ANSWERS TO PROBLEMS
1. Johnson and Wilson were the principal shareholders in Matthew Corporation, located in the city of
Jonesville, Wisconsin. This corporation was engaged in the business of manufacturing paper novelties,
which were sold over a wide area in the Midwest. The corporation was also in the business of binding
books. Johnson purchased Wilson’s shares of the Matthew Corporation and, in consideration thereof,
Wilson agreed that for a period of two years he would not (a) manufacture or sell in Wisconsin any paper
novelties of any kind that would compete with those sold by the Matthew Corporation or (b) engage in the
bookbinding business in the city of Jonesville. Discuss the validity and effect, if any, of this agreement.
Answer: Common Law Restraint of Trade.
(a) The agreement to refrain from doing business in the State of Wisconsin was no more than necessary to
prevent competition upon the part of Wilson. The restraints as to both time and territory are reasonable.
2. Wilkins, a Texas resident licensed by that state as a certified public accountant(CPA), rendered service in
his professional capacity in Louisiana to Coverton Cosmetics Company. He was not registered as a CPA in
Louisiana. His service under his contract with the cosmetics company was not the only occasion on which
he had practiced his profession in that state. The company denied liability and refused to pay him, relying
on a Louisiana statute declaring it unlawful for any person to perform or offer to perform services as a
CPA for compensation until he has been registered by the designated agency of the state and holds an
unrevoked registration card. The statute provides that a CPA certificate may be issued without examination
to any applicant who holds a valid unrevoked certificate as a CPA under the laws of any other state. The
statute provides further that rendering services of the kind performed by Wilkins, without registration, is a
misdemeanor punishable by a fine or imprisonment in the county jail or by both fine and imprisonment.
Discuss whether Wilkins would be successful in an action against Coverton seeking to recover a fee in the
amount of $1,500 as the reasonable value of his services.
Answer: Licensing Statute. Decision in favor of Coverton Cosmetics Company. The statute is a regulatory
measure designed to protect the public by permitting only persons with the necessary qualifications to
3. Michael is interested in promoting the passage of a bill in the State legislature. He agrees with Christy, an
attorney, to pay Christy for her services in drawing the required bill, procuring its introduction in the
legislature, and making an argument for its passage before the legislative committee to which it will be
referred. Christy renders these services. Subsequently, upon Michael’s refusal to pay her, Christy sues
Michael for damage for breach of contract. Will Christy prevail? Explain.
Answer: Corrupting Public Officials. Yes. Decision in favor of Christy. There is nothing in the agreement
4. Anthony promises to pay McCarthy $10,000 if McCarthy reveals to the public that Washington is a
Communist. Washington is not a Communist and never has been. McCarthy successfully persuades the
media to report that Washington is a Communist and now seeks to recover the $10,000 from Anthony, who
refuses to pay. McCarthy initiates a lawsuit against Anthony. What result?
5. The Dear Corporation was engaged in the business of making and selling harvesting machines. It sold
everything pertaining to its business to the ABC Company, agreeing “not again to go into the manufacture
of harvesting machines anywhere in the United States.” The Dear Corporation, which had a national and
international goodwill in its business, now begins the manufacture of such machines contrary to its
agreement. Should the court enjoin it?
Answer: Common Law Restraint of Trade. The question is whether the restraint is reasonable and therefore
binding upon Dear Corporation. Since Dear Corp. sells harvesting machines throughout the country, the
6. Charles Leigh, engaged in the industrial laundry business in Central City, employed Tim Close, previously
employed in the home laundry business, as a route salesperson. Leigh rents linens and industrial uniforms
to commercial customers; the soiled linens and uniforms are picked up at regular intervals by the route
drivers and replaced with clean ones. Every employee is assigned a list of customers whom she services.
The contract of employment stated that in consideration of being employed, on termination of his
employment, Close would not “directly or indirectly engage in the linen supply business or any competitive
business within Central City, Illinois, for a period of one year from the date when his employment under
this contract ceases.” On May 10 of the following year, Close’s employment was terminated by Leigh for
valid reasons. Close then accepted employment with Ajax Linen Service, a direct competitor of Leigh in
Central City. He began soliciting former customers he had called on for Leigh and obtained some of them
as customers for Ajax. Will Leigh be able to enforce the provisions of the contract?
Answer: Common Law Restraint of Trade. Leigh is entitled to the relief sought. Close was permitted, under
the contract, to engage in the home laundry business in which he was previously employed before entering
7. On April 30, 2013, Barack and George entered into a bet on the outcome of the 2013 Kentucky Derby. On
January 28, 2014, Barack, who bet on the winner, approached George, seeking to collect the $3,000
George had wagered. George paid Barack the $3,000 wager but now seeks to recover the funds from
Barack. Result?
