Mattison v. Johnston, 1

• Decision Date: 16 September 1986
• Docket Number: CA-CIV,No. 1,1
• Citation: Mattison v. Johnston, 152 Ariz. 109, 730 P.2d 286 (Ariz. App. 1986)
• Parties: Diane MATTISON, an individual, dba Hidden Hills, a sole proprietorship, Plaintiff-Appellant, v. Donna JOHNSTON and John Doe Johnston, wife and husband; Ed White and Jane Doe White, dba Fountainbell Hair Creations; Kathy Sue Drowne and John Doe Drowne, wife and husband, Defendants-Appellees. 8677.
• Court: Arizona Court of Appeals

Page 286

730 P.2d 286

152 Ariz. 109

Diane MATTISON, an individual, dba Hidden Hills, a sole proprietorship, Plaintiff-Appellant, v. Donna JOHNSTON and John Doe Johnston, wife and husband; Ed White and Jane Doe White, dba Fountainbell Hair Creations; Kathy Sue Drowne and John Doe Drowne, wife and husband, Defendants-Appellees.

No. 1 CA-CIV 8677.

Court of Appeals of Arizona Division 1, Department A.

Sept. 16, 1986.

[152 Ariz. 111] Farley, Robinson & Larsen by R. Chip Larsen, Phoenix, for plaintiff-appellant.

Corwin & Merritt by Brent E. Corwin and Kenneth D. Everett, Phoenix, for defendants-appellees.

OPINION

EUBANK, Judge.

The primary issue on this appeal is whether the continued employment of a terminable-at-will employee is sufficient consideration to support a restrictive covenant executed by the employee more than two years after commencement of employment.

For purposes of this appeal, the following facts are undisputed. Kathy Sue Drowne, one of the appellees, was employed as a beautician at Hidden Hills, a Sun City beauty salon, in October, 1982. Two years later, on November 21, 1984, Drowne signed an agreement which provides that Drowne will not engage in competition in "the beauty salon business" within a "six square mile radius" of Hidden Hills for one year following termination of her employment with Hidden Hills. Drowne voluntarily terminated her employment with Hidden Hills during February, 1985. She began working for Fountainbell Hair Salon located approximately one and a half miles from Hidden Hills.

Diane Mattison, the appellant and operator of Hidden Hills, filed a complaint against the operators of Fountainbell, Donna Johnston and Ed White, and Drowne, the appellees. The complaint alleges that Drowne violated the covenant not to compete and that Johnston and White induced Drowne to violate the agreement and conspired to injure Mattison's business.

Johnston, White and Drowne filed a motion for summary judgment. The trial court expressly found that the restrictive covenant failed for lack of consideration and granted appellees' motion. The judgment, including an award of $1,000 for attorney's fees, was entered in favor of the appellees on September 9, 1985. Mattison filed a timely notice of appeal to this court.

The law is well established that a restrictive covenant which is ancillary to a valid employment contract and is not unreasonable in scope will be upheld in the absence of bad faith or contravening public policy. See Lassen v. Benton, 86 Ariz. 323, 346 P.2d 137 (1959); Lessner Dental Laboratories, Inc. v. Kidney, 16 Ariz.App. 159, 492 P.2d 39 (1971). There is no clear limit to the period of time during which a restraint must be imposed in order to be considered "ancillary." The Restatement (Second) of Contracts § 187, comment b (1979) provides in part:

A promise made subsequent to the transaction or relationship is not ancillary to it. In the case of a continuing transaction or relationship, however, it is enough if the promise is made before its termination, as long as it is supported by consideration and meets the other requirements of enforceability.

See also comment a of Reporter's Note to Restatement (Second) of Contracts § 188 (1979). Cf. Amex Distributing Co., Inc. v. Mascari, 150 Ariz. 510, 724 P.2d 596 (1986).

Although there is authority to the contrary, most jurisdictions which have considered the issue have found that continued employment is sufficient consideration to support a restrictive covenant executed after employment has commenced even where employment continues to be on an at-will basis. See generally Annot. 51 A.L.R.3d 825 (1973).

Those jurisdictions which have rejected "continued employment" as consideration have concluded that the promise of continued employment is illusory because even though the employee signs the covenant, the employer retains the right to discharge the employee at any time. See, e.g., Kadis v. Britt, 224 N.C. 154, 29 S.E.2d 543 (1944); George W. Kistler, Inc. v. O'Brien, 464 Pa. 475, 347 A.2d 311 (1975); McCombs v. McClelland, 223 Or. 475, 354 P.2d 311 (1960). See also Restatement (Second) of Contracts § 77 (1979).

