COVENANTS NOT TO COMPETE AND CONSIDERATION

by David McCarthy

Enforceable covenants not to compete are, like giant pandas, few and far between.

Why?

Because they are restraints on trade.

The law abhors restraints on trade, and therefore covenants not to compete will be scrutinized with care to ascertain whether they do or do not prevent competition per se. One object of this scrutiny is an element that is always indispensable to formation of a contract but usually a matter of indifference: consideration, or what might be more easily understood as quid pro quo, though the scholars cringe when the terms are used interchangeably. Consideration is the "great divide" of contracts, the element which separates promises that will be enforced from those that will not.

When the contract under examination is a covenant not to compete, the law will take pains to examine consideration for its presence and for its adequacy.

Often enough the consideration for a covenant not to compete is cast in terms of continued employment. Is that consideration? Yes but only when the employment continues for a "substantial" period of time following formation of the agreement. What is a "substantial" period of time? There are decisions holding that employment for more than two years following formation of the agreement qualifies as "substantial."

One way to eliminate the uncertainty as to whether the continued employment is or is not "substantial" is to offer a different form of consideration, namely, a definite and substantial sum of money that is over and above what would otherwise be the employee's due, e.g., $250.00.

Consideration is a necessary but not sufficient condition. Its absence is fatal to the existence of a contract but its presence does not, in and of itself, make the agreement enforceable. There would be further scrutiny to ascertain whether a legitimate and protectible business interest of the plaintiff-employer is at stake and whether the restrictions in the agreement in question exceed what is reasonably required to protect those business interests.