Simko, Inc. v. Graymar Co., 1496

• Decision Date: 09 September 1983
• Docket Number: No. 1496,1496
• Citation: 55 Md.App. 561,464 A.2d 1104
• Parties: SIMKO, INC. et al. v. GRAYMAR COMPANY.
• Court: Court of Special Appeals of Maryland

Page 561

55 Md.App. 561

464 A.2d 1104

SIMKO, INC. et al. v. GRAYMAR COMPANY.

No. 1496.

Court of Special Appeals of Maryland.

Sept. 9, 1983.

William A. Snyder, Jr. and Kevin A. Dunne, Baltimore, with whom were Ober, Grimes & Shriver, Baltimore, on brief, for appellants.

Steven K. Fedder, Baltimore, with whom were Ann MacNeille and Weinberg & Green, Baltimore, on brief, for appellee.

Argued before WEANT, GETTY and BLACKWELL, ALBERT T., Jr. (Specially Assigned), JJ.

WEANT, Judge.

In 1971, Paul H. Smith, an employee of the Graymar Company, was asked, along with all other Graymar salesmen, to sign an agreement not to compete with Graymar should they ever leave its employ. Smith declined. Thereafter Smith was informed that he would be fired if he did not so agree. Because his wife was pregnant with their first child and he was facing embarrassment, he knuckled under and signed the agreement providing that he would not compete with Graymar for one full year within a "50 mile radius from the City of Baltimore."

During his employment with Graymar, Smith was compensated on a commission plus bonus basis. However, in 1980 Smith experienced difficulties in collecting his bonus. It was at that time that Smith decided to leave Graymar and set up his own business. He, along with Karl Knab, a Graymar service technician, formed Simko, Inc. In May of 1981 they met with Jack B. Miller, one of the owners of Graymar, and informed him of their decision. Smith and Knab departed amicably from Graymar on 4 September 1981. In October of that year Graymar, relying on the non-competition agreement, demanded that Smith, Knab and Simko stop competing with Graymar. This the alleged competitors refused to do, resulting in a bill of Complaint being filed in the Circuit Court for Baltimore City by Graymar requesting injunctive relief and imposition of a constructive trust upon Simko's profits. The matter was initially heard by a general equity master whose findings were excepted to by Smith and Simko. Judge Joseph H.H. Kaplan denied the exceptions, adopted the Master's Report and Recommendations and issued an interlocutory order enjoining Smith and Simko from soliciting, negotiating, contracting, or attempting to engage in the sale or maintenance of business machinery or office equipment to certain Graymar customers. The determination of damages has been stayed pursuant to Rule 605 a pending this appeal by Simko and Paul H. Smith. The following issues have been raised:

1. Is an employer's mere continuation of the employment of an at-will employee insufficient consideration to support a post-employment covenant not to compete with the employer?

2. Did the lower court err in finding that [appellant] Paul H. Smith had not signed the covenant under duress?

3. Does the 1974 employment contract supersede the prior employment arrangement?

4. Did Graymar materially breach the employment agreement by failing to pay [appellant's] 1980 bonus, by failing to pay [appellant] a commission on a $130,000 sale, and by unilaterally canceling a benefit conferred upon [appellant] as part of his employment contract?

5. Did the Master err in failing to find that Graymar's actions in failing to alert [protest] during negotiations with Simko; Graymar's signing of contracts with Simko; and, Jack Miller's explicit approval to Simko to submit a bid for business with a Graymar customer, constituted a waiver by Graymar of any rights under the covenant not to compete?

6. Are Smith and Simko free to bid on service contracts, where the agreement was drafted by Graymar and by its terms prohibits only sales of goods, wares, and merchandise?

1.

Heretofore, neither the Court of Appeals nor this Court has considered the precise question of whether continued employment of an at-will employee is sufficient consideration to support a covenant not to compete against his employer. The general rule in Maryland regarding the enforceability of restrictive covenants in employment contracts was stated in Becker v. Bailey, 268 Md. 93, 96, 299 A.2d 835 (1973):

if ... supported by adequate consideration and is ancillary to the employment contract, an employee's agreement not to compete with his employer will be upheld 'if the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose undue hardship on the employee or disregard the interests of the public.'

