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Saturday, December 3, 2005

Korobkin on Walker-Thomas

Russell_korobkin As part of our efforts to highlight interesting contracts scholarship that came along before we got around to starting this blog, check out A 'Traditional' and 'Behavioral' Law-and-Economics Analysis of Williams v. Walker-Thomas Furniture Company, by Russell Korobkin (UCLA).  If you attended the 2004 AALS annual meeting you heard the synopsis, but the whole thing is worth reading.  Here’s the abstract:

Williams v. Walker-Thomas Furniture Company is a casebook favorite, taught in virtually every first-year Contract Law class. In the case, the D.C. Circuit holds that courts have the power to deny enforcement of contract terms if the terms are "unconscionable," and it remands the case to the lower court to consider whether the facts of the case meet this standard. This article, written for a session of the 2004 AALS Annual Meeting sponsored by the Contracts Section, analyzes the question that the D.C. Circuit posed to the lower court in Williams -- and that Contracts teachers routinely pose to their students -- from a "traditional" law-and-economics perspective, and from a "behavioral" law-and-economics perspective.

[Frank Snyder]

December 3, 2005 in Famous Cases, Recent Scholarship | Permalink | TrackBack (0)

Working off the Books in Argentina

Agentine_flag Argentine labor law requires employers to register their employees with the government, yet nearly half of the country’s work force works off the books in unregistered employment.  Courts may be cracking down on companies that violate the law, according to a recent report by Buenos Aires’s Beretta Kahale Godoy.

[Frank Snyder]

December 3, 2005 in Commentary | Permalink | TrackBack (0)

Friday, December 2, 2005

Today in History: Katz v. Danny Dare

On this date 25 years ago -- December 2, 1980 -- the Missouri Court of Appeals decided Katz v. Danny Dare, Inc.,  610 S.W.2d 121 (Mo. Ct. App.1980), a popular casebook follow-up to Feinberg v. Pfeiffer Co. in the promissory estoppel part of the course.  In the case, the president of the company wanted to get his brother-in-law to resign instead of having to fire him (thus ticking off his sister) so he promised him a pension.  After the man retired, the company reneged on the promise, claiming that there was no consideration for the promise because the employee would have been fired anyway.  The court's holding -- that there was no consideration but that there was reliance -- is just off base enough to make for great class discussion.

We've been completely unable to find out any details about the protagonists in the case.  There was a Danny Dare (1905-1996) who was a dancer/choreographer/director on Broadway and in Hollywood.  He's best known as the choreography of films like Holiday Inn with Bing Crosby and Fred Astaire.

But we have no idea if he had any connection with the Danny Dare, Inc., involved in the case.  If you have any information, we'd be delighted to get it.

[Frank Snyder]

December 2, 2005 in Famous Cases, Today in History | Permalink | Comments (0) | TrackBack (0)

Court Battle: Williams Sisters Defend Breach of Contract Suit

A jury in Palm Beach has begun hearing a breach of contract case against sisters and tennis superstars Serena and Venus Williams.  Brought by two principals in a company known as CCKR, the lawsuit alleges that the Williams sisters reneged on an agreement to play in a Battle of the Sexes tennis match.  The Williams sisters claim that they never agreed to participate.  According to the Sun Sentinel, their father put in writing possible contract terms, but he says that he did so to help CCKR “get a foot in the door” with the Williams sisters’ sports agency, IMG.  Apparently, he considered what he signed a letter, not a contract.  Further, according to the article, the Williams sisters argue that “no one, including their father, can make promises or sign contracts on their behalf.” Probably the best defense here is not necessarily a legal one; the sisters’ attorney reportedly said: "They don't want any part of this circus called Battle of the Sexes . . . [w]here's the honor and pride in beating some retired 45-year-old man?"

