Role of Consideration in Connecticut Non-Compete Agreements
J. M. Layton & Co. v. Millar, 2004 Conn. Super LEXIS 2226
Mr. Reid Millar worked at J. M. Layton & Co., a Connecticut commercial insurance brokerage firm, for close to twenty years until he voluntarily terminated his employment on December 3, 2003. During his career at Layton, Mr. Millar developed and maintained client relationships and the company even sent him to seminars in Florida on how to engender customer loyalty. In January 1994, the company’s ownership transferred to an ‘Employee Stock Option Plan” scheme wherein Mr. Millar and the other employees became the new owners of the brokerage firm. Mr. Millar signed an employment agreement later that year in August in response to a memo from the company’s president stating, “The value of the stock in the company would increase when all employees/shareholders signed employment agreements”. The employment agreement contained non-compete and non-solicitation clauses prohibiting Mr. Millar from performing any service provided by Layton for a period of two years to any entity or person that was a client of Layton in the two years prior to termination.
Four years later, in 1998, the employee-owners sold the firm to SIG Acquisition Co. for $5.59 million. Mr. Millar terminated his employment on December 3, 2003 and began to work for a competitor, Shoff Darby, soon after this decision. Several clients made the switch with Mr. Millar and he provided them with services they previously received from Layton. Layton sued Mr. Millar to enforce the terms of the restrictive covenant to which Mr. Millar presented a defense that there was not adequate consideration for the agreement to be enforceable.
The court found in favor of Mr. Millar and held that the agreement between Layton and himself lacked the adequate consideration required to make the covenant legally binding on the signatory parties. The court rejected Layton’s contentions that continued employment and increased value of stock in the firm were adequate forms of consideration for the agreement. Consideration is a crucial contract law principle wherein each party must receive a benefit and/or a detriment from the agreement to make it legally valid and enforceable. In the absence of consideration, an executory promise is generally unenforceable. Courts have determined that continued employment alone is not adequate consideration for a restrictive covenant. Past decisions have permitted it to qualify as adequate consideration when it accompanied by another defined benefit such as a change in compensation.
Likewise, the court held that the “increase in stock value” argument was without merit and did not constitute adequate consideration. There was a timeline disconnect with the issuance of the stock, the employment agreement, and any increase in value that prevented adequate consideration in this form. Mr. Millar received the stock seven months prior to signing the employment agreement and the increase in its value (if any) occurred four years after the agreement’s execution. These components lacked a coherent connection that would unite them in a manner as to represent the adequate consideration needed to make the agreement enforceable. The court concluded that the possible increase in stock value was far too “imprecise, indefinite, and self-serving, to be adequate consideration” and it denied Layton’s request for enforcement of the non-compete agreement.