3.2 Contract Formation

• Library: Virginia Employment Practices and Forms (Virginia CLE) (2015 Ed.)

3.2 CONTRACT FORMATION

3.201 Consideration.

A. In General. With noncompetition agreements, as with all contracts, the essential elements for the formation of a contract must be present. Consequently, a covenant not to compete is unenforceable unless supported by adequate consideration.

As a general rule, when a covenant not to compete is attached to or part of an employment contract or offer, the employer's agreement to hire the employee is sufficient consideration to support the employee's promise not to

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compete upon termination of the employment. ⁹ A more difficult question arises when an existing employee is required to sign a noncompetition agreement as a condition of continuing employment and without any corresponding change in status or compensation.

In a 1989 decision, Paramount Termite Control Co. v. Rector, ¹⁰ the Virginia Supreme Court appeared to have resolved this issue by holding that a covenant entered into after the inception of employment is supported by consideration if the parties subsequently perform, namely, the employee remains in the employment of the employer and receives compensation normally attributable to the relationship. But in 2002 the United States District Court for the Eastern District of Virginia held, without reference to Rector, that continuation of employment did not furnish the consideration necessary to create a valid restrictive covenant in Virginia, although the court's ruling may have turned on whether the employee was informed that his failure to sign the covenant would result in his termination. ¹¹

More recently, however, Virginia circuit courts have applied the holding in Rector, reasoning that continued employment constitutes sufficient consideration to support an employee's covenant not to compete. ¹²

B. Cases Finding Continued Employment as Sufficient Consideration.

1. International Paper Co. v. Gilliam. ¹³ An employee who left his employment with the plaintiff employer after 23 years argued that the restrictive covenant he signed after 21 years of service was void for lack of consideration, citing Mona Electric Group, Inc. v. Truland Service Corp. ¹⁴ in support of his argument. The court disagreed, noting that the federal court in Mona Electric Group contained an "inaccurate statement of law," given the Virginia Supreme Court's ruling in Rector. The employee's demurrer to the breach of contract claim on the basis of lack of consideration was thus overruled.

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2. Paramount Termite Control Co. v. Rector. ¹⁵ In Rector, five employees entered into written noncompetition agreements as a condition of their continued at-will employment. When their employer sought to enforce the agreement against the employees after they terminated their employment, the employees argued that because they were already employed when they signed the agreements, there was no consideration for their covenants not to compete.

The Virginia Supreme Court held that continued employment after an agreement with an employee already working supplies the necessary consideration to support a later agreement to be bound by a covenant not to compete. The court stated: "Even though Paramount could have terminated the employees at its will after they signed the non-competition agreements, Paramount continued to employ them and give them access to valuable information. This supplied the consideration for their promise not to compete." ¹⁶

3. Zuccari, Inc. v. Adams. ¹⁷ This circuit court opinion cites Paramount and recognizes that "[i]n an at-will employment situation, such as the one here, if the employer continues the employee's employment after the employee signs the contract containing the covenant not to compete, the continuing employment relationship supplies the consideration for the covenant not to compete." ¹⁸

C. Cases Finding Continued Employment as Not Sufficient Consideration.

1. Mona Electric Group, Inc. v. Truland Service Corp. ¹⁹ In Mona Electric Group, the plaintiff, an electrical service contractor, asserted a claim for tortious interference with contract against a competitor that hired away a field service manager. The manager had signed a one-year nonsolicitation agreement during his employment with the plaintiff. In his new position, the plaintiff alleged, the former employee solicited customers for the competitor in violation of the agreement. The court found, however, that no valid contract existed for purposes of the tortious interference claim because the restrictive covenant signed by the employee was void for lack of consideration.

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Surprisingly, in light of the Rector decision, the federal court stated that "[n]either the Fourth Circuit nor the Supreme Court of Virginia has addressed this issue." ²⁰ The Rector decision is not referred to in the court's opinion. The court then noted that the employee was not informed at the time he executed the agreement that "failure to sign the agreement would result in...