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Colorado Supreme Court Rules Continued Employment Is Sufficient Consideration For Restrictive Covenant

  • June 6, 2011

Reversing a state court of appeals’ decision, the Colorado Supreme Court has held that an employer’s continued employment of a current at-will employee provides sufficient consideration for a non-competition agreement entered into after the inception of employment.  Lucht’s Concrete Pumping, Inc. v. Horner, 09SC627 (Colo. May 31, 2011).  The ruling will impact Colorado employers’ decision about how and when to implement non-competition agreements.

The Facts

Tracy Horner had worked for Lucht’s Concrete Pumping for two years as a mountain division manager before LCP asked him to sign an “employee non-disclosure and confidentiality agreement.”  In the event of Horner’s termination, the agreement’s non-competition provisions prohibited him from competing against LCP for 12 months following the termination.  Horner signed the agreement, but was not given any additional pay or benefits in exchange for doing so. 

After he voluntarily resigned from LCP and began working for one of its competitors, LCP filed suit against Horner, seeking to enforce the non-competition provisions of the agreement.

Lower Court Decisions

The trial court entered summary judgment in favor of Horner, finding the non-competition provisions of the agreement unenforceable for lack of consideration.  The court of appeals agreed, specifically rejecting LCP’s argument that continued employment, by itself, provided adequate consideration for the non-competition agreement. 

The court of appeals noted that, by continuing to employ the employee after he signed the agreement, LCP had done nothing more than it had already promised to do, and nothing prevented the employer from later discharging the employee.  The employee, however, made a new commitment to LCP by promising not to compete against it following his termination.  His promise was to refrain from competition for months beyond his termination.  The court of appeals held additional consideration was needed to support such an undertaking.  It explained, “Thus, an independent consideration requirement ‘reflects the fact that employers and employees have unequal bargaining power.’”  The court of appeals identified several promises on the part of the employer that might constitute sufficient consideration, including a pay increase, a promotion or additional benefits.

Supreme Court Decision

The Supreme Court reversed, holding that an employer that refrains from terminating an existing at-will employee forbears the exercise of a legal right and, therefore, such forbearance constitutes adequate consideration for a non-competition agreement.  The Court noted its longstanding holding that any benefit to a promisor or any detriment to a promisee at the time of the contract — no matter how slight — constitutes adequate consideration. 

The Supreme Court reasoned that distinguishing between covenants not to compete signed on the first day of hire and covenants signed during employment would perversely induce employers to terminate employees and then rehire them the next day with a covenant not to compete.
 
It noted, however, that all non-competition agreements must be assessed for reasonableness.  To the extent an employer enters into a noncompetition agreement with an employee, with the intention of terminating the employee immediately afterwards, the agreement may fail for lack of consideration.   The Court remanded the case to the trial court for consideration of whether the agreement was reasonable.

The decision addresses only the consideration necessary and does not affect other criteria for the enforceability of non-competition agreements, including whether they fall within one of Colorado’s recognized statutory exceptions from the presumption against enforceability of non-competition agreements.  Further, while the decision makes it possible for a Colorado employer to impose a non-competition agreement based solely on continued employment, various other factors, including employee relations issues, may militate in favor of providing some consideration beyond continued employment.  Jackson Lewis attorneys advise employers on drafting enforceable non-competition agreements.

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