Labriola v. Pollard Group, Inc., 74002-0.

• Court: United States State Supreme Court of Washington
• Citation: 152 Wash.2d 828,100 P.3d 791
• Decision Date: 10 November 2004
• Docket Number: No. 74002-0.,74002-0.
• Parties: Anthony A. LABRIOLA, Petitioner, v. POLLARD GROUP, INC., Respondent.

100 P.3d 791
152 Wash.2d 828

Anthony A. LABRIOLA, Petitioner,
v.
POLLARD GROUP, INC., Respondent

No. 74002-0.

Supreme Court of Washington, En Banc.

Argued March 9, 2004.

Decided November 10, 2004.

100 P.3d 792

A. Richard Maloney, Seattle, for Petitioner

Eisenhower & Carlson, Stuart Morgan, Tacoma, for Respondent.

IRELAND, J.

In this case we consider whether there was consideration for the formation of a valid noncompete agreement signed by an employee, five years after he was hired, when the employer offered no other additional benefits or promises to the employee. Anthony Labriola (Employee) seeks a declaration that an agreement not to compete is null and void against Pollard Group, Inc. (Employer), his former Employer. A noncompete agreement entered into after employment has commenced is validly formed only when there is independent consideration at the time the agreement is reached. Finding that there was no independent consideration at the time of the 2002 noncompete agreement, we reverse the trial court's summary judgment ruling.

FACTS

In 1997, Employer hired Employee to work as a commercial print sales person, and the parties entered into an employment agreement. Under the agreement, Employer could terminate Employee without cause.¹ Employee's compensation consisted of a base salary and commission from sales. The agreement also contained a restrictive covenant not to compete in the custom printing business for a period of three years after employment ended. The agreement had no geographical limitations.²

Nearly five years later, in April 2002, Employer requested and Employee executed a "Noncompetition and Confidentiality Agreement" (noncompete agreement). The noncompete agreement required Employee to refrain from accepting employment with a competitor for a period of three years within 75 miles of Employer's business in Tacoma, Washington. Employee remained an "at-will" employee and received no additional benefits. Employer incurred no additional obligations from the noncompete agreement. The noncompete agreement also contained clauses for confidentiality, severability, and an award of attorneys fees and costs.

A few months later, in July 2002, Employer announced a new commission sales compensation schedule. The new schedule raised the threshold sales level required for commissions to be paid. The old schedule's threshold paid commission when an employee

100 P.3d 793

generated sales of at least $25,000 for the month while the new schedule paid commission to an employee only after sales for the month exceeded $60,000. Employee determined that the new schedule would reduce his income by about 25% and sought employment for a similar position elsewhere. On November 12, 2002, Employer discovered Employee's intention to seek employment with a competitor and terminated Employee. Employer sent a letter to the competitor interested in hiring Employee, stating its intent to enforce Employee's noncompete agreement. The competitor did not hire Employee. Employee remains unemployed despite actively seeking a position similar to the one he had held with Employer

Employee initiated suit against Employer, seeking a declaratory judgment that the noncompete agreement was null and void and that Employer tortiously interfered with Employee's business. Employee moved for partial summary judgment that the noncompete agreement was unenforceable. The trial court ruled against Employee and upheld the agreement. The trial court also denied Employee's motion that the trial court modify the 2002 noncompete agreement's time restriction from three years to six months. Employee voluntarily dismissed his tortious business interference claim following the trial court's decision on partial summary judgment. Employee sought direct review of this court which was granted.

STANDARD OF REVIEW

The issues before the court involve questions of law and the standard of review on appeal is de novo. Nationwide Mutual Fire Ins. Co. v. Watson, 120 Wash.2d 178, 195, 840 P.2d 851 (1992). When reviewing an order of summary judgment, the court engages in the same inquiry as the trial court. Marincovich v. Tarabochia, 114 Wash.2d 271, 274, 787 P.2d 562 (1990). A summary judgment motion can be granted only when no genuine issue as to any material fact exists, and the moving party is entitled to judgment as a matter of law. Id. The court must consider the facts in the light most favorable to the nonmoving party, and the motion should be granted only if reasonable persons could reach only one conclusion. Id.

ANALYSIS

Issue 1. Is there consideration for the formation of a contract when an employee, already employed by the employer, executes a noncompete agreement but receives no new benefit and the employer incurs no further obligations?