[Meredith R. Miller]

December 2, 2005 in Celebrity Contracts | Permalink | TrackBack (0)

Thursday, December 1, 2005

Wayne & Garth on product placements

From Wayne's World (1992):

     Benjamin:  Wayne! Listen, we need to have a talk about Vanderhoff. The fact is he's the sponsor and you signed a contract guaranteeing him certain concessions, one of them being a spot on the show.
     Wayne [holding a Pizza Hut box]:  Well that's where I see things just a little differently. Contract or no, I will not bow to any sponsor.
     Benjamin: I'm sorry you feel that way but basically it's the nature of the beast.
     Wayne [holding a bag of Doritos]: Maybe I'm wrong on this one, but for me the beast doesn't include selling out. Garth you know what I'm talking about right?
     Garth [wearing Reebok wardrobe]: It's like people only do these things because they can get paid.  And that's just really sad.
     Wayne:  I can't talk about it anymore, it's giving me a headache.
     Garth:  Here take two of these!  [Dumps two pills into Wayne's hand]
     Wayne:  Ah, Nuprin.  Little. Yellow. Different.
     Benjamin: Look, you can stay here in the big leagues and play by the rules or you can go back to the farm club in Aurora. It's your choice.
     Wayne [holding a can of Pepsi]: Yes, and it's the choice of a new generation.

[Frank Snyder]

December 1, 2005 in Film Clips | Permalink | TrackBack (0)

Long-Term Lost Profits Too Speculative to Recover

Sutherland When a party breaches a 20-year contract early in the term, are lost profits damages available to the other party for the entire remainder of the term?  The theoretical answer is yes, but a recent decision in a New York federal district court suggests that the practical answer may be no.  Sutherland Asbill & Brennan LLP reports the case here.

In the case, Tractebel Energy Marketing, Inc. v. AEP Power Marketing, Inc., Tractebel and AEP entered into a requirements contract under which AEP would sell electricity to Tractebel from a new co-generation station AEP was building.  The agreement had a 20-year term.  Almost immediately, Tractebel realized it was a bad deal; its estimates of $80 million in profits under the deal turned to estimates of $360 million in losses.  Tractebel took various steps to try to get AEP to cancel the deal, but AEP didn’t bite, and Tractebel finally breached.

The interesting issue was one of damages for the portion of the contract that still remained.  Experts testified for both sides on the profits that AEP could have expected over the 20 year term.  But the court found their projections to be almost entirely speculative, since the future price of electricity was fraught with so many variables that the experts might as well have “consulted tea leaves or a crystal ball.”  Accordingly, AEP could not collect lost profits on the remainder of the contract.

[Frank Snyder]

December 1, 2005 in Commentary, Recent Cases | Permalink | TrackBack (0)

Today in History: Harvard Needs a Dean

Theophilus_parsons_1 On this date, December 1, 1869, Dean and Dane Professor Theophilus Parsons, Jr. (left), stung by criticism that “the condition of the Harvard Law School has been almost a disgrace to the Commonwealth of Massachusetts,” submits a letter of resignation to President Charles Eliot.  Eliot, looking for fresh blood to put a spark into the old horse, will quickly settle on a largely unknown New York lawyer who doesn’t much like actual law practice, Christopher Columbus Langdell.  This will start a trend.

Parsons, now largely forgotten, was himself a commercial lawyer of the first rank.  A Boston Brahmin, his father Theophilus Sr. had played a key role in getting Massachusetts to ratify the new Constitution and had taught law to the young John Quincy Adams, before serving as Chief Justice of Massachusetts.  The younger Theo, at Harvard since 1848, apparently had been a popular teacher:

The affable Theophilus Parsons was a fascinating lecturer whose humor and enthusiasm were enduring. He hated the more technical parts of the law and preferred to present his witty anecdotes with a poetic dreaminess of temperament. He presented both sides of his legal issues so fully and fairly that students wondered whether he had any opinions, but when he did express one it was sure to be original. Yet it was said that his lectures, "for clearness, scope and literary excellence, have often been compared to those of Blackstone."  [Mark D. Hirsch, William C. Whitney: Modern Warwick 19 (1948)]

Parsons was himself a formidable commercial lawyer, having written such works as The Law of Contract (1853), Elements of Mercantile Law (1856), Laws of Business for Business Men (1857), Maritime Law (1859); Notes and Bills of Exchange (1862); and Shipping and Admiralty (1869), as well as The Law of Conscience (five editions, 1853-64) and The Political, Personal, and Property Rights of a Citizen of the United States (1875).

