non competes Require Real Consideration to be Enforceable

December 2, 2015
Sally Abrahamson

A New York trial court recently addressed the issue of adequate consideration for a non compete, finding that now-lapsed stock options were not adequate consideration, nor was continued employment where the agreement stated that the employer maintained the right to terminate the employees at will.

Like any contract, a non compete agreement must be supported by adequate consideration; the employee agreeing to the restriction must receive some benefit of the bargain. A cash bonus or other compensation to which the employee is not already entitled is a good example of this. But what if that compensation is in the form of stock options the employee never exercises? And if that is not adequate consideration, then is the employee’s continued employment sufficient? In a number of jurisdictions, including New York, continued employment is generally deemed adequate consideration for subjecting an at-will employee (an employee who can be fired at any time) to a non compete. But is this true if the actual language of the agreement does not support this interpretation of the employment arrangement? For one New York employer, the answer to both these questions was found to be no.

In the case in question, NBTY, Inc. v. Vigliante, 2015 WL 7694865 (Suffolk Cty Sup. Ct., Nov. 24, 2015), three employees of the plaintiff company, NBTY, resigned and went to work for a direct competitor. Each had signed a stock option agreement containing a non compete several years into his or her employment with NBTY. At the time of resignation, none of the employees had exercised the options, and, per the agreement, the options expired 90 days after their employment ceased. Nevertheless, NBTY sued to enforce the non compete.

NBTY argued, among other things, that the option to purchase company stock was adequate consideration for the non compete. Since the employees let the options lapse by not exercising them within the 90-day post-employment window prescribed under the agreement, the court found that the employees had knowingly forfeited the options and the agreements had expired. The court cited the employee choice doctrine on this point, which holds that if benefits are conditioned upon complying with a non compete, the employee has the choice of complying and keeping the benefits or competing and forfeiting them.

The court then considered whether the employees’ continued employment after signing the agreements was adequate consideration for the non competes. Answering this question in the negative, the court pointed out that the agreements explicitly stated that the employees were not induced to sign them as a requirement of or in exchange for continued employment, and also stated that nothing Therein conferred upon the employees the right to continued employment. In other words, the employer had included standard language in the agreements designed to protect its own interest in maintaining the employees’ status as at-will employees, but that very language led to the non compete being found unenforceable. The court was applying Delaware law, but its rationale could easily be applied under New York law as well.

The takeaway here is not that employees are now free to violate any non compete agreement that contains language preserving the at-will relationship. This was, after all, merely a trial court decision. But the decision does indicate that employers should not expect to have it both ways – to refuse to enter into an employment contract with an at-will employee while also relying on that employee’s continued employment as sole consideration for a non compete.

(*Prior results do not guarantee a similar outcome.)