Contracts containing restrictive covenants prohibiting certain types of competition are commonplace in employment and business contracts. Because these agreements are contracts, Michigan courts have not historically looked into the sufficiency of consideration, since the longstanding Michigan rule is that sufficiency of consideration is not a matter for legal review. The Michigan Supreme Court, in a 2002 case, has commented that a “cent or a pepper corn, in legal estimation, would constitute a valuable consideration.” Essentially, this means that courts refrain from evaluating the quality of the deal, i.e., whether it was good or bad for one party.
This underpinning has been the basis for court holdings stating that in Michigan continued at-will employment is sufficient consideration to support noncompete restrictive covenants. Other states have deviated from this rule. Notably, an important Illinois decision held that employment alone is insufficient consideration to support a restrictive covenant agreement unless the employment continues for two years or more, even if the agreement is signed when the employee is hired. Fifield v. Premier Dealer Services, Inc., 2013 IL App (1st) 120327.
In the recent Michigan case, Innovations Ventures, LLC v. Liquid Manufacturing, LLC, the parties engaged in business under a verbal agreement. Later the parties decided to memorialize their relationship with a written contract. The agreement provided for continued business relations plus a new confidentiality provision and a new noncompete provision. Within days, Innovations Ventures cancelled the contract and, after the 14-day notice period, the business relationship ended. Thereafter, Liquid Manufacturing began competing and Innovations Venture brought suit.
Many issues were raised in litigation, however, this article will focus only on those portions dealing with required consideration for the noncompete agreement. The trial court granted summary judgment for the defendants on the theory that there was insufficient consideration. The court of appeals upheld the lower court’s decision, but focused itself upon failure of consideration. The court of appeals wrote, “discontinuation of the business/employment relationship within two weeks of the signing of agreements constituted a failure of consideration.”
Michigan Supreme Court’s Holding
The Michigan Supreme Court reversed the lower courts’ decisions, ruling that sufficient consideration existed and there was no failure of consideration. Its reasoning was straight to the point on both fronts. Sufficient consideration existed because one side agreed to continued business and, in exchange, the other agreed to a noncompete restriction. Plainly, the Michigan Supreme Court really means that a cent or a peppercorn constitutes consideration—and so does the mere assent to engage in business with another. The failure of consideration argument was likewise quickly swatted aside. The court noted that failure of consideration generally arises when the side that committed the first material breach tries to enforce the agreement against the other party. Therefore, in the Innovation Ventures situation, there was no first material breach because the contract itself stated that a party could terminate the contract at any time without cause. In the court’s eye the “Agreement[s] were not void for a failure of consideration because the parties exercised their rights as plainly contemplated by the contract.”
A footnote in the decision specifically states that the decision was limited to contracts between sophisticated businesses. The court wrote, “We decline to address . . . whether failure of consideration applies to at-will employees who sign a noncompete agreement after at-will employment has started.” Nevertheless, the theory and argument could have application to the employment situation and it may prove to be difficult to factually distinguish employment contracts from the case’s scope. Specifically, Innovation Ventures could be argued to stand for the proposition that when employment may be terminated at will, there is no failure of consideration when the employer exercises that contractual right—no matter how soon the termination occurs after the parties enter into the contract.
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