8. Carl, a salesperson for Smith, comes to Benson’s home and sells him a complete set of “gourmet cooking
utensils” that are worth approximately $300. Benson, an eighty-year–old man who lives alone in a
one-room efficiency apartment, signs a contract to buy the utensils for $1,450 plus a credit charge of $145
and to make payments in ten equal monthly installments. Three weeks after Carl leaves with the signed
contract, Benson decides he cannot afford the cooking utensils and has no use for them. What can Benson
do? Explain.
Answer: Unconscionable Contracts. Benson is not bound to his obligation. The doctrine of
“unconscionability” as set forth in the UCC would probably apply here. If it did, Benson could obtain
9. Consider the same facts in Question 8 but assume that the price was $350. Assume further that Benson
wishes to avoid the contract based on the allegation that Carl befriended and tricked him into the
purchase. Discuss.
10. Adrian rents a bicycle from Barbara. The bicycle rental contract Adrian signed provides that Barbara is
not liable for any injury to the renter caused by any defect in the bicycle or the negligence of Barbara.
Injured when she is involved in an accident due to Barbara’s improper maintenance of the bicycle, Adrian
sues Barbara for her damages. Will Barbara be protected from liability by the provision in their contract?
Answer: Exculpatory Clauses. Decision for Adrian; Barbara is still liable to Adrian. Most courts would hold
that this exculpatory clause is void against public policy. In deciding this question courts look at such
factors as:
“(1) It concerns a business of a type generally thought suitable for public regulation. (2) The party
seeking exculpation is engaged in performing a service of great importance to the public which is
11. Merrill Lynch employed Post and Maney as account executives. Both men elected to be paid a salary and
to participate in the firm’s pension and profit-sharing plans rather than take a straight commission.
Thirteen years later, Merrill Lynch terminated the employment of both Post and Maney without cause.
Both men began working for a competitor of Merrill Lynch. Merrill Lynch then informed them that all of
their rights in the company-funded pension plan had been forfeited pursuant to a provision of the plan that
permitted forfeiture in the event an employee directly or indirectly competed with the firm. Is Merrill
Lynch correct in its assertion?
Answer: Restrictive Covenants/Employment Relationship. No, Merrill-Lynch is not correct; Judgment for
Post and Maney. Employment contracts prohibiting competition create a tension between the freedom of
12. Tovar applied for the position of resident physician in Paxton Community Memorial Hospital. The
hospital examined his background and licensing and assured him that he was qualified for the position.
Relying upon the hospital’s promise of permanent employment, Tovar resigned from his job and began
work at the hospital. He was discharged two weeks later, however, because he did not hold a license to
practice medicine in Illinois as required by state law. He had taken the examination but had never passed
it. Tovar claims that the hospital promised him a position of permanent employment and that by
discharging him, it breached their employment contract. Discuss.
Answer: Licensing Statute. Judgment for Paxton Hospital. The purpose of the licensing statute is not to
generate revenue but rather to protect the public by assuring them of adequately trained physicians. Since
13. Carolyn Murphy, a welfare recipient with very limited education and with four minor children, responded
to an advertisement that offered the opportunity to purchase televisions without a deposit or credit history.
She entered into a rent-to-own contract for a twenty-five-inch console color television set that required
seventy-eight weekly payments of $16 (a total of $1,248, which was two and one-half times the retail value
of the set). Under the contract, the renter could terminate the agreement by returning the television and
forfeiting any payments already made. After Murphy had paid $436 on the television, she read a
newspaper article criticizing the lease plan. She stopped payment and sued the television company. In
response, the television company has attempted to take possession of the set. Decision?
Answer: Usury/Unconscionability. Judgment for Murphy. The contract was unconscionable because the
television company failed to inform Murphy of the true purchase price and required her to pay two and one
14. Albert Bennett, an amateur cyclist, participated in a bicycle race conducted by the United States Cycling
Federation. During the race, Bennett was hit by an automobile. He claims that employees of the
Federation improperly allowed the car onto the course. The Federation claims that it cannot be held
liable to Bennett because Bennett signed a release exculpating the Federation from responsibility for any
personal injury resulting from his participation in the race. Is the exculpatory clause effective?
