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November 16, 2011
Supreme Court Holds That Non-Compete Signed During Employment Requires Stated Independent Consideration
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LABRIOLA V. POLLARD GROUP, INC.
152 Wn.2d 828, __ P.3d ___, 2004 WL 2533876 (Wash. 2004)

In a significant employment case involving an Eisenhower business client, the Washington Supreme Court decided that a covenant not to compete requires stated consideration in addition to continued employment and regular training if executed after the start of employment.

Pollard Group, Inc. (“Pollard”) hired Anthony Labriola in 1997. In 2002, Labriola executed a non-compete limiting his ability to compete with Pollard for three years within 75 miles of Pollard’s business. Labriola remained an at-will employee and the Court found that Pollard provided Labriola no additional benefits other than continued employment and incurred no additional obligations to him.

In November 2002, Pollard terminated Labriola after learning that he intended to seek employment with a competitor. Pollard sent a letter to the competitor informing it of Labriola’s non-compete agreement.

Labriola brought (1) a declaratory judgment action to determine if the non-compete agreement was enforceable and (2) a claim for tortious interference with contractual relations. Both parties moved for partial summary judgment on the enforceability of the non-compete. The trial court denied Labriola’s motion, granted Pollard’s motion, upheld the agreement and refused to reduce the three year restriction to six months. After Labriola dismissed his tortious interference claim, the Supreme Court granted direct review on the declaratory judgment claim.

The Supreme Court framed the issue as whether there is consideration for the formation of a contract when an existing employee executes a non-compete agreement but receives no new benefit and the employer incurs no further obligations. Labriola contended the non-compete agreement lacked consideration. Pollard argued the agreement was enforceable because future and continued employment and/or job training served as adequate consideration.

The Supreme Court began by explaining that consideration exists if the employee enters into a non-compete agreement when first hired. The court went on, however, to clarify the law concerning non-competes entered into after employment begins. It held that such agreements are enforceable only if supported by independent, additional and stated consideration; e.g. more pay, a better job or guaranteed employment. The court for the first time required “new promises or obligations previously not required of the parties.” Diverging both from several Washington court of appeals decisions and the trend of cases nationwide, the Labriola court held that continued at-will employment was not sufficient consideration for a non-compete signed during employment.

Applying this new law to the facts as it found them, the Supreme Court held the noncompete unenforceable for several reasons. First, Labriola executed it after starting work. Second, the terms of the noncompete did not promise future employment, wages or extra benefits. Third, Pollard promised Labriola no additional duties or obligations. Fourth, Labriola remained an “at will” employee. Finally, the Supreme Court determined that, since the training Labriola received after signing the agreement was not different than it would have been had he not signed the agreement, it was not consideration for his promise not to compete.

In a concurring opinion, one justice would have invalidated the non-compete agreement on other grounds, concluding that it was unenforceable under any circumstances because the three-year and 75-mile restriction was unreasonable. The concurring justice concluded that this restraint was more restrictive than necessary to protect Pollard’s legitimate business interests. The concurring opinion did not mention the court’s inherent equitable power to “blue pencil” non-competes to make them more reasonable, casting some doubt on the continued viability of this power.

In light of the Labriola case, Eisenhower is advising its business clients to review all noncompetes signed during employment. If such post-hire non-competes either do not recite consideration or recite continued employment as consideration, the employer should prepare new non-competes for signature by existing employees. The new non-competes should, at the least, recite the additional and independent consideration supporting them; e.g. an increase in pay, a one-time bonus, improved fringe benefits, additional training or enhanced job security. They should also be no more restrictive in either temporal or geographic scope than necessary to protect the employer’s legitimate business interests. If you have any questions concerning your non-compete, do not hesitate to call Eisenhower’s Labor and Employment Group.

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