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Central Adjustment Bureau, Inc. v. Ingram

    Brief Fact Summary. P brought suit against D seeking compensatory and injunctive relief for breach of a non-compete covenant.

    Synopsis of Rule of Law. There is a valid consideration when a non-compete covenant is signed after employment has begun and the employee continues to work for the employer for an appreciable length of time.

    Facts. Ingram (D) worked at Central Adjustment Bureau (P), a corporation.  D was working for P for one week when P indicated that D must sign a non-compete clause. Initially D objected, but when threatened with termination, he signed.  D left P to form Ingram & Associates.  Ingram & Associates competed directly with P.  P brought suit against D seeking compensatory and injunctive relief for breach of the non-compete covenant.  The Chancellor awarded P $80,000 and injunctive relief.  The Court of Appeals reversed the Chancellor, holding that the covenants were unenforceable for lack of consideration.  P appealed.

    Issue. Is there a valid consideration when a non-compete covenant is signed after employment has begun and the employee continues to work for the employer?

    Held. Yes.  The judgment of the Court of Appeals is reversed and the judgment of the Chancellor is affirmed.
    •    A covenant signed prior to, contemporaneously with or shortly after employment begins is part of the original agreement and is supported by an adequate consideration.
    •    Where there has been full or substantial performance by one party to a bilateral contract, originally invalid for want of mutuality of obligation, the other party cannot refuse performance after receiving the promised benefits.  In this case, the court held the covenant binding against D because of the length of employment of D.
    •    Even when the covenant is not signed until after employment has begun, courts in some states have found continued employment to be sufficient consideration.  Some of these courts reason that the mutual promises of the parties as to continued employment form a binding bilateral contract with the promise of employment constituting a sufficient consideration.
    •    A covenant is enforceable if the employer continues to employ the employee for an appreciable length of time after he signs the covenant, and the employee severs his relationship with his employer by voluntarily quitting.  In this case, D left voluntarily.  There was no evidence that P acted in bad faith or with unclean hands.

    Dissent. P did not present the covenant to D until after employment had begun.  At that point the covenants were not the subject of free bargaining.  D had little choice but to sign.  There was no guarantee that the employee would not be terminated even if he signed the non-compete agreement; the employer furnished no consideration.  A valid consideration is not a promotion or increased pay because for an act to constitute a valid consideration for a promise it must have been bargained for and given in exchange for the covenant.  The covenant fails for lack of consideration.

    Discussion. Although there was no consideration when D, already an employee, signed the covenant, continued employment provided a necessary consideration to make the covenant enforceable.


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