Share
Explore BrainMass

Company Contract and Employee Agreement Legal Situations

Company A enters into an employment agreement with Sales Manager. The employment agreement provides that, upon termination of the agreement, Sales Manager is prohibited from working for any competitor of Company A in any capacity for ten years. The agreement also provides that, in the event of a breach of this covenant, Sales Manager will be liable for $5,000,000 in liquidated damages.
- Is the covenant an enforceable agreement in restraint of trade? Why or why not?
- If you believe that the covenant is unenforceable, what changes would you recommend to make it enforceable?
- Sales Manager leaves Company A and goes to work for Company B, a competitor of Company A. Company A sues and demands payment of $5,000,000 in liquidated damages. Assuming the agreement in partial restraint of trade is otherwise enforceable, will Company A be entitled to a judgment in the amount of $5,000,000 against Sales Manager? Why or why not?

Company A enters into an agreement with Company B to purchase widgets from Company B for a two-year period. The contract sets forth quality standards that require at least 95% of the widgets to be suitable for Company A's purposes. From the first month of the arrangement, only 90% of the widgets met the quality standards. At first, Company A does not advise Company B of the problem because Company A needs to keep its production line moving and it hopes that Acme will improve its performance. However, after six months, Company A wants to terminate the contract.
- What contract clause or clauses should Company A review before terminating the agreement?
- Assume the same facts except Company A's Production Manager orally tells Company B that it can live with the 90% quality level but Company B needs to improve its performance. Does this modify the contract? What contract clause or clauses would you review to determine your answer to this question and why? Would your answer be different if the Production Manager sent a letter? Why or why not?
- What defenses could Company B assert against Company A?
- Assume that Company B sues Company A. Since Company B is a small company with few resources, Company B wants to recover its attorneys' fees. Is this possible? What contract clauses should be reviewed and why?

Company A enters into a contract with Company B that requires Company B to use its best efforts to create a positive public image for Company A in consideration for payment in the amount of $10,000 per month. After three months, Company B has placed only one newspaper article about Company A, and Company A stops making the $10,000 per month payments.
- What contract clause or clauses should Company A review before stopping payments?
- What claims are Company A likely to make against Company B?
- What defenses are Company B likely to assert against Company A?
- Would it make any difference if the contract required "commercially reasonable best efforts"? Why or why not?

Solution Preview

When Can a Former Employee Challenge a Restrictive Covenant? By: Miles, Michael J., Employment & Labor Relations Law, 19373406, Winter2012, Vol. 10, Issue

Company A enters into an employment agreement with Sales Manager. The employment agreement provides that, upon termination of the agreement, Sales Manager is prohibited from working for any competitor of Company A in any capacity for ten years. The agreement also provides that, in the event of a breach of this covenant, Sales Manager will be liable for $5,000,000 in liquidated damages.

- Is the covenant an enforceable agreement in restraint of trade? Why or why not?

Employment law enables former employees such as the sales manager to question the validity of a restrictive covenant such as a noncompetition or non-solicitation agreement with his or her former employer, when it has been breached. The law gives the former employee to argue that the restrictive covenant was invalid. When deciding if a covenant is enforceable YOU must pay attention to the Uniform Declaratory Judgment Act in the state that you reside as different states have different paradigms for determining when a case or controversy or actual controversy exists in regard to the validity of restrictive covenants such as the one for this scenario.

In this scenario the enforceability of the covenant will be predicated upon the judgment of whether the stipulations included are overbroad, which I believe that they are because it restricts the employee from seeking another form of employment for 10 years and assesses a 5 million dollar fine. I would say that this is unenforceable, but as I stated in the beginning of this summary, the employee does have legal recourse because he or she has breached the covenant by being hired by a rival company. Whether a legitimate controversy exists is difficult and challenging to answer without all the facts in your state's law, but I cannot fathom this being a enforceable covenant.

- If you believe that the covenant is unenforceable, what changes would you recommend to make it enforceable?

There are changes that could be made that would figuratively enable the covenant to be enforceable including not restricting the former employee from obtaining gainful employment for 10 years nor assessing an asinine fine if he or she does. The assessing of a 5 million dollar penalty is ridiculous and any court would see this as an overbroad attempt that places undue burden on the former employee's ability to remain financially solvent once they have parted ways with their previous employer. Any company that sought to hire this former employee and compete with the former employer will be subject to this fine if the covenant was enforceable making the former employee virtually unable to be ...

Solution Summary

The solution discusses the company contract and employee agreement legal situations.

$2.19