Test time! Is the following non-competition agreement enforceable?
“Frank, a Jimmy John’s franchisee, hired his nephew, Nick, to begin working at his Jimmy John’s franchise in Ohio. Three months after Nick started working, Frank realized that Nick never returned the noncompete agreement he gave Nick during their initial discussions about the job. The non-compete agreement states that Nick is prohibited from participating in another sub shop within 15 miles while employed and for two years following employment.
Frank has trusted Nick with recipes and procedures that are proprietary and trade secrets of Jimmy John’s, so Frank wants to be sure his entrepreneurial minded nephew doesn’t get any funny ideas about starting his own neighborhood sub shop.
When Frank approached Nick about signing the non-compete agreement, Nick said he forgot and promptly signed and returned the agreement to Nick. Two months later, Nick quits to open up Nick’s Original Gourmet Subs a few blocks away. It’s modern decor and authentic rocker vibe is attracting Frank’s customers away, and Frank’s sales drop 40%. Frank sues Nick for breaching his non-compete agreement. Who wins?
Hint: The issue is whether an employee’s continued employment is sufficient consideration (is it enough benefit) for the employee to make the agreement enforceable.
The short answer is… it depends what state you are in. In Ohio, it would be enforceable. In Washington, South Carolina, Colorado and Minnesota, the non-compete agreement would not be enforceable because continued employment IS NOT sufficient consideration, courts require more benefit such as a pay raise. In Illinois, the outcome is uncertain. Illinois courts have held that continued employment for a “substantial period of time” will constitute sufficient consideration. The length of time that the employee remains on the job, along with the manner in which the employment ends, are relevant factors for Illinois courts to consider when examining the validity of afterthought covenants.
In the above example, not only is Frank going to have a tough time stopping Nick, but Frank likely violated his franchise agreement which has it’s own set of ramifications. So the lesson is don’t do casual hires! Seemingly minor legal oversights can sink you.