In Dahl v. Brunswick Corporation, 277 Md. 471, 356 A.2d 221 (1976), the employer initiated a policy of granting severance pay. An action was brought by twenty-one former employees to enforce this promise. The Court of Appeals held:

... there is abundant support for the proposition that employer policy directives regarding aspects of the employment relation become contractual obligations when, with knowledge of their existence, employees start or continue to work for the employer. [Id. at 476, 356 A.2d 221, emphasis added.]

The appellant makes the bald assertion that Dahl cannot and does not apply to the case sub judice for the reasons that: (1) employees as opposed to the employer were seeking to have the contract enforced, (2) the employee gave up nothing to receive a new benefit that the employer was bestowing upon all employees, (3) the instant case involves restraints of trade while the Dahl case does not.

The employees' continued service was determined to be consideration for the employer's promise of severance pay in Dahl. In the case at bar, the employer consented not to terminate the employment relationship in return for the employee's covenant not to compete. The employment at-will relationship is mutual in that, generally, either party may terminate the relationship at any time. Given the inherent mutality, we see no basis for distinguishing the employee's consent to continue from the flip side of the coin--the employer's consent not to terminate.

Finally, appellant's third attempt at distinguishing Dahl confuses the necessity of consideration for the information of a contract with public policy concerns which may render the existing contract unenforceable. One who purchases the winning subscription to an illegal lottery is denied access to the courts to collect his winnings not because of the lack of contractual consideration but because the agreement violates public policy.

As noted by the trial judge, the viewpoint which holds that continuation of an at-will employee is not sufficient consideration for a covenant not to compete represents the distinct minority. See, e.g., Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279 (1974); Forrest Paschal Machinery Co. v. Milholen, 27 N.C.App. 678, 220 S.E.2d 190 (1975); and Morgan Lumber Sales Co. v. Toth, 41 Ohio Misc. 17, 321 N.E.2d 907 (1974). The approach taken by these courts has been checkered. The most persuasive rationale for deeming the continuation of an at-will employee to be insufficient consideration was set forth in Kadis v. Britt, 224 N.C. 154, 29 S.E.2d 543, 548 (1944):

A consideration cannot be constituted out of something that is given and taken in the same breath--of an employment which need not last longer than the ink is dry upon the signature of the employee, as where the performance of the promise is under the definite threat of discharge. Unemployment at a future time is disturbing--its immediacy is formidable. The choice may be expected.

The contrary or majority position holding that continued employment of an at-will employee does constitute sufficient consideration for a restrictive covenant has been adopted by at least eleven jurisdictions. See Hogan v. Bergen Brunswiq Corporation, 153 N.J.Super. 37, 378 A.2d 1164 (App.Div.1977) and cases cited therein. The court in Hogan held:

The existence of sufficient consideration to support a post-employment restraint may be found in either the original contract of employment or in a post-employment contract, where the supporting consideration is at least, in part, the continuation of employment ....

A verbalized threat of immediate discharge in the event the employee does not sign a proposed restrictive covenant is not necessary to constitute the consideration required to support a post-employment contract. Such a consequence can be inferred from conduct. Here the request for the restrictive covenant, ... indicates that the employer was insisting upon its execution. The continuation of the plaintiff's employment for approximately three years after he signed the letter which acknowledges the covenant also provides consideration for the restrictive covenant.

Generally, the courts in the majority position have found sufficient consideration for the restrictive covenant in either the agreement not to discharge or in the continued employment for a substantial period of time after execution of the restrictive covenant. In the instant case, the threat of discharge was the express and galvanizing force which prompted Smith's acquiescence. Also, Smith remained in Graymar's employ for a period of ten years after executing the restrictive covenant before he decided to leave and go into competition. Thus, both forms of consideration recognized by the majority courts were present in this case.

We think the way to handle the court's objection in Kadis, supra, is to look to the facts and circumstances of each case. 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 the restrictive covenant. Rather than adopt a 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...