Central Adjustment Bureau, Inc. v. Ingram
678 S.W. 2d 28, 1984 Tenn. LEXIS 847 (1984)
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Rule of Law:
Continued at-will employment for a substantial period constitutes sufficient consideration to support a non-competition covenant signed after employment has begun. Additionally, courts may judicially modify the terms of an unreasonably broad non-competition covenant to make it reasonable and enforceable, unless there is evidence of the employer's bad faith.
Facts:
- Central Adjustment Bureau (CAB), a national debt collection agency, hired Henry Ingram, Richard Goostree, and James Bjorkholm.
- Shortly after each employee began working, CAB required them to sign an identical non-competition covenant as a condition of their continued employment.
- The covenant prohibited employees from competing with CAB anywhere in the United States for two years after their employment ended.
- Ingram and Goostree worked for CAB for seven years after signing, receiving multiple promotions and salary increases, while Bjorkholm worked for CAB for two years.
- While still employed by CAB, Ingram began taking steps to form a competing company, Ingram & Associates, including incorporating the business and obtaining confidential client lists from CAB.
- Ingram, Goostree, and Bjorkholm voluntarily resigned from CAB and immediately began operating Ingram & Associates in direct competition with CAB.
- The newly formed Ingram & Associates used confidential information and client contacts acquired at CAB to solicit CAB's customers, often undercutting CAB's commission rates.
- The non-competition agreement contained a clause stating that if a court found it unreasonable, the court could enforce it for a period of time and within an area determined to be reasonable.
Procedural Posture:
- Central Adjustment Bureau, Inc. (CAB) sued its former employees in the Chancery Court, a state trial court, seeking an injunction and damages for breach of the non-competition covenants.
- The Chancellor (trial judge) found the covenants were unreasonably broad but judicially modified their time and scope, enforcing the modified versions against the defendants.
- The Chancellor also awarded CAB $80,000 in damages.
- The defendants-appellants appealed to the Tennessee Court of Appeals, an intermediate appellate court.
- The Court of Appeals reversed the trial court's ruling on the covenants, holding they were entirely unenforceable due to lack of consideration and their unreasonable breadth.
- CAB, as plaintiff-appellant, appealed the Court of Appeals' decision regarding the covenants to the Supreme Court of Tennessee.
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Issue:
Is a non-competition agreement signed by an at-will employee after commencing employment enforceable if it is supported by continued employment and its overly broad terms are judicially modified by the court to be reasonable?
Opinions:
Majority - Drowota, Justice
Yes. A non-competition agreement signed by an at-will employee after commencing employment is enforceable if supported by substantial continued employment, and its overly broad terms may be judicially modified by the court to be reasonable. The court distinguished its prior holding in Ray Moss, clarifying that while a mere promise of continued employment is not consideration, the actual performance of continued employment for a substantial period is sufficient consideration to make the covenant binding. Here, the defendants worked for CAB for several years after signing, and two of them received significant promotions and pay raises, which rendered the covenants enforceable. Regarding modification, the court rejected the traditional 'all or nothing' and 'blue pencil' rules, adopting the 'rule of reasonableness.' This modern approach allows a court to enforce an overly broad covenant to the extent reasonably necessary to protect the employer’s legitimate interests, provided there is no evidence of bad faith on the employer's part. The Chancellor's modification of the covenant's terms was therefore a proper exercise of judicial authority.
Dissenting - Brock, Justice
No. A non-competition agreement entered into after employment begins is unenforceable for lack of consideration, and courts should not rewrite invalid contracts for the parties. The dissent argued that continued employment is not valid consideration because it was not bargained for; the covenants were imposed on the employees after they had already committed to the job, leaving them with no real bargaining power. Subsequent promotions were not given in exchange for the covenants and therefore cannot serve as consideration. Furthermore, judicial modification of unreasonable covenants is improper because it encourages employers to draft oppressive, 'in terrorem' agreements, knowing that courts will simply pare them down and enforce them to some extent. This practice places the court in the position of making new contracts for the parties and provokes needless litigation, as employers have nothing to lose by overreaching.
Analysis:
This case significantly altered Tennessee law by establishing two key principles for non-competition agreements. First, it resolved a major question on consideration by holding that actual, substantial continued employment, rather than just the promise of it, can validate a covenant signed post-hire. Second, it adopted the modern 'rule of reasonableness' for judicial modification, empowering courts to reform and enforce overly broad covenants. This holding moves Tennessee away from the harsher, all-or-nothing approach, providing more protection for employers' legitimate business interests but also raising the concern, highlighted by the dissent, that it may incentivize employers to draft overly broad covenants without risk.
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