Posts tagged with "inadequate consideration"

Change in Business Services/Products Doesn’t Invalidate a Non-Compete Agreement

DiscoveryTel SPC, Inc. v. Pinho, 2010 Conn. Super. LEXIS 2683

In 2002, DiscoveryTel SPC hired Mr. Ismael Pinho as its chief financial officer (CFO) as an at will employee. The parties later executed an employment agreement on December 27, 2004 that would go into effect January 1, 2005. The employment contract modified Mr. Pinho’s employment from at will to a one-year automatic renewable basis and outlined his salary, incentive bonuses, vacation, personal days, insurances, severance package, and several restrictive covenants.

Mr. Pinho was prohibited from directly or indirectly competing with DiscoveryTel by being involved in the purchase and/or sale of international voice and traffic data systems during the term of the employment agreement or during any period for which he was receiving severance pay. Additionally, the agreement stated that he was bound by an indefinite non-disclosure clause pertaining to DiscoveryTel’s confidential and proprietary information.

In between 2004 and 2010, DiscoveryTel experienced a corporate reorganization and shifted its focus and the services it provided. By 2010, it was no longer engaged in the purchase and/or sale of international voice and data traffic but instead facilitated the sale of telephone traffic.

The Defense’s Argument

Mr. Pinho informed the president of DiscoveryTel in a May 21, 2010 letter that he had accepted a position with World Telecom Exchange Communications, LLC (WTEC) and would be starting at the new company on June 1, 2010. DiscoveryTel brought suit and requested that the court grant its request for an injunction to prevent any violations of the restrictive covenants in connection to Mr. Pinho’s new employment. Mr. Pinho did not have an issue with the non-disclosure clause in the employment contract but asserted that his mere employment with WTEC was not a violation of the non-compete agreement.

He contended that the agreement did not prohibit working for a competitor but rather specifically from “being involved in ‘any business relating to the purchase and sale of international voice and data traffic’”. He went on to argue that engaging in this sector of the industry should not violate a non-compete agreement because DiscoveryTel was no longer engaged in that specific industry activity. Additionally, he argued that the agreement had inadequate consideration and was therefore unenforceable.

The Court’s Findings

The court found these arguments unconvincing however and granted DiscoveryTel’s request for injunctive relief and restrained Mr. Pinho from working for WTEC until December 31, 2010 (the end of the current employment term) in order to prevent further violations of the non-compete agreement. It looked to the modification in the nature of Mr. Pinho’s employment (from at will to a contract renewable on an annual basis) and enhanced benefits (mainly the introduction of a severance package) in the employment agreement to conclude that there was sufficient consideration.

Finally, the court analyzed whether Mr. Pinho’s activities as an employee of WTEC violated the covenant, taking into account DiscoveryTel’s reorganization and shift in focus. The court ultimately held that Mr. Pinho had indeed violated the non-compete agreement by working at WTEC and that a mere change in business services/products did not render the non-compete agreement invalid or release Mr. Pinho from its obligations.

The lawyers at Maya Murphy, P.C., are experienced and knowledgeable employment and corporate law practitioners and assist clients in New York, Bridgeport, Darien, Fairfield, Greenwich, New Canaan, Norwalk, Stamford, Westport, and elsewhere in Fairfield County. If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

Continued Employment is Inadequate Consideration in Absence of At-Will Employment

Cost Management Incentives, Inc. v. London-Osborne, 2002 Conn. Super. LEXIS 3967

Cost Management Incentives, Inc. was a company that specialized in the placement of employees in the pharmaceutical industry. This case addressed covenants signed by the company and two former employees, Ms. Yolanda London-Osborne and Ms. Kristen Herman. The company presented the two employees with non-compete agreements in May 1996 after several years of employment. The restrictive covenant contained a one-year non-compete clause and a two-year non-solicitation clause.

Neither woman was afforded the opportunity to consult with a lawyer to go over the agreement and both felt they were in jeopardy of termination should they refuse to sign. The agreement did not offer anything in addition to their current salary and benefits. Mr. David Hallen, the president and Chief Executive Officer of the company, gave them approximately five minutes to skim and sign the agreements, preventing the women from gaining a firm grasp on what their obligations were under the agreement. The employees continued in their employment in same manner and with the same benefits until the company terminated them.

Inadequate Consideration

Cost Management sued the two former employees and asked the court to issue an order preventing any violations of the covenant. Ms. London-Osborne and Ms. Herman both sought an order declaring that the agreement was unenforceable on the grounds of inadequate consideration and the inappropriate and egregious conduct of the company’s management. Both former employees further contended that they did not breach the agreement and there was no indication that they were likely to do so. The court found in favor of the former employees and held that the restrictive covenants were unenforceable because they lacked consideration and their provisions were so broad that they unnecessarily restricted their ability to procure future employment.

The restrictions in the agreement prohibited employment with any business enterprise engaged in facilitating temporary and/or permanent placement in the pharmaceutical industry for one year after termination. The court found this specific nation-wide restriction to be reasonable since the company maintained national operations.

The court however found that the two-year non-solicitation clause was unreasonable and rendered the covenant unenforceable. This was overly broad and restrictive since 70-75% of Cost Management’s business came from a mere six pharmaceutical companies. The court commented that Cost Management should have tailored this clause to protect its legitimate business interests without placing such an extensive hardship on former employees. Analysis of the covenants also led the court to hold that the provisions provided the employer with much more protection than was deemed necessary or permissible.

The Court’s Decision

While the finding of unreasonable provisions is sufficient to invalidate a restrictive covenant, the court went on to discuss the lack of consideration, a factor that also renders a non-compete agreement unenforceable. Connecticut law indicates that continued employment is not adequate consideration for a non-compete agreement for employees that are not working on an at-will basis. Continued employment is sufficient for employees working on an at-will basis but this was not the case with Ms. London-Osborne and Ms. Herman.

For these reasons, the court denied Cost Management’s request for injunctive relief and declared that the agreements were unenforceable and void under Connecticut law.