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Restrictive covenants in employment contracts will be enforced if they are reasonable under the particular circumstances. The rule of reasonableness applies to consideration as well as to other matters such as territorial and time limitations.
Defendant former employees of Central Adjustment Bureau (“CAB”) had signed covenants not to compete with CAB. The defendants left CAB to form a company which competed directly with CAB. Consequently, CAB brought suit in Chancery Court seeking both compensatory and injunctive relief. According to CAB's allegations, the defendants were liable in tort and for breach of the non-competition covenants. The Chancellor found that the non-competition covenants were unreasonably broad with regard to geographical and time limitations. The Chancellor, however, modified these restrictions enforcing them as modified by injunctive relief. The Court of Appeals reversed the Chancellor on the issue of the covenant not to compete, holding that the covenants were unenforceable for lack of consideration. As an additional ground for its decision, it held, without discussing the issue of modification, that the covenants were unenforceable because they were unreasonably broad in their geographic and time limitations.
Were the restrictive covenants unenforceable for lack of consideration and for being broad in their geographic and time limitations?
The court found that because defendants had continued working for plaintiff after signing the covenants, they could not assert lack of consideration. The court found that though a promise of continued employment was not adequate, defendants' actual continuing employment with plaintiff constituted substantial performance and was sufficient consideration. The court also found that though the covenant's two-year, nationwide restrictions on competition were unreasonably broad, the trial court had properly modified them to the extent reasonably necessary to protect plaintiff's interests, so defendant had no cause to complain. Accordingly, the court reversed the appellate court’s judgment.