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Editor: Myanna Dellinger
University of South Dakota School of Law

Monday, December 19, 2005

Beaver State Appellate Court Enforces Noncompete

Oregon_state_flag In Oregon, ORS 653.295 provides that a noncompetition agreement is unenforceable unless certain conditions are met.  For example, under the statute, a noncompete is only enforceable if it was signed at the initial time of employment.  In a recent case, an Oregon appellate court addressed an employee’s suit to enforce a noncompete -- the employer was attempting to get out of its payment obligations under the noncompete by claiming that the agreement was executed during the course of employment and, therefore, was not enforceable. 

Here's what happened:

Plaintiff was hired by defendant in 1973 to work as its chief engineer. In 1996, plaintiff planned to retire and informed defendant of that fact. To induce plaintiff to continue in its employ, defendant offered and plaintiff agreed to a two-year, part-time employment contract "following your retirement on August 3, 1996. The employment contract provided that plaintiff would work up to 300 hours per year at $1,040 per month, and would receive medical benefits equivalent to what he had received as a full-time employee during the two years of the contract and for an additional eight years following. The contract also specified that [plaintiff’s work would no longer include production engineering, field engineering or field service, but would include consulting on design and sales assistance.]

The part-time employment contract was also subject to plaintiff's entering into a noncompetition agreement with defendant. The noncompetition agreement recited that "[plaintiff] intends to retire on August 3, 1996, and [defendant] desires to have an agreement with [plaintiff] not to compete" and provided that defendant would pay plaintiff $30,000 per year for a period of ten years as consideration for the agreement, to begin on August 3, 1996. The noncompetition agreement specified that plaintiff would not directly or indirectly compete or disclose information he learned or obtained while working for defendant that was not already available to the public. In the event of plaintiff's death, payments due under the contract would be made to a person specified by plaintiff, provided that his estate was bound by the terms of the agreement. In 1998, the part-time employment contract was modified by the parties to extend it an additional eight years, until 2006. Under the modification, plaintiff agreed to work up to 200 hours per year for $1,200 per month, with medical benefits to continue throughout the period of the contract and up to eight years following its expiration.

The employer made the payments required under the noncompetition agreement until 2003, when it declared the agreement "void and not enforceable" under ORS 653.295.  The employer argued that the noncompete was executed after the employee’s initial employment.  The employee sued for breach of contract.  The appellate court affirmed the decision of the trial court and enforced the noncompete.

After reviewing the statutory history of the phrase “initial employment,” the court held that:

because plaintiff's new employment relationship with defendant began after he retired and because his employment was as a consultant rather than as a chief engineer, the noncompetition agreement is enforceable under the statute. Here, plaintiff gave notice to defendant that he intended to retire on August 3, 1996. With his retirement on that day, plaintiff's employment relationship as chief engineer with defendant ended. But for the new agreement to employ plaintiff as a consultant, there would have been no employment relationship between them. The subsequent agreement to employ plaintiff in a different capacity as a consultant operated to create a new employment relationship that had not existed before. Under the agreement that employed him as a consultant, plaintiff's job responsibilities and working hours decreased dramatically, resulting in a completely different employment relationship from the one that had existed previously.

The court noted that its reasoning was consistent with “the legislature's intent to protect employees from the coercive effect of employers requiring a noncompetition agreement in the midst of the employment term as a condition of continued employment.”  Because the employee intended to retire, the employer “lacked the leverage of a continuing employment relationship that concerned the legislature.”

McGee v. The Coe Manuf. Co. (Or. Ct. App. Dec. 7, 2005).

[Meredith R. Miller]

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