Appeals Court Overturns ‘Unenforceable’ Noncompete Decision

The following article was first published on Shipman & Goodwin attorney Dan Schwartz’ Connecticut Employment Law Blog. It is reposted here with permission.

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For those of you that haven’t read the July 2 91-page primary decision from the Connecticut Supreme Court in Dur-A-Flex, Inc. v. Dy, there’s a lot to unpack from an enforcement of trade secret perspective, which goes a bit beyond the scope of this blog.

But buried deep in the decision is an interesting holding regarding noncompete agreements between employers and employees.

Several years into at-will employment, the employer in that case required the employee to sign a noncompete agreement.

The employee argued that the noncompete agreement was unenforceable because it lacked consideration. The trial court agreed.

In doing so, the trial court relied on Thoma v. Oxford Performance Materials, Inc., a 2014 Connecticut Appellate Court case, and held that ‘‘a party giving nothing more than the status quo of continuing employment … offers no consideration [in] exchange for his promise, and the promise is, therefore, unenforceable.”

Appeal

On appeal, the employer said the trial court erred and relied on Roessler v. Burwell, the seminal 1934 case from the Connecticut Supreme Court that held that when employment is terminable at will, continued employment constitutes consideration for a noncompete agreement.

Because no party had asked the Supreme Court to reconsider the holding in Roessler, the court said it would decline to do so on its own.

The court concluded that the lower court “incorrectly determined that continued employment can never be consideration.”

But it suggested that the ruling from that case was still useful today because it had been followed many times by federal courts even though it was “decided in a different era.”

Thus, the court concluded that the lower court “incorrectly determined that continued employment can never be consideration for a noncompete agreement.”

Note that the court emphasized “never”—suggesting that there may be instances where continued employment might not be sufficient consideration.

Employer Considerations

So what does this mean for employers?

The easy takeaway is that you should not roll the dice as to whether continued employment will be sufficient consideration for a noncompete offered mid-employment.

And note that this might only apply in at-will employment situations, as the court was quick to classify.

You should not roll the dice as to whether continued employment will be sufficient consideration.

There are two primary options: First, offer the noncompete at the start of employment and condition employment on the signing of the noncompete. Be sure to put it in the offer letter for emphasis.

Second, if doing it mid-employment, be sure to provide some valuable consideration for the noncompete such as stock options, or restricted stock units, or a substantial bonus for the following year.

And as always, talk with your employment counsel to make sure you’re following the very latest on the law.

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About the author: Dan Schwartz is a partner at Shipman & Goodwin and has decades of experience solving complex, employment law problems for companies.