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Readings week 2

monday lake Land Employment Group of Akron, LLC v. Columber Supreme Court of Ohio 804 N.E.2d 27 (2004)

Rule of Law Continued employment is adequate consideration to enforce a non-competition agreement where the agreement was entered after employment already commenced.

Facts Lee Columber (defendant) began working for Lake Land Employment Group of Akron, LLC (Lake Land) (plaintiff) in 1988. In 1991, Lake Land asked Columber to sign a non-competition agreement. Columber received no increase in salary or other benefits for signing the agreement, but he continued to work at Lake Land until 2001, at which time he terminated his employment and started a business that was substantially similar to the business of Lake Land. Lake Land sued Columber for breaching the non-competition agreement he signed in 1991. Columber admitted that he signed the agreement but moved for summary judgment on the ground that the non-competition agreement was unenforceable for lack of consideration and because the terms were overly restrictive and unreasonable. The trial court granted summary judgment in Columber’s favor, finding a lack of consideration, and without considering the reasonableness of the terms of the agreement. The court of appeals affirmed the trial court’s ruling but certified a question to the Supreme Court, asking whether continued employment is adequate consideration to support the enforceability of a non-competition agreement. Issue Is continued employment adequate consideration to enforce an employee’s assent to a noncompetition agreement after employment has commenced? Holding and Reasoning (Moyer, C.J.) Yes. An employee’s acceptance of a non-competition agreement after employment has begun is a renegotiation of the terms of the continued employment. The employer, by continuing to employ the employee after he or she accepts the terms of the non-competition agreement, agrees to continue the employee’s employment for an undefined period in exchange for acceptance of the agreement. Therefore there are mutual promises to support the renegotiated terms and the continued employment constitutes sufficient consideration for the change in terms of employment. Columber accepted the non-competition agreement in 1991 and continued his employment at Lake Land until 2001. His continued employment at Lake Land is sufficient consideration to make the non-competition agreement binding. Despite finding adequate consideration, the reasonableness of the non-competition agreement must be assessed without violating the longstanding rule against testing the adequacy of consideration. Since the reasonableness of the non-competition agreement must be assessed on grounds other than consideration, the trial court’s grant of summary

judgment in favor of Columber is reversed and the matter is remanded for further proceedings to determine the reasonableness of the non-competition agreement. Dissent (Resnick, J.) Continued employment does not constitute adequate consideration because there is no detriment to the employer in continuing to employ, and there is no benefit to the employee in continuing employment since the employment relationship otherwise continues as it would have without the non-competition agreement. Since there is no change in the terms of employment, there is no consideration. Dissent (Pfeifer, J.) I concur with Judge Resnick’s dissent that continued employment does not constitute consideration for the non-competition agreement. The majority’s analysis involves a promise by the employer to continue the employment for some period in exchange for the employee accepting the terms of the non-competition agreement. However, the promise to extend employment for some period of time alters the at-will nature of the employment and leaves courts to determine what is a reasonable period. ============================ Strong v. Sheffield Court of Appeals of New York 39 N.E. 330 (1895) Rule of Law A creditor's promise to forbear from collecting a debt cannot constitute valuable consideration for a third party’s promise to answer for the debt, when the terms of the promise do not obligate the creditor to forbear for any length time. Facts Benjamin Strong (Strong) (plaintiff) sold a business on credit to Gerardus Sheffield (Gerardus), husband of Louisa Sheffield (Louisa) (defendant). Strong and Gerardus memorialized the debt in a promissory note that was payable on demand. Louisa endorsed the note, per Strong’s request. Strong later brought an action against Louisa for payment on the promissory note. The question before the trial court was whether there was consideration for Louisa’s agreement to be responsible for Gerardus’ debt. Strong testified that he had promised to hold the note and not sell it or collect on it until he decided that he wanted the money, provided that Louisa endorsed it. Strong then held the note for two years before demanding payment. The trial court ruled in favor of Strong. The General Term reversed the trial court on an initial appeal by Louisa, and Strong appealed that reversal to the Court of Appeals of New York. Issue May a creditor's promise to forbear from collecting a debt constitute valuable consideration for a third party's promise to answer for the debt, when the terms of the promise do not obligate the creditor to forbear for any length of time? Holding and Reasoning (Andrews, C.J.) No. Where a party agrees to refrain from collecting a debt for a period of time, that promise constitutes valuable consideration for a third party’s agreement to answer for the debt. This is true when the creditor expressly agrees to forbear for a time, and it is true when the creditor is asked to forbear for a time and does so. Here, however, Strong's promise was only to forbear until he wanted the money. Strong's promise did not obligate him to forbear for any length of time. It is irrelevant that Strong did, in fact, hold the note for two years before collecting on it. What matters is that the terms of his promise did not obligate him to do so. Because the terms of the promise left the decision of when to collect on the note entirely to Strong's discretion, there was nothing that actually required Strong to refrain from enforcing the debt for any length of time. Consequently, there was no consideration for

Louisa's promise to be responsible for Gerardus' debt. The order of the General Term reversing the trial court’s judgment for Strong is affirmed, and judgment is entered for Louisa.

