Modern Controls, Inc. v. Andreadakis

• Decision Date: 17 July 1978
• Docket Number: No. 78-1210,78-1210
• Citation: 578 F.2d 1264
• Parties: MODERN CONTROLS, INC., a Minnesota Corporation, Appellant, v. Nicholas C. ANDREADAKIS, an Individual, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1264

578 F.2d 1264

MODERN CONTROLS, INC., a Minnesota Corporation, Appellant, v. Nicholas C. ANDREADAKIS, an Individual, Appellee.

No. 78-1210.

United States Court of Appeals,

Eighth Circuit.

Submitted May 19, 1978.

Decided June 20, 1978.

Rehearing and Rehearing En Banc Denied July 17, 1978.

Paul G. Neimann (on brief), Wiese & Cox, Minneapolis, Minn., argued, for appellant.

Charles W. Bradley, New York City (argued), and Robert F. Henson, Minneapolis, Minn., on brief, for appellee.

Before HEANEY and STEPHENSON, Circuit Judges, and BECKER, Senior District Judge. ^*

HEANEY, Circuit Judge.

Modern Controls, Inc., a Minnesota corporation, appeals from the denial of a preliminary injunction. It seeks preliminary and permanent injunctive relief for the breach of an employee confidentiality agreement executed by its former employee, Nicholas C. Andreadakis. In its complaint, Modern Controls alleges that Andreadakis violated the agreement's covenants not to compete or to disclose and use confidential information. After filing the complaint, Modern Controls moved for a preliminary injunction. The District Court denied the motion. ¹ We reverse and remand.

I.

Modern Controls is a relatively small company specializing in developing equipment used with computers. Andreadakis, who has a Ph.D. in physics, was employed by Modern Controls from January 27, 1976, until May 27, 1977. While at Modern Controls, Andreadakis helped develop a commercially marketable flat panel gas discharge display device used to display information from a computer to a computer user. ²

Prior to working for Modern Controls, Andreadakis had worked for Control Data Corporation for five years. For three of those years, he had assisted in developing the flat panel gas discharge display device which had the best commercial prospects of all the similar devices being tested by Control Data. William Mayer, an employee of Control Data and a member of the Board of Directors of Modern Controls, approached Andreadakis and others asking if they would be interested in working for Modern Controls to develop the device commercially. Andreadakis and another member of the team that worked with him expressed an interest. On January 13, 1976, Mayer brought them both a letter from Modern Controls confirming the oral offer of employment and affirming their acceptance of the offer. Mayer indicated to Andreadakis that he might have to sign a formal employment agreement similar to the one he had at Control Data. Andreadakis gave Control Data a two-week notice of termination and began work at Modern Controls on January 27, 1976.

On the first day of work, Andreadakis was requested to sign an employee confidentiality agreement. He initially refused to do so, but, nine weeks later, he signed it at the insistence of Modern Controls. He realized that the agreement's provisions would seriously restrict his employment if he were to leave Modern Controls, but he signed it because he could not afford to be unemployed. By the terms of the agreement, Andreadakis was to assign to Modern Controls his rights to any inventions developed during his employment and to refrain from disclosing any confidential information obtained while so employed. He also agreed to refrain from working for a competitor of Modern Controls for a two-year period after terminating his employment.

The covenant not to compete is at issue on appeal. ³ It provides that Andreadakis would not work for a competitor of Modern Controls for two years after leaving Modern Controls if the competitor produced or developed a product which Andreadakis worked on while employed at Modern Controls. If, however, the competitor was diversified, Andreadakis could work for the competitor in a division not producing or developing the competing product. Modern Controls agreed to pay Andreadakis his base salary at the time of his termination for two years if he quit but was unable to find comparable work because of the covenant.

In February or March of 1977, Andreadakis wrote to several companies seeking employment. He received an offer from the Burroughs Corporation and began work there on June 6, 1977. Burroughs was developing a flat panel gas discharge display device similar to that he had helped develop at Modern Controls. Andreadakis was immediately assigned to the division of Burroughs developing the device. He was working in that division at the time of this appeal.

In his letter of resignation from Modern Controls, dated May 13, 1977, Andreadakis failed to indicate he would soon be working for a competitor. Instead, he represented that while he did not know what he was going to do, he was leaving the area of research in which he had been involved and was considering a teaching position in the East. Modern Controls became aware of Andreadakis's employment at Burroughs only by accident and, shortly thereafter, brought this suit to enforce the covenant not to compete.

