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Monday, November 28, 2005

Court Refuses to Enforce Non-Compete for Lack of Consideration

A judge in the Eastern District of Pennsylvania recently refused an employer’s request to enforce a non-competition clause against a former employee. The court held that the agreement lacked consideration and the restrictions were unreasonably overbroad.

Robert Bodell worked as a sales representative for Fres-co, a manufacturer and distributor of “flexible packaging materials.” In 1998, three weeks before he began employment with Fres-co, Bodell signed a confidentiality and non-competition agreement. All of Fres-co’s 350 employees signed the same agreement. In 1999, Fres-co had the employees sign a slightly revised agreement based on concerns that the 1998 agreement was overbroad. So, in 1999, during his employment with Fres-co, Bodell signed a new non-compete, promising, among other things, not to work for any of Fres-co’s competitors for one year after termination of his employment.

Inevitably, Bodell left Fres-co and went to work for Ultra Flex, a Fres-co competitor. Fres-co sought injunctive and declaratory relief against Bodell, alleging breach of the 1999 confidentiality and non-solicitation agreement. The court denied the request, holding that the 1999 agreement was not supported by “new consideration” – under Pennsylvania law, a restrictive covenant entered into after employment begins requires a new, corresponding benefit to the employee. The court held:

According to the language of the 1999 Agreement, Bodell signed it "in consideration of the nullification of a prior confidentiality and non-competition agreement." The 1999 Agreement differed from the 1998 Agreement in that it (1) reduced the restricted period from two years to one year; (2) introduced and defined the phrase "line of business;" and (3) eliminated a liquidated damages provision. Fres-co characterizes these lessened restrictions as consideration.

* * *

However, as Fres-co has conceded, the company had employees sign the 1999 Agreement because it was concerned that the 1998 Agreement might be unenforceably overbroad. If the 1998 Agreement is unenforceable, there were no prior restrictions on Bodell's post-Fres-co activity. In that case the 1999 Agreement's non-compete language would not decrease the period of a restriction (as Fres-co contends), but rather it would increase restrictions on Bodell's post-Fres-co activity by creating a new a one-year restriction where none existed before. This hardly constitutes consideration.

Moreover, Fres-co admits that every employee, however lowly, had to sign the same 1999 Agreement and was not permitted to negotiate any terms. Fres-co argues this was done for consistency across the organization. No doubt this method was administratively convenient and achieved consistency, but whether such an agreement was permissible under Pennsylvania law is quite a different matter. Lacking consideration since gratuitously sought, the 1999 Agreement fails to satisfy Pennsylvania's requirements and is thus unenforceable on this basis alone.

The court further held that, even if Bodell had received consideration for the 1999 agreement, it was unenforceable because (1) the restrictions were not reasonably necessary for Fres-co’s protection and (2) the restrictions were not reasonably limited in duration and geographic extent.

Finally, the court refused to exercise its equitable powers to rewrite the contract terms:

Having recognized an overbreadth problem with its 1998 Agreement, Fres-co failed properly to address it.  Now it asks this Court to take on a wholesale rewriting that properly belongs to corporate decision-makers working with their counsel. We decline this expansive invitation to exercise our equitable powers to help this employer stifle legitimate competition by a salesman merely seeking to ply his trade.

Fres-co Sys. USA, Inc. v. Bodell (E.D. Pa. Nov. 15, 2005).

[Meredith R. Miller]

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