As it happens, his chief research assistant on The Law of Contract had been young Langdell.

[Frank Snyder]

December 1, 2005 in Contract Profs, Today in History | Permalink | TrackBack (0)

Wednesday, November 30, 2005

Do Noncompetes Survive Job Changes?

Goodwin_procter Where an employer requires an employee sign a noncompete agreement, what happens when the employee’s job changes, as by promotion or reassignment?   According to Wilfred J. Benoit, Jr., James W. Nagle, Robert M. Hale and Bradford J. Smith of Boston’s Goodwin Procter LLP, a number of lower court Massachusetts cases have suggested that changes in the job or employment status will nullify the clauses, and that employers must get new agreements signed when the employee’s job responsibilities change.  Other courts, they say, have rejected a per se rule.

[Frank Snyder]

November 30, 2005 in Commentary, Recent Cases | Permalink | TrackBack (0)

A Sticky Insurance Coverage Dispute

250pxpeanutbutterThe Seventh Circuit recently decided an insurance coverage dispute involving spoiled peanut butter. The court held that a peanut butter company’s insurer was not obligated to indemnify the company for amounts paid to a cookie mix manufacturer after the peanut butter company supplied spoiled peanut butter.  (Image Source: Wikipedia).  Under the terms of the Insurance Coverage Agreement between the peanut butter company and the insurer, the spoiled peanut butter did not cause “property damage” subject to indemnification. Moreover, certain “business risk” exclusions to coverage applied.

Here is the story as Judge Sykes tells it:

The peanut butter in question was contained in sealed packets supplied by plaintiff Sokol and Company ("Sokol") to its customer Continental Mills ("Continental") for inclusion in boxes of Continental's cookie mix. When Continental discovered that the peanut butter had gone bad, it retrieved the cookie mix, substituted fresh peanut butter packets, and sought reimbursement from Sokol for the costs associated with the replacement. Sokol filed notice of Continental's claim with Atlantic Mutual Insurance Company ("Atlantic"), its Comprehensive General Liability ("CGL") insurer.  Atlantic denied coverage, citing a number of the policy's “business risk” exclusions. Sokol then paid Continental's claim itself and sought indemnification from Atlantic under the policy. Atlantic again denied coverage and this litigation ensued.

After parsing out the difference between a duty to defend and a duty to indemnify, the court turned to the language of the policy, noting that “property damage” was defined as:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or

b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the "occurrence" that caused it.

Applying this definition, the court held that “Sokol's peanut butter paste . . . did not cause 'physical injury to tangible property.'" The court reasoned:

The paste was sealed in individual packets, and those packets were simply removed from the boxes of cookie mix. There has been no allegation that the spoilage of the peanut butter affected the other food products contained within the boxes. Sokol suggests weakly that when Continental opened the boxes to remove and replace the spoiled paste, the opening itself constituted "property damage" within the meaning of the policy. The act of opening and resealing cookie mix boxes can scarcely be characterized as an "injury" to the boxes.

Even assuming the spoiled peanut butter caused “property damage,” the court held that certain “business risk” exclusions from coverage applied, namely: the exclusion of damage to impaired property and the exclusion of recalled products.

Sokol & Co. v. Atlantic Mut. Ins. Co. (7th Cir. Nov. 29, 2005).

[Meredith R. Miller]

 

November 30, 2005 in Recent Cases | Permalink | TrackBack (0)

Be Careful Out There

Merle_weiner_1 Lots of people have complained about an alleged explosion of frivolous litigation in the United States.   Next target:  People who write law review articles.

University of Oregon law professor Merle Weiner (left) has been threatened with a lawsuit for her references to a particular lawsuit in an article she wrote that appeared in the University of San Francisco Law Review.  And she's discovered that she's all alone.  Neither her employer nor the law review will defend her, even though she has a legal opinion that her report was accurate.  Rather than face litigation, the law review reportedly has pulled the disputed reference from its online version of the article.

The article, for those interested, is Strengthening Article 20, 38 U.S.F. L. Rev. 701 (2004).

