
perhaps not true in ordinary contract cases." Corbin on Contracts, supra,
§ 80.23, at 168 ("The common interest in an open market, with everyone free
to buy and sell and exchange, causes the courts to scrutinize the
consideration.").
¶ 31. In this case, Staci Lasker began working for Summits 7 in
2000 as a ten-dollar-an-hour employee and gradually progressed in the
company. More than a year after she commenced her employment with Summits
7, the company required her to sign a noncompetition agreement severely
restricting her post-employment rights. The trial court suggested in its
decision that Lasker's general development as an employee-her learning how
to handle increased responsibilities concerning the business-was adequate
consideration for signing the noncompetition agreement. I concur with the
majority's rejection of this position. An employee's development of skills
during the employment period is neither adequate consideration nor a
legitimate protectable interest of the employer sufficient to justify a
restraint on trade. See id. § 80.16, at 143-46 ("[I]f the harm caused by
service to another [employer] consists merely in the fact that the new
employer becomes a more efficient competitor just as the first employer did
through having a competent and efficient employee, courts should not
enforce the restraint.").
¶ 32. The trial court also rejected Lasker's argument that
requiring her to sign the noncompetition agreement upon threat of dismissal
amounted to coercion. The court reasoned that because employers have a
legal right to offer continued employment in consideration for signing a
noncompetition agreement, requiring Lasker to enter into such an agreement
in exchange for continued employment and/or other benefits was not coercive
in nature. By engaging in this circular reasoning, the court avoided
examining both the specific facts of this case and the public policy
concerns that are at the heart of a strict-construction approach to
noncompetition agreements. Lasker had argued that she did not really have
a choice as to whether to sign the agreement because her marriage was
breaking up at the time and she had to stay financially solvent to support
her two children. Her situation illustrates the unequal bargaining power
that typically exists between employer and employee, particularly when the
employer requires the employee to sign a noncompetition agreement upon
threat of dismissal after the employee has become established in the job.
Like Lasker, employees often have obligations and responsibilities that
require them to stay with their job, even if it means signing onto an
agreement that restricts their right to seek other jobs in the future. In
such situations, employers should not be able to take advantage of their
unequal bargaining power by requiring the employee to sign an agreement in
exchange for mere continued employment. See T. Staidl, supra, at 118
(requiring employee to sign noncompetition agreement upon threat of
discharge should be treated as irrefutably coercive in nature).
¶ 33. The existence of unequal bargaining power between employers
and employees and the resulting restraint on trade require courts to
carefully scrutinize covenants not to compete. See Vt. Elec. Supply Co. v.
Andrus, 132 Vt. 195, 198, 315 A.2d 456, 458 (1974) ("Restrictions on doing
business or on the exercise of an individual's trade or talent are subject
to scrutiny for reasonableness and justification."). Yet, here, the trial
court ceased its scrutiny of the noncompetition agreement upon ruling that
it was supported by adequate consideration. After finding consideration
for the agreement, the court never questioned whether the agreement was
reasonable or based on any legitimate employer interest. But even assuming
that adequate consideration existed, that fact should not have been
dispositive of the case. As our case law demonstrates, the focus of cases
involving noncompetition agreements should be on whether the employer had a
legitimate protectable interest sufficient to justify the restraint on
trade resulting from limiting the employee's future employment. See id.
(restrictive covenants will not be enforced if they are "contrary to public
policy, unnecessary for protection of the employer, or unnecessarily
restrictive of the rights of the employee"). Unfortunately, that is not
what occurred here.
¶ 34. It may be true that at trial Lasker emphasized the absence of
consideration for the noncompetition agreement rather than the lack of a
legitimate protectable employer interest. Nevertheless, Lasker did
generally argue in her motion for partial summary judgment that the
agreement was unreasonable and unduly restrictive of her rights. I agree
with the majority that the employer, not the employee, should bear the
burden of demonstrating the existence of a legitimate protectable interest.
NBZ, Inc. v. Pilarski, 520 N.W.2d 93, 97 (Wis. Ct. App. 1994) ("The
employer has the burden of proving the reasonable necessity of the
restrictive covenant."); Restatement (Third) of Employment Law, Preliminary
Draft No. 2, supra, § 6.05 (employer bears burden of proving that
restrictive covenant is reasonably tailored to protect its legitimate
interests). Under the circumstances of this case, the trial court should
have examined the reasonableness of the parties' agreement, including
whether Summits 7 had a legitimate protectable interest.
¶ 35. In sum, I believe that requiring an employee to sign a
post-employment covenant not to compete upon threat of dismissal, without
conferring any benefit upon the employee other than continued at-will
employment, which can be terminated at any time after the agreement is
reached, is coercive in nature and unsupported by any real consideration.
I would strike the agreement in this case for lack of consideration.
_______________________________________
Associate Justice
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Footnotes
FN1. Defendant's maiden name is Staci Kelly, but by the time of trial, she
was using her married name, Staci Lasker.