Mattei v. Hopper Supreme Court of California 330 P.2d 625 (1958) Rule of Law A satisfaction clause in a real-estate contract that bases one party’s promise to perform on satisfaction of a condition does not render the promise illusory or lacking consideration. Facts Peter Mattei (plaintiff), a real-estate developer planning to build a shopping center, made several offers to purchase land owned by Amelia Hopper (defendant). After Hopper rejected Mattei's offers because the price was inadequate, Hopper eventually submitted an offer that Mattei accepted on the same day. The parties’ agreement was recorded in a real-estate form called a deposit receipt. According to the agreement, Mattei was to pay a deposit of $1,000, after which he had 120 days to examine the title and pay the rest of the purchase price, subject to “obtaining leases satisfactory to the purchaser.” Mattei included this clause to allow him time to secure leases for the shopping center before paying the full purchase price for the land. Once Mattei paid the remainder of the purchase price, Hopper was obligated to convey the deed. Mattei paid the initial deposit as required by the deposit receipt and began to secure leases, but before the 120-day period expired, Hopper informed Mattei that she was unwilling to proceed with the sale under the terms in the deposit receipt. Although Mattei obtained the leases and offered to pay the balance, Hopper refused to convey the deed as promised in the deposit receipt. Mattei brought an action against Hopper for breaching the agreement in the deposit receipt, and after a non-jury trial, the trial court ruled in favor of Hopper. Mattei appealed. Issue Does a satisfaction clause in a real-estate contract that bases one party’s promise to perform on satisfaction of a condition render the promise illusory or lacking consideration? Holding and Reasoning (Spence, J.) No. A satisfaction clause in a real-estate contract that bases one party’s promise to perform on satisfaction of a condition does not render the promise illusory or lacking consideration. If parties enter a contract in which promises are exchanged as consideration, both parties must have assumed some sort of legal obligation for the contract to be binding. Without mutuality of obligation, the contract will be unenforceable for lack of consideration. If a party's promise is conditioned on either that party's or the other party's satisfaction that something subject to the contract meets the party's subjective judgment or taste, a good-faith standard is applied in determining whether the condition has been met. In that situation, the promisor's duty to exercise judgment in good faith constitutes adequate consideration supporting the contract. Here, the deposit agreement between Mattei and Hopper was an enforceable contract. The condition that Mattei procure leases he found satisfactory before submitting the full sale price to Hopper was not a condition to forming the contract between the parties; rather, it was a condition preceding Mattei’s obligation to perform a portion of the agreement. However, it is irrelevant that the leases requiring Mattei's satisfaction were not part of the performance to be rendered. Because the satisfaction clause in the parties’ agreement does not allow Mattei to withdraw from the agreement based on his general dissatisfaction with the contract, but instead imposes an obligation to exercise the condition in good faith, his promise to perform is valid consideration. Therefore, a contract existed between the parties, and Hopper

breached that contract when she refused to accept the purchase price and convey the deed to Mattei as promised. The trial court’s judgment in favor of Hopper is reversed.

Structural Polymer Group, Ltd. v. Zoltek Corp. United States Court of Appeals for the Eighth Circuit 543 F.3d 987 (2008) Rule of Law A party’s good-faith obligation to purchase its requirements is sufficient consideration for a requirements contract, even if the party had no requirements at the time of formation. Facts Structural Polymer Group, Ltd. and Structural Polymer Systems (SP) (plaintiffs) manufactured a building material called “prepreg” using carbon fiber. Zoltek Corporation (Zoltek) (defendant) entered a ten-year requirements contract to supply SP’s carbon fiber. SP had no requirements at the time. The agreement covered a large-tow carbon fiber product called Panex 33, which is lower cost and quality than small-tow carbon fiber. The contract gave SP the option to buy from different suppliers if Zoltek could not meet lower prices. In 2002, Zoltek stopped making Panex 33 and started making a similar product called Panex 35. SP did not buy any carbon fiber for two years, but did order Panex 35 in 2004. Later, SP ordered two shipments of Panex 35 that were never filled. SP sued Zoltek for breach. At trial, the parties disputed whether SP was entitled to both Panex 33 and Panex 35. SP offered alternative damage calculations based on each product. The jury awarded SP lost profits based on SP’s calculations for damages using both Panex 33 and Panex 35 but declined to award future lost profits. The district court reduced the duplicative damage award. Zoltek moved for a new trial and judgment as a matter of law, which were denied. SP appealed the damage reduction, and Zoltek appealed the denial of its motions. Issue Will a requirements contract be void for lack of mutuality of obligation if the party had no requirements at the time it was formed? Holding and Reasoning (Colloton, J.) No. If a contract is supported by valid consideration, no further “mutuality of obligation” is needed. Restatement (Second) of Contracts § 79 (1981). Whether consideration is adequate is a question of law in Missouri. Here, Zoltek claims that the requirements contract was unenforceable because there was no mutuality of obligation. Zoltek argues that SP’s obligation was illusory because: (1) SP did not require any carbon fiber when the contract was formed, (2) SP could have bought carbon fiber from anyone else under the contract’s price protection clause, and (3) SP was free to substitute small-tow fiber for large-tow fiber, which Zoltek claims are “interchangeable.” First, the contract did not lack mutuality because SP had no requirements at formation. There is an implied duty of good faith in requirements contracts, which means a contract will not be void because the promise is “illusory.” Zoltek could claim bad faith if SP refused to order anything. However, that would mean that SP breached the contract, not that the agreement was void for lack of consideration. Next, the price protection clause gave SP the right to buy elsewhere if Zoltek could not meet a lower price; SP was obligated to buy from Zoltek if the price was met. The promise was not illusory. Missouri courts have upheld such clauses. Lastly, the record indicates that small-tow and large-tow fiber are not “interchangeable.” Even if they were, the contract is not void. If SP bought an interchangeable product from someone else without good faith, Zoltek could sue for breach. SP’s good-faith obligation to buy its large-tow fiber needs from Zoltek was valid consideration, and the contract is enforceable. The verdict and reduction of damages are affirmed. Does putting in an order mean payment?