Other jurisdictions have found continued employment in an at-will relationship sufficient consideration for a variety of reasons. In Hogan v. Bergen Brunswig, Corp., 153 N.J.Super. 37, 378 A.2d 1164 (1977), the court discussed the fact that in an at-will employment relationship, the employer could discharge an employee who refused to sign the agreement. Whether the consideration is viewed as "forbearance to discharge" or "continued employment", as a practical matter, the consideration is the same. The court concluded that a threat of discharge is not necessary to establish consideration by continued employment.

Similarly, in McRand, Inc. v. Van Beelen, 138 Ill.App.3d 1045, 93 Ill.Dec. 471, 486 N.E.2d 1306 (1985), the Illinois Court of Appeals found that in order to establish that continued employment was consideration for a restrictive covenant, it would not be necessary for an employer to discharge an at-will employee and then rehire on the condition that the employee sign a restrictive covenant.

Courts have also emphasized that it is not simply the implied promise of continued employment but performance, i.e., the continuation of employment for a substantial period of time that establishes consideration for a restrictive covenant. For example, in Simko v. Graymar Co., 55 Md.App. 561, 464 A.2d 1104 (1983), the Maryland Court of Appeals stated:

Were an employer to discharge an employee without cause in an unconscionably short length of time after extracting the employee's signature to a restrictive covenant through a threat of discharge, there would be a failure of the consideration. An employer who bargains in bad faith would be unable to enforce a restrictive covenant. Rather than adopt the bright line but inequitable rule, we deem the better approach is to hold that the continuation of employment for a substantial period beyond the threat of discharge is sufficient consideration for a restrictive covenant. What constitutes a substantial period is dependent on the facts and circumstances of a particular case.

55 Md.App. at 567, 464 A.2d at 1107-08. See also Research & Trading Corp. v. Powell, 468 A.2d 1301 (Del.Ch.1983); Ranch Hand Foods v. Polar Pak Foods, Inc., 690 S.W.2d 437 (Mo.App.1985); Smith, Batchelder & Rugg v. Foster, 119 N.H. 679, 406 A.2d 1310 (1979); Central Adjustment Bureau, Inc. v. Ingram, 678 S.W.2d 28 (Tenn.1984).

This court adopted a similar position in American Credit Bureau, Inc. v. Carter, 11 Ariz.App. 145, 462 P.2d 838 (1969). American Credit Bureau sought to enforce a restrictive covenant against an at-will employee. It apparently conceded that the agreement may have lacked sufficient consideration at its inception due to the at-will nature of the employment. However, it contended that employment for three years at a sizable salary constituted sufficient consideration for the non-competition agreement. This court agreed, finding no need to determine whether the at-will employment per se was lacking in consideration at its inception. 11 Ariz.App. at 147, 462 P.2d at 840. See Amex Distributing Co., Inc. v. Mascari, supra.

In Lessner Dental Laboratories, Inc. v. Kidney, Division Two of this court concluded that there was adequate consideration on its face in a written employment contract containing a restrictive covenant in which the employer agreed to continue employment "so long as the Employee [shall] faithfully and properly perform all the duties and tasks of [her] position ... [and abide by terms of this agreement.]" However, the contract also provided that nothing required the employer to "retain the Employee if, in his sole judgment, conditions or circumstances do not warrant or require the continued employment of the employee." 16 Ariz.App. at 160, 492 P.2d at 40. The court concluded that the promise of future employment was sufficient consideration for the employee's promise not to compete. It did not discuss the fact that the promise arose in the context of an at-will employment relationship. Lessner Dental Laboratories, Inc. v. Kidney differs from the instant case in that it involved a restrictive covenant executed at the inception of a written employment relationship. The implied promise of continuing employment to Drowne arose during the course of an unwritten at-will employment relationship.

Johnston, White and Drowne argue that Drowne continued to be employed by Hidden Hills less than three months after the restrictive covenant was signed and that this does not constitute "employment for a substantial period" sufficient to constitute consideration for the covenant. However, this argument ignores the rationale underlying those decisions which have emphasized employment itself rather than the promise of continued employment as the basis for finding consideration.

Several courts have stated that a "short" period of employment might not suffice as consideration for a restrictive covenant. However, these statements arose in the context of discussing the possibility of a bad faith action by an employer requiring an employee to sign a restrictive covenant and then discharging that employee within a short period of time. See Simko v. Gramar Co., and Central Adjustment Bureau, Inc. v. Ingram.

In Central Adjustment Bureau, Inc. v. Ingram, the court emphasized that in determining whether there is consideration for a restrictive covenant a reviewing court should be concerned with both the length of employment following execution of the restrictive covenant and the circumstances of the discharge. Specifically, the court indicated its concern with whether the discharge had been made in bad faith. 678 S.W.2d at 35.

None of the cases distinguishing between short term periods of employment and employment for a "substantial time" for purposes of finding consideration address a...