[Frank Snyder]

November 30, 2005 in In the News | Permalink | TrackBack (0)

Gordon Lightfoot and the Farnsworth Casebook

Edmund_fitzgerald Those of you who use the Farnsworth-Young-Sanger casebook are familiar with the case of Oglebay Norton Co. v. Armco, Inc., 52 Ohio St. 3d 232, 556 N.E.2d 515 (1990).  The case involves a series of long-term contracts entered into by ONC and Armco beginning in 1957, for carriage of iron ore across the Great Lakes.

What you may not know is that one of those ships operated by Oglebay Norton was the SS Edmund Fitzgerald, whose 1975 sinking off Whitefish Bay in Lake Superior became the subject of Gordon Lightfoot’s subsequent hit record, The Wreck of the Edmund Fitzgerald.

The ship was the pride of the American side,
Coming back from some mill in Wisconsin.
As the big freighters go it was bigger than most
With a crew and the Captain well seasoned.

Concluding some terms with a couple of steel firms,
When they left fully loaded for Cleveland.
And later that night when the ships bell rang,
Could it be the North Wind they'd been feeling?

The ship was built for the Northwestern Mutual Life Insurance Co. (and named after its chairman), and was chartered to Oglebay Norton for its entire career.  As Lightfoot's lyric notes, it was at the time it was built the largest freighter on the Great Lakes.  A good deal of information about the Fitzgerald can be found at S.S. Edmund Fitzgerald Online.  An Edmund Fitzgerald desktop is here.

Oglebay Norton itself is a venerable company, founded as an iron-ore partnership in 1851.  One of its early employees was 16-year-old John D. Rockefeller, who made $3.50 a week as a bookkeeper before quitting in 1859 for greener pastures in the oil business.  After filing for bankruptcy protection in 2003, the company exited the shipping business (though it still carries its own products in its own ships) and now remains a supplier of industrial aggregates.

[Frank Snyder]

November 30, 2005 in Famous Cases | Permalink | TrackBack (0)

Tuesday, November 29, 2005

California Strikes Pre-Dispute Jury Waivers

Pillsbury_winthrop Contractual pre-dispute waivers of jury trials are not effective in California, according to a recent ruling by the state supreme court in Grafton Partners, L.P. v PriceWaterHouseCoopers L.L.P. (August 5, 2005).

Parties can agree in advance to arbitration, said the court, but they cannot agree in advance to have their case tried by a judge instead of a jury.  What is striking is that this is not a consumer case, but one between sophisticated business entities.  Christopher R. Ball and John M. Grenfell of New York’s Pillsbury Winthrop offer a brief report on the case.

[Frank Snyder]

November 29, 2005 in Commentary, Labor Contracts, Recent Cases | Permalink | TrackBack (0)

Statute of Frauds Trumps Promissory Estoppel

Indiana_flag_3 A plaintiff home builder’s complaint against buyers who backed out of a deal was properly dismissed on the pleadings, because the complaint on its face showed that the alleged contract was not in writing, according to a recent decision by the Indiana Court of Appeals.

In the case, a home builder e-mailed a purchase agreement to prospective buyers.  The buyers never actually executed it.  When the buyers backed out of the deal, the builder sued.  Its complaint

adequately alleged the existence of an oral contract for the sale of real property.  It alleged that the parties agreed on the identity and location of the property to be sold, the purchase price, the date of closing, and the down payment.  And in their answer, the [buyers] admitted to all allegations in the complaint for purposes of the Rule 12(C) motion.  Thus, in this appeal, we conclude that the parties entered into an oral contract for the sale of real estate.

     But the [buyers] also pleaded the statute of frauds as an affirmative defense with their answer.  The statute requires that contracts for the sale of real property be in writing. . . .  The statute is intended to preclude fraudulent claims that would probably arise when one person's word is pitted against another's and that would open wide the flood-gates of litigation. . . .  Nevertheless, oral contracts for the sale of real property are voidable, not void. . . .  Oral contracts for the sale of real property are excepted from the statute of frauds where there is part performance, . . . or promissory estoppel . . . .

The builder argued that it did in fact rely on the oral contract, and thus that it could not be said as a matter of law that the contract would be unenforceable.  Trouble was, it did not raise any exceptions to the statute in its complaint.  Since on its face the contract set forth in the complaint was unenforceable, it had to be dismissed.

