Required Consideration Lacking For Replacement Employment Contract

LR-Conference-Table-Men-FolderA September 23rd Connecticut Appellate Court decision tells a cautionary tale for employers drafting employment contracts intended to replace earlier contracts. Thoma v. Oxford Performance Materials, Inc., 2014 WL 4548490 (Conn. App.).

In Thoma, the employee’s first contract gave her the right to a generous severance if the employer terminated her without cause. It also contained a six month post-employment non-compete. Almost immediately after the employee signed the first contract, the employer’s board regretted its award of severance and created a new, replacement agreement with no severance provision. The employee signed the second agreement, which included an explicit statement that it superseded all prior agreements, including the one with the six-month severance. Some eleven months later, the employer terminated her without cause. Based on the replacement agreement, it paid her no severance. The employee sued for severance under the first agreement, and, surprisingly, she won.

The critical issue was whether there was consideration for the second agreement – a new benefit flowing to the employee. If there were none, as the employee contended, the agreement would be invalid. It would not supersede the first agreement. The first agreement would apply, and the employee would have the right to severance.

The employer insisted there was consideration for the second agreement – the elimination of the six month post-employment non-compete, and its replacement with a less burdensome non-compete applicable only during the employee’s employment. It pointed to §1.2 of the agreement which imposed an obligation not-to-compete only “during the period of [her] employment with [the employer].” The employee acknowledged §1.2, but pointed to §1.1, which stated that if she were fired or quit, she “shall continue to comply with the provisions of section 1.2.” She argued that these provisions were inconsistent and incapable of being reconciled by a reasonable construction, and that under these circumstances, the second contract was ambiguous as to the duration of its non-compete. Was it for the period of employment only, as §1.2 stated, or was it for an indefinite time post-employment, as §1.1 indicated? If it was for an indefinite time post-employment, the covenant would be more burdensome, the foregoing of the six-month noncompete would not have produced a benefit for the employee, and there would therefore be no consideration for the second agreement.

The trial court and the Appellate Court ruled for the employee, agreeing with her that the duration of the noncompete in the second agreement was unclear. Therefore, it reasoned that it was also unclear whether the covenant in the second agreement was more or less burdensome than the covenant in the first agreement. Given, this lack of clarity, the courts determined that the second agreement was not supported by consideration.

The lesson for employers: Make sure your employment agreements are clear; avoid conflicting provisions; and always be mindful of the need for consideration – providing a benefit to the employee, something the employee didn’t already have – when creating an employment agreement intended to replace an earlier agreement.