Employee claims that the noncompete agreement fails for lack of consideration; in other words, a contract was not formed. Employer contends that the noncompete agreement is enforceable because future and continued employment and/or job training served as the Employer's consideration in exchange for Employee's execution of the noncompete agreement.

Courts enforce noncompete agreements that are validly formed and are reasonable. Racine v. Bender, 141 Wash. 606, 615, 252 P. 115 (1927). Consideration is "any act, forbearance, creation, modification or destruction of a legal relationship, or return promise given in exchange." King v. Riveland, 125 Wash.2d 500, 505, 886 P.2d 160 (1994). Consideration is a bargained-for exchange of promises. Williams Fruit Co. v. Hanover Ins. Co., 3 Wash.App. 276, 281, 474 P.2d 577 (1970). The Restatement (Second) of Contracts states:

(1) To constitute consideration, a performance or a return promise must be bargained for.

(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.

(3) The performance may consist of

(a) an act other than a promise, or

(b) a forbearance, or

(c) the creation, modification, or destruction of a legal relation.

RESTATEMENT (SECOND) OF CONTRACTS § 71(1)-(3) (1981).

Courts generally do not inquire into the adequacy of consideration and instead utilize a legal sufficiency test. Browning v.

100 P.3d 794

Johnson, 70 Wash.2d 145, 147, 422 P.2d 314, 430 P.2d 591 (1967). Legal sufficiency "is concerned not with the comparative value but with that which will support a promise." Id.

The general rule in Washington is that consideration exists if the Employee enters into a noncompete agreement when he or she is first hired. Wood v. May, 73 Wash.2d 307, 310-11, 438 P.2d 587 (1968); Racine, 141 Wash. at 609, 252 P. 115; Knight, Vale & Gregory v. McDaniel, 37 Wash.App. 366, 368, 680 P.2d 448 (1984).

A noncompete agreement entered into after employment will be enforced if it is supported by independent consideration. Rosellini v. Banchero, 83 Wash.2d 268, 273, 517 P.2d 955 (1974); Schneller v. Hayes, 176 Wash. 115, 118, 28 P.2d 273 (1934). Independent, additional, consideration is required for the valid formation of a modification or subsequent agreement. There is no consideration when "one party is to perform some additional obligation while the other party is simply to perform that which he promised in the original contract." Banchero, 83 Wash.2d at 273, 517 P.2d 955 (citing 15 Walter H.E. Jaeger, Williston on Contracts § 1826 at 487 (3d ed.1972)). Independent consideration may include increased wages, a promotion, a bonus, a fixed term of employment, or perhaps access to protected information. Schneller, 176 Wash. at 118-19, 28 P.2d 273. Independent consideration involves new promises or obligations previously not required of the parties.

In Racine, the court concluded that a warranty not to compete signed by the Employee on a weekly basis for 260 consecutive weeks created a valid contract. Racine, 141 Wash. at 610, 252 P. 115. Racine employed Bender as a certified public accountant. At the time of hire, the parties made no mention of restrictions on Bender's future employment. However, at the end of each week during the employment, Bender was required to prepare a report and sign a warranty agreeing not to compete against Racine for three years after the conclusion of his employment. Id. at 607, 252 P. 115. We reasoned that

when each week [employee] signed the warranty which expressly provides in the first three provisions in words that no man may misunderstand, `(a) my entire time shall be devoted; (b) during such employment I shall not do[;] and (c) either during or after leaving such employment I will not take any action,' such a warranty contained in each report was certainly a basis and a part consideration for future employment.

Id. at 609, 252 P. 115. Although signed after the completion of one week's worth of work, the warranty not to compete signed by Bender served as consideration for future employment based upon the conduct of the parties each week for 260 weeks.

In Schneller, the court held a noncompete agreement that the employee signed just after starting work lacked consideration because the employer failed to advise Hayes, the employee, of a noncompete agreement at the time of the offer for hire. Schneller, 176 Wash. at 118, 28 P.2d 273. Hayes promised not to compete within one mile of the city of Walla Walla. The court reasoned there was no consideration since Hayes's noncompete agreement made no promises to the employee for future employment and stipulated nothing as to wages. The employer reduced Hayes's salary after only four months on the job. After seven months on the job, the employer announced he intended to reduce Hayes's salary again. A few weeks later the Employer terminated Hayes's employment and sought to enforce the noncompete agreement after Hayes set up a competing business in Walla Walla.

In the present case, Employer contends that continued employment served as consideration for the 2002 noncompete...