II.

The traditional test governing the issuance of preliminary injunctive relief is whether the moving party has shown substantial probability of success at trial and whether that party will suffer irreparable injury in the event the injunction is denied. ⁴ Fennell v. Butler, 570 F.2d 263, 264 (8th Cir. 1978); Minnesota Bearing Company v. White Motor Corporation, 470 F.2d 1323, 1326 (8th Cir. 1973). The District Court denied relief primarily on the ground that Modern Controls had not shown a substantial probability of success at trial because it believed the covenant not to compete was unenforceable for three reasons.

It first reasoned that the covenant lacked consideration as it was not ancillary to the initial employment agreement and was not supported by independent consideration. ⁵ We agree that the covenant was not ancillary to the initial oral employment contract and, thus, that the covenant not to compete can be sustained only if it is supported by independent consideration. We disagree, however, with the District Court's finding that there was no independent consideration.

Whether a covenant not to compete entered into after employment has commenced is supported by independent consideration is a question that has evoked considerable disagreement in the courts. Many courts support the position that continued employment constitutes sufficient consideration for a covenant not to compete. Annot., 51 A.L.R.3d 825, 835-839 (1973); Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 669 n. 145 (1960). Other courts require something in addition to the mere continuance of employment. Annot., 51 A.L.R.3d 825, 833-835 (1973). This "something in addition" may be a raise, a new position or an increased employment term. The Minnesota Supreme Court has not yet determined whether continued employment alone is sufficient consideration for a covenant not to compete. ⁶ We need not predict what the Minnesota Court would do, however, as the covenant not to compete was supported by something more than the mere continuance of employment. It was supported by an obligation on the part of Modern Controls to pay Andreadakis his base pay for two years if he could not find suitable work in another field. ⁷ See Bradford v. New York Times Company, 501 F.2d 51 (2d Cir. 1974).

Andreadakis argues, however, that Modern Controls is not in fact obligated to pay him the base salary if he is unable to find employment because the agreement provides that

(Modern Controls) is obligated to make such payments to me, upon my fulfillment of the conditions set forth above, for 24 consecutive months Unless (Modern Controls) gives me written permission to accept available employment, or gives me a written release from the obligations of (the covenant not to compete). (Emphasis added.)

Andreadakis contends that what appears to be an "obligation" is in fact a mere "option" running to the benefit of Modern Controls since it may avoid the payments by merely releasing him from the covenant.

Modern Controls does have an option but "a promise is not rendered insufficient as a consideration for a return promise by the fact that promisor is expressly given some option, or choice, between performances, provided that this option is not wholly unlimited." 1A A. Corbin, Contracts § 160 at 61 (2d ed. 1963). This option is not wholly unlimited for, if Modern Controls chooses to enforce the covenant, it becomes unconditionally bound to pay him if he is unemployed as a result of the covenant. If Modern Controls refuses to pay Andreadakis, it must release him from the covenant or become liable for breach of contract. Andreadakis's promise not to compete for two years and Modern Controls' promise to pay him his base salary for two years are both conditioned on Modern Controls' decision to enforce the covenant and both promises must either be performed together or not at all. See 1A A. Corbin, Contracts §§ 160, 161 (2d ed. 1963).

Second, the District Court reasoned that the covenant not to compete was unenforceable because Modern Controls had not proved that trade secrets existed with respect to the device. It erred in so holding. ⁸

The Minnesota Supreme Court has held that confidential business information which does not rise to the level of a trade secret can be protected by a properly drawn covenant not to compete. Walker Employment Service, Inc. v. Parkhurst, 300 Minn. 264, 219 N.W.2d 437 (1974); Bennett v. Storz Broadcasting Co., 270 Minn. 525, 134 N.W.2d 892 (1965). Cf. Equipment Advertiser, Inc. v. Harris, 271 Minn. 451, 458, 136 N.W.2d 302, 306 (1965). See generally Blake, Employee Agreements Not to Compete, supra at 669 n. 146. To require an employer to prove the existence of trade secrets prior to enforcement of a covenant not to compete may defeat the only purpose for which the covenant exists. An employer need only show that an employee had access to confidential information and a court will then determine the overall reasonableness of the covenant in light of the interest...