Fox Development, Inc. v. England, 2005 Ind. App. LEXIS 2131 (2d Dist. Nov. 14, 2005).

[Frank Snyder]

November 29, 2005 in Recent Cases | Permalink | TrackBack (0)

Cyberspace Fete Slated

Aba_logo_2 The ABA Cyberspace Law Committee's Winter Working Meeting will take place at the offices of Potter Anderson & Corroon LLP in Wilmington, Delaware, on Friday and Saturday, January 27-28, 2006.  The group historically has been involved in some interesting and important project, and they're always interested in getting more academics involved.  According to the organizers:

The Winter Working Meeting attracts Internet and technology lawyers from around North America. If you have not attended the Committee's "WWM" in the past, it is not to be missed -- this is where we roll up our sleeves and get some real work done with our colleagues without a heavy schedule of Section and Association gatherings. We especially encourage everyone who has joined the Cyberspace Law Committee this year to attend the Winter Working Meeting.
A block of rooms at the Hotel DuPont will be available at a discounted rate. Hotel reservations must be made by January 5, 2006 to take advantage of the ABA group rate. The Committee will also hold its traditional Friday evening dinner, which is always great fun and a good opportunity to connect with Committee members and guests. The deadline to register for the meeting and dinner is January 13, 2006.

To find out about membership, and to sign up for the meeting, you can visit the Committee Web Site.

November 29, 2005 in Meetings | Permalink | TrackBack (0)

Today in History: The Alien Prince of Paradine v. Jane

Prince_rupert_1 On this date, November 29, 1682, Prince Rupert of the Palatinate died at London.  His role in contract law, as all contracts teachers know, was as the supervening force in Paradine v. Jane.

The case describes Rupert as a “German prince, . . . an alien born, enemy to the King and his kingdom.”  Though he was, in fact, a German prince and an alien, he was also nephew to King Charles I, being the son of his sister Elizabeth of Bohemia.  His uncle created him Earl of Holderness and Duke of Cumberland, in addition to his German titles.  Far from being an enemy of the King, he was one of his staunchest supporters in the Civil War.

Trouble had been brewing for years between Charles and Parliament.  On January 4, 1642, royal troops entered Parliament to arrest its leaders, but they had fled.  Because of hostility in London, Charles moved north to raise an army.  Rupert, though only 23, already had nine years’ military experience campaigning on the Continent, and he was appointed commander of all Royalist cavalry.  Oxford, intensely loyal to the Crown, became the Royal capital during the war.

On July 19, 1642, Royalist troops took possession of some property owned by one Paradine and leased to Jane.  Charles subsequently raised the royal banner at Nottingham on August 22, triggering the Civil War.  The tide of war ebbed and flowed, but by December 1645, the king was bottled up in Oxford and the Royalist resistance is broken.  When Oxford fell, shortly after the Feast of the Annunciation, in April 1646, the remaining resistance collapsed.  Jane got his land back.

Paradine sued for three years of back rent.  By the time the case reached the judges, Rupert was banished to the Continent and the King was a prisoner of Parliament -- hence the "enemy" label.  In his defense against Paradine’s claim for rent, Jane raised the fact that he had been deprived of use of the land for three years.  The court’s opinion, finding for the landlord, can be read by clicking on “continue reading.”

Rupert, meanwhile, joined a group of English exiles fighting for the King of France, turned buccaneer for a while, preying on English shipping in the West Indies, and with the Restoration came back to England with Charles II.  He commanded the English fleet successfully during the Second Anglo-Dutch War and unsuccessfully during the Third, helped invent the mezzotint, and served as the first Governor of the Hudson’s Bay Company.  He died peacefully at home with his mistress, a Drury Lane actress, and his daughter Ruperta.

