Central Adjustment Bureau, Inc. v. Ingram

Central Adjustment Bureau, Inc. v. Ingram

• Three former employees of CAB had signed agreements not to compete CAB (debt collection business).
• Value in business is based on knowledge and relationships (‘intangible assets’ rather than ‘tangible assets’).
• Probably the norm rather than the exception to have non-compete covenants in this sort of business.
• Agreement bound employees for two years; if agreement had been ‘forever’ court would not have enforced it based on policy of not hampering trade.
• Question is whether there was consideration given in return for non-compete agreement.
1984 Supreme Court of Tennessee (cb53)

• Time in contract was two years non-competition (fairly typical), all of United States (expansive, but not unreasonable given CAB’s operations in all 50 states).
• Historically, Anglo-American policy has looked askance at Restraints on Trade, similar to Property Law prohibitions on Restraints on Alienation.
• Policy to allow people to earn living also goes against non-competition agreements.
• Courts examine non-competition agreements carefully, and they must be reasonable in time, area, and business reasons.
• Lower court modified agreement (probably in geographic scope, not clear from facts of this case).
• If you had a cardiologist practice in Buffalo, a court would likely enforce non-competition agreement that applied to Buffalo but not for whole state. CAB has tougher issue because scope is so wide.
• Agreement included provision to pay all costs of litigation
• Was there consideration on the part of the employer for the promise? ? How long after employment started did employee sign contract–future employment as consideration. But employees were already employed by CAB when they signed non-competition agreements. Court sees recency of hiring to suggest that non-competition is part of “original employment agreement”. Would have been better for CAB if employees had signed contract and been informed of it before they started working.
? Company threatened to fire Ingram if he refused to sign agreement, suggests that there may not have been a real ‘bargain’. “Sign here, or you’ll be fired.”
? Promise of continued employment. Employment is generally held to be ‘at will’–employer has immediate right to terminate employment, but agrees not to terminate immediately if employee signs non-compete agreement. If no time period is specified, however, promise could be entirely illusory.
? Actual continued employment. Not only does company promise to continue to employ, but it does continue to employ. Actual performance has converted this from bilateral contract to unilateral contract. Promise may not have been sufficient but when employer actually performed (continued employment) it became binding. Problem: Traditionally actual performance can’t substitute for promise and promise can’t substitute for actual performance. At no time did CAB give up right to fire employees.
? Beneficial changes. Employees had raises and promotions. This could constitute consideration.

• Court finds sufficient consideration, including all these different ‘possible’ sources.
• What errors did Ingram make? ? Taking information, soliciting clients from CAB while he was still working for them.
? Ingram was agent of CAB, owes duties to employer.

• Why are non-compete agreements often not enforced? ? Enforcement is expensive, particularly with low level employee.
? Employer may be involved in same conduct (recruiting).
? Pace of litigation, time of agreement may have expired.

• Why enforce non-compete agreements? ? Repeat players. No one will be scared of non-compete agreements if they know they are never litigated.

Issue of employee handbooks with employee at will: ‘you will not be terminated without cause’, then handbook was changed to ‘with or without cause’. Was there consideration for the original agreement or the modified one? Courts disagree on whether this sort of change can be made unilaterally. If no, employer may have disincentive to ever adopt this sort of policy if they can’t ever get rid of it.

Conclusion

Notes

See Also

References and Further Reading

About the Author/s and Reviewer/s

Author: international

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