Answer: Exculpatory Clause. Judgment for Bennett; the clause in not effective. A valid exculpatory clause
15. In February, Brady contracted to construct a house for Fulghum for $206,850. Brady began construction
on March 13. Neither during the negotiation of this contract nor when he began performance was Brady
licensed as a general contractor as required by North Carolina law. Brady was awarded his builder’s
license on October 22, having passed the examination on his second attempt. At that time, he had
completed two-thirds of the work on Fulghum’s house. Fulghum paid Brady $204,000. Brady brought suit,
seeking an additional $2,850 on the original contract and $29,000 for “additions and changes” Fulghum
requested during construction. Is Fulghum liable to Brady? Explain
Answer: Licensing Statute. No– Fulghum is not liable. Generally, contracts entered into by unlicensed
general contractors, in violation of a statute passed for the protection of the public, are unenforceable by the
16. Robert McCart owned and operated an H&R Block tax preparation franchise. When Robert became a
district manager for H&R Block, he was not allowed to continue operating a franchise. So, in accordance
with company policy, he signed over his franchise to his wife June. June signed the new franchise
agreement, which included a covenant not to compete for a two-year period within a fifty-mile radius of
the franchise territory should the H&R Block franchise be terminated, transferred, or otherwise disposed
of. June and Robert were both aware of the terms of this agreement, but June chose to terminate her
franchise agreement anyway. Shortly thereafter, June sent out letters to H&R Block customers, criticizing
H&R Block’s fees and informing them that she and Robert would establish their own tax preparation
services at the same address as the former franchise location. Each letter included a separate letter from
Robert detailing the tax services to be offered by the McCarts’ new business. Should H&R Block be able to
obtain an injunction against June? Against Robert?
Answer: Common Law Restraint of Trade. Yes on both injunctions. Judgment for H&R Block. A covenant
in general restraint of trade is void as against public policy. However, a covenant which is clear, specific,
17. Michelle Marvin and actor Lee Marvin began living together, holding themselves out to the general public
as man and wife without actually being married. The two orally agreed that while they lived together they
would share equally any and all property and earnings accumulated as a result of their individual and
combined efforts. In addition, Michelle promised to render her services as “companion, homemaker,
housekeeper and cook” to Lee. Shortly thereafter, she gave up her lucrative career as an entertainer in
order to devote her full time to being Lee’s companion, homemaker, housekeeper, and cook. In return he
agreed to provide for all of her financial support and needs for the rest of her life. After living together for
six years, Lee compelled Michelle to leave his household but continued to provide for her support. One
year later, however, he refused to provide further support. Michelle sued to recover support payments and
half of their accumulated property. Lee contends that their agreement is so closely related to the supposed
“immoral” character of their relationship that its enforcement would violate public policy. The trial court
granted Lee’s motion for judgment on the pleadings. Decision?
Answer: Public Policy. Judgment for Michelle Marvin. Adults who voluntarily live together and engage in
sexual relations can, nonetheless, make arrangements concerning their earnings and property rights. They
18. Richard Brobston was hired by Insulation Corporation of America (ICA) in 2003. Initially, he was hired as
a territory sales manager but was promoted to national account manager in 2007 and to general manager
in 2011. In 2013, ICA was planning to acquire computer-assisted design (CAD) technology to upgrade its
product line. Prior to acquiring this technology, ICA required that Brobston and certain other employees
sign employment contracts that contained restrictive covenants or be terminated and changed their
employment status to “at will” employees. These restrictive covenants provided that in the event of
Brobston’s termination for any reason, Brobston would not reveal any of ICA’s trade secrets or sales
information and would not enter into direct competition with ICA within three hundred miles of Allentown,
Pennsylvania, for a period of two years from the date of termination. The purported consideration for
Brobston’s agreement was a $2,000 increase in his base salary and proprietary information concerning
the CAD system, customers, and pricing.
Brobston signed the proffered employment contract. In October 2013, Brobston became vice president of
special products, which included responsibility for sales of the CAD system products as well as other
products. Over the course of the next year, Brobston failed in several respects to properly perform his
employment duties and on August 13, 2014, ICA terminated Brobston’s employment. In December 2014,
Brobston was hired by a competitor of ICA who was aware of ICA’s restrictive covenants. Can ICA
enforce the employment agreement by enjoining Brobston from disclosing proprietary information about
ICA and by restraining him from competing with ICA? If so, for what duration and over what geographic
area?
Answer: Restrictive Covenants/Employment Relationship. Preliminary injunction affirmed to the extent it
enjoins Brobston from disclosing trade secrets and reversed to the extent that it restricts Brobston from
competing with ICA.