[Frank Snyder]

Continue reading

November 29, 2005 in Famous Cases, Today in History | Permalink | TrackBack (0)

Monday, November 28, 2005

Academy Chicago Publishers v. Cheever Teaching Resources

Academy Chicago Publishers v. Cheever, 144 Ill. 2d 24 (1991), is a fun case to teach.  John Cheever was a Pulitzer Prize-winner author.  After his death, a small publisher entered into a licensing agreement with John Cheever's widow for the right to republish a collection of John Cheever's stories.  Things went horribly wrong, however.  Neither party had the help of counsel, and the contract was poorly-drafted and ambiguous--leaving open basic questions like which stories were being licensed or even how many.  Even though the contract did not initially appear to be financially significant (the widow received a $1,500 advance against royalties), the resulting lawsuit ultimately generated over $1 million in legal fees.  Unfortunately for the publisher, the contract ultimately failed for indefiniteness. 

I like teaching the case for several reasons:

  • it shows the limits of gap-filling in common law contracts (and offers an opportunity to discuss if this case comes out differently under the UCC's more liberal gap-filling approach)
  • it shows what happens when clients draft complex intellectual property agreements without legal help--the client may end up spending far more money trying to clean up a crummy contract than the client would have spent getting competent counsel involved at the drafting/negotiation stage
  • it shows how relatively small contracts can become significant assets, reinforcing that lawyers need to treat even seemingly-inconsequential contracts with respect
  • it gives students an opportunity to consider the negotiation dynamics.  Why didn't the parties resolve basic details?  Why didn't the parties use lawyers?  Was one party preying on the other?

This litigation is surprisingly well-documented.  The publishers wrote a book called Uncollecting Cheever: the Family of John Cheever vs. Academy Chicago Publishers (1998; ISBN 0-8476-9076-8).  You can typically buy this book used for less than $5 at Amazon or Half.com.  This book was extensively reviewed (including at the New York Times and Salon), and the book reviews provide a nice summary of the story to supplement the case facts.  This page aggregates the various opinions and contains a variety of contemporaneous news articles.

Meanwhile, Academy Chicago Publishers did end up publishing a book, composed entirely of public domain works for which no license agreement was needed, called Thirteen Uncollected Stories by John Cheever (1994, ISBN 0-89733-405-1).  You can also buy this book used at Amazon or Half.com for less than $5.  I circulated both books in class as props, which I thought made the case far more tangible for students.

Finally, students may be interested in learning more about John Cheever (biography and photograph).  Also, he was a small but essential character in a Seinfeld episode.

[Eric Goldman]

November 28, 2005 in Famous Cases | Permalink | Comments (0) | TrackBack (0)

Weekly Top Ten

Ssrn_logo_34 There’s a slew of new papers breaking into this week’s Top Ten.  Following are the ten most-downloaded papers from the SSRN Journal of Contract and Commercial Law for the 60 days ending November 27, 2005.  (Last week's ranking in parentheses.)

1 (2) Katrina's Continuing Impact on Procurement - Emergency Procurement Powers in H.R. 3766, Christopher R. Yukins & Joshua I. Schwartz (Geo. Washington).

2 (4) In Memoriam, John Cibinic, Jr., Ralph C. Nash (Geo. Washington), et al.

3 (5) Rethinking Spyware: Questioning the Propriety of Contractual Consent to Online Surveillance, Wayne Barnes (Texas Wesleyan).

4 (9) Taking Information Seriously: Misrepresentation and Nondisclosure in Contract Law and Elsewhere, Richard Craswell (Stanford).

5 (8) Contracting in the Shadow of the Law, Nicola Gennaioli (IIES-Stockholm).

6 (10) Effective vs. Nominal Valuations in Venture Capital Investing, Michael Woronoff (Proskauer Rose) &  Jonathan Rosen (Shelter Capital).

7 (-) From St. Ives to Cyberspace: The Modern Distortion of the Medieval 'Law Merchant,' Stephen E. Sachs (Yale).

8 (-) An Embedded Options Theory of Indefinite Contracts, George S. Geis (Alabama).

9 (-) Hurricane Katrina's Tangled Impact on U.S. Procurement, Christopher R. Yukins (Geo. Washington).

10 (-) One-Sided Contracts in Competitive Consumer Markets, Lucian Arye Bebchuk (Harvard) & Richard A. Posner (Chicago).

November 28, 2005 in Recent Scholarship | Permalink | TrackBack (0)

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]

November 28, 2005 in Labor Contracts | Permalink | TrackBack (0)