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Modern Controls, Inc. v. Andreadakis, 578 F.2d 1264 (9th Cir. 1978) (full-text).
Factual Background Edit
Modern Controls, Inc. was a relatively small company specializing in developing equipment used with computers. Andreadakis, who had a Ph.D. in physics, was employed by Modern Controls from January 27, 1976, until May 27, 1977. While at Modern Controls, Andreadakis helped develop a commercially marketable, flat panel, gas discharge display device for computers.
Prior to working for Modern Controls, Andreadakis worked for Control Data Corporation for five years. During three of these years, he assisted in developing a flat panel, gas discharge display device which had the best commercial prospect of all similar devices being tested by Control Data. Another employee at Control Data, a member of the board of directors of Modern Controls, had approached Andreadakis and others, and asked them if they would be interested in working for Modern Controls to develop the same device. Andreadakis and another member of the Control Data team expressed an interest and, shortly thereafter, Andreadakis left Control Data for Modern Controls.
On the first day of his employment at Modern Controls, Andreadakis was requested to sign an employee confidentiality agreement. He initially refused to do so, but did sign it some nine months later at the insistence of Modern Controls. By the terms of the agreement, Andreadakis agreed to assign to Modern Controls his rights to any inventions developed during his employment and to refrain from disclosing any confidential information obtained while employed. He also agreed to refrain from working for a competitor of Modern Controls for two-years following termination of his employment. Modern Controls agreed to pay Andreadakis is base salary for two years after his termination if he quit and was unable to find comparable work because of this covenant.
In February or March 1977, Andreadakis wrote to several companies seeking employment. He received an offer from Burroughs Corporation and began work there on June 6, 1977. Burroughs was also developing a flat panel, gas discharge display device similar to the one that he had helped to develop at Modern Controls. Andreadakis was immediately assigned to the division of Burroughs developing the device.
In his letter of resignation from Modern Controls date May 13, 1977, Andreadakis represented that he was leaving the area of research in which he had been involved and was considering a teaching position in the east. Modern Controls became aware of Andreadakis’ employment at Burroughs only by accident and, shortly thereafter, brought this action to enforce the covenant not to compete.
Trial Court Proceedings Edit
The district court denied Modern Controls’ motion for a preliminary injunction on the ground that it had not shown a substantial probability of success at trial because the court believed the covenant not to compete to be unenforceable since (1) the covenant lacked consideration, as it was not ancillary to the initial employment agreement and was not supported by independent consideration, (2) since Modern Controls had not proved that trade secrets existed with respect to the device, and (3) because the employee confidentiality agreement containing the covenant was broader in scope than reasonably necessary to protect any legitimate need of Modern Controls.
The district court also denied relief to Modern Controls since it had failed to show irreparable harm and had not established that Andreadakis had disclosed or world disclose to Burroughs any trade secrets or confidential business information gained by Modern Controls.
Appellate Court Proceedings Edit
The court of appeals reversed and remanded the case for further proceedings. It reasoned that the covenant not to compete was not ancillary to the initial employment and was supported by independent consideration. As the court noted:
- Whether a covenant not to compete entered into after employment has commenced is supported by independent consideration is a question that has evoked considerable disagreement in the courts. Many courts support the position that continued employment constitutes sufficient consideration for a covenant not to compete. Other courts require something in addition to the mere continuance of employment. This "something in addition" may be a raise, a new position or an increased employment term. The Minnesota Supreme Court has not yet determined whether continued employment alone is sufficient consideration for a covenant not to compete. We need not predict what the Minnesota Court would do, however, as the covenant not to compete was supported by something more than the mere continuance of employment. It was supported by an obligation on the part of Modern Controls to pay Andreadakis his base pay for two years if he could not find suitable work in another field.
It also found that Modern Controls sufficiently established that Andreadakis had access to confidential business information and it was likely that Modern Controls would suffer irreparable injury if a preliminary injunction was denied.
- ↑ 578 F.2d at 1267-68.