Wood v. Lucy, Lady Duff-Gordon Court of Appeals of New York 118 N.E. 214 (1917)

Rule of Law (1) A contract may be enforced when there is no evidence of a promise, exchanged as consideration, in the explicit terms of the contract. (2) A promise to use reasonable efforts may be implied from the entire circumstances of a contract. Facts Wood (plaintiff) entered into a contract with Lucy, Lady Duff-Gordon (Lady Duff-Gordon) (defendant), whereby Lady Duff-Gordon agreed to grant Wood the exclusive right to place her endorsement on others’ clothing designs. She also granted Wood the exclusive right to market her designs and sell them. In return, Lady Duff-Gordon would receive 50 percent of the profits from Wood’s efforts with regard to her endorsements and designs. Wood agreed to keep records of all accounts and to take out all patents, copyrights, and trademarks necessary to protect Lady Duff-Gordon’s designs. Lady Duff-Gordon later entered into a contract with another company whereby she placed her endorsement on others’ clothing designs. Wood filed suit, claiming breach of contract. Lady Duff-Gordon filed a motion for demurrer, arguing that there was no enforceable contract for lack of consideration. The trial court denied the motion. Lady Duff-Gordon appealed. The Appellate Division reversed and entered judgment for Lady Duff-Gordon. Wood appealed to the Court of Appeals of New York. Issue (1) Can a contract be enforced when there is no evidence of a promise, exchanged as consideration, in the explicit terms of the contract? (2) Whether a promise to use reasonable efforts may be implied from the entire circumstances of the contract. Holding and Reasoning (Cardozo, J.) (1) Yes. A promise, exchanged as consideration, may be implied and enforceable, even though it is not provided in the explicit terms of the contract. In the current matter, the facts reveal that Wood made a promise to use reasonable efforts to place endorsements and market Lady Duff-Gordon’s designs. Because Lady Duff-Gordon gave an exclusive privilege, Wood’s acceptance of the privilege assumed its duties, one of which was to use sufficient reasonable efforts. Also, because Lady Duff-Gordon would receive 50 percent of all sales, it is clear that both parties intended that Wood would use sufficient reasonable efforts because, without them, Lady Duff-Gordon could not have expected any payment. Additionally, Wood’s agreement that he would keep track of accounts and take out protections necessary for the designs implies he would promise to use sufficient reasonable efforts. Based upon these facts, it is clear that a promise to use reasonable efforts to place endorsements and market the designs is a term of the contract and should be implied. Accordingly, the judgment of the appellate division is reversed. (2) Yes. The agreement between Wood and Lucy contains an implied promise by Wood to use reasonable efforts, and thus constitutes sufficient consideration by Wood to form a valid and enforceable contract. A promise to use reasonable efforts may be implied from the entire circumstances of a contract. Once successfully implied, that promise may constitute sufficient consideration to create a valid and enforceable contract. Wood’s promise to use

reasonable efforts in performing his contract with Lucy may be implied from many circumstances. Lucy gave Wood an exclusive privilege to place her endorsements on products and market her designs. The acceptance of this exclusive right by Wood equaled an assumption of the basic duties encompassed in that right. Additionally, Lucy was not to receive any compensation other than one-half of all agreements formed by Wood’s efforts. Thus, unless Wood used reasonable efforts, Lucy would not receive any compensation, and there would be no basis for the parties to have entered into such an agreement. Finally, Wood agreed to provide a monthly accounting of his profits and activities to Lucy. If he was not under a duty to use reasonable efforts to earn profits, this accounting would be meaningless. Thus Wood’s promise to pay Lucy one-half of the profits and revenues resulting from his exclusive privilege to use her endorsement, as well as his promise to provide a monthly accounting of his profits supports the implication that Wood had a duty to use reasonable efforts to create profits and revenues. This promise by Wood constitutes sufficient consideration to form a valid and enforceable contract with Lucy, and the decision of the appellate court is reversed....