My colleague Chris Engler reports today on a new Connecticut Appellate Court case that focuses on a often misunderstood concept in employment contracts — the need for “consideration”.  What was it that Dire Straits’ sang about in the 1980s? Getting “Money for Nothing”?

We’ve all been told that you can’t get something for nothing.  That lesson was reiterated in a new case by the Appellate Court due to be officially released next week. 

The Facts

As told by the Court, the facts of the case,  Thoma v. Oxford Performance Materials, Inc., revolve around the employer’s attempts to attract investors. 

One investment company told the employer, Oxford, that it wanted assurances that key personnel would not leave.  Oxford dutifully entered into employment contracts with various employees, including Lynne Thoma.

The details of the contracts are important.  This first employment contract gave Ms. Thoma a higher salary, job security (termination could only be with 60 days’ notice), and a severance package.  In return, Ms. Thoma promised not to leave during the contract period and not to work for a competitor for six months after leaving.  Ms. Thoma signed this contract.

 At this point, both parties had gotten a benefit, and all seemed well.

But then a second investment company informed Oxford of its dissatisfaction because the employment contract was “too strong.”  So Oxford went back to the drawing board and crafted new contracts.

 Ms. Thoma’s second contract was quite different.  It removed all of the monetary elements, including the salary increase.  The new contract also allowed Oxford to fire Ms. Thoma without notice or cause.  Finally, it prohibited Ms. Thoma from working for a competitor.  (The length of this prohibition was unclear.  If you’re a contract jargon junkie, I recommend reading the court’s analysis in full.) 

Nevertheless, Ms. Thoma went ahead and signed this contract as well.

A year later, Oxford fired Ms. Thoma.  She demanded the benefits from the first contract.  Thus commenceth this case.

Is the Second Contract Enforceable?

Ultimately, both the trial court and the appellate court sided with Ms. Thoma, concluding that she didn’t receive any consideration in exchange for the sacrifices she made in the second contract.  In other words, she gave up some perks without getting anything in return.

I’ll spare you the legal analysis, which could have come straight from a law school textbook.  The most important takeaway for employers is that employment contracts must be a two-way street – they can’t just benefit the employer.

The Appellate Court also provided some insight into what it considers adequate consideration, and what just won’t make the cut:

  • Oxford argued that the company, and therefore its employees, would be financially better off by making the investors happy.  The court didn’t buy this because Ms. Thoma already got a promise of continued employment in the first contract.
  • However, the court seemed to indicate that improving an employer’s well-being could be enough to make a contract valid, as long as the employer could prove the connection.  This leaves open the possibility of a successful argument under different circumstances.
  • Oxford also argued that the new contract didn’t restrict Ms. Thoma’s ability to work for competitors for as long.  Although the court disagreed with Oxford’s interpretation of the contracts, it implied that a shorter noncompete provision could pass muster.
  • Finally, the court found that a list of supposed benefits for Ms. Thoma in the second contract wasn’t sufficient, especially when Ms. Thoma herself testified that she received nothing.  The court clearly wanted benefits of substance and not merely words.

A final thing to note: the court emphasized that ambiguities in employment contracts will often be interpreted against the drafter.  Since the drafter is usually the employer, this means that employers must be particularly careful to make sure their contracts are well-drafted, well-proofread, and internally consistent.

This case doesn’t break ground or make new law.  However, it does reiterate the importance of making sure that both parties to an employment contract come away with something.  If the promises are meaningless, the contract will be too.