In order for a “non-competition” covenant to be valid, it must relate to a contract for employment, be
supported by adequate consideration and be reasonably limited in both time and territory. More specifically,
where a restrictive covenant has been entered into between an employer and its employee, courts have
19. Henrioulle, an unemployed widower with two children, received public assistance in the form of a rent
subsidy. He entered into an apartment lease agreement with Marin Ventures that provided
“INDEMNIFICATION: Owner shall not be liable for any damage or injury to the tenant, or any other
person, or to any property, occurring on the premises, or any part thereof, and Tenant agrees to hold
Owner harmless for any claims for damages no matter how caused.” Henrioulle fractured his wrist when
he tripped over a rock on a common stairway in the apartment building. At the time of the accident, the
landlord had been having difficulty keeping the common areas of the apartment building clean. Will the
exculpatory clause effectively bar Henrioulle from recovery? Explain.
Answer: Exculpatory Clause. No. Judgment for Henrioulle. The criteria used to identify when an exculpatory
clause is invalid as against public policy include whether: (1) it concerns a business of a type generally
20. Emily was a Java programmer employed with Sun Microsystems in Palo Alto, California. Upon beginning
employment, Emily signed a contract which included a noncompetition clause that prevented her from
taking another Java programming position with any of five companies Sun listed as “direct competitors”
within three months of terminating her employment. Later that year Emily resigned and two months later
accepted a position with Hewlett-Packard (HP) in Houston, Texas. HP was listed in Emily’s contract as a
“direct competitor,” but she argues that due to the significant geographic distance between both jobs, the
contract is not enforceable. Explain whether the contract is enforceable.
21. Between 2009 and 2014, Williams purchased a number of household items on credit from Walker-Thomas
Furniture Co., a retail furniture store. Walker-Thomas retained the right in its contracts to repossess an
item if Williams defaulted on an installment payment. Each contract also provided that each installment
payment by Williams would be credited pro rata to all outstanding accounts or bills owed to
Walker-Thomas. As a result of this provision, an unpaid balance would remain on every item purchased
until the entire balance due on all items, whenever purchased, was paid in full. Williams defaulted on a
monthly installment payment in 2014, and Walker-Thomas sought to repossess all the items that Williams
had purchased since 2009. Discuss.
22. Universal City Studios, Inc. (Universal) entered into a general contract with Turner Construction
Company (Turner) for the construction of the Jurassic Park ride. Turner entered into a subcontract with
Pacific Custom Pools, Inc. (PCP), for PCP to furnish and install all water treatment work for the project
for the contract price of $959,131. PCP performed work on the project from April 2011 until June 2012
for which it was paid $897,719. PCP’s contractor’s license, however, was under suspension from October
12, 2011, to March 14, 2012. In addition, PCP’s license had expired as of January 31, 2011, and it was
not renewed until May 5, 2012. California Business and Professions Code Section 7031 provides that no
contractor may bring an action to recover compensation for the performance of any work requiring a
license unless he or she was “a duly licensed contractor at all times during the performance of that
[work], regardless of the merits of the cause of action brought by the contractor.” The purpose of this
licensing law is to protect the public from incompetence and dishonesty in those who provide building
and construction services. PCP brought suit against Universal and Turner, the defendants, for the
remainder of the contract price. Explain who should prevail.
Answer: Licensing Statute. Universal and Turner should prevail. As a general rule, the failure to comply with
ANSWERS TO “TAKING SIDES” PROBLEMS
EarthWeb provided online products and services to business professionals in the information technology (IT)
industry. EarthWeb operated through a family of websites offering information, products, and services for IT
professionals to use for facilitating tasks and solving technology problems in a business setting. EarthWeb
obtained this content primarily through licensing agreements with third parties. Schlack began his employment
with EarthWeb in its New York City office. His title at EarthWeb was Vice President, Worldwide Content, and
he was responsible for the content of all of EarthWeb’s websites. Schlack’s employment contract stated that he
was an employee at will and included a section titled “Limited Agreement Not To Compete.” That section
provided:
(c) For a period of twelve (12) months after the termination of Schlack’s employment with EarthWeb,
Schlack shall not, directly or indirectly:
(1) work as an employee . . . or in any other . . . capacity for any person or entity that directly competes
with EarthWeb. For the purpose of this section, the term “directly competing” is defined as a person or
entity or division on an entity that is
(i) an online service for Information Professionals whose primary business is to provide Information
Technology Professionals with a directory of third party technology, software, and/or developer
resources; and/or an online reference library, and or
(ii) an online store, the primary purpose of which is to sell or distribute third party software or products
used for Internet site or software development.
About one year later, Schlack tendered his letter of resignation to EarthWeb. Schlack revealed at this
time that he had accepted a position with ITworld.com.
a. What arguments would support EarthWeb’s enforcement of the covenant not to compete?
b. What arguments would support Schlack’s argument that the covenant is not enforceable?
c. Which side should prevail? Explain.
ANSWER:
(a) EarthWeb would argue that a contract should be upheld since both parties
voluntarily entered into the agreement. In addition, Schlack could reveal trade