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Business Law Chapter 14 Homework Capacity And Legality Statute Clearly

Page Count
9 pages
Word Count
5090 words
Book Title
Business Law: Text and Cases 14th Edition
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
A covenant not to compete is often in a contract for the sale of an ongoing business. This
enables a seller to sell, and a buyer to buy, the goodwill and reputation of a business. A seller
agrees not to initiate a similar business within a certain area for a specified period of time.
The restrictions must be reasonable.
b. Covenants Not to Compete in Employment Contracts
A covenant not to compete may accompany an employment agreement if the restriction is no
greater than necessary to protect a legitimate business interest. What constitutes a
reasonable time period online may be shorter because the restrictions are global.
Covenants Not to Compete
Cases considering the legality of covenants not to compete include the following:
QSP, Inc. v. Hair, __ N.C.App. __, 566 S.E.2d 851 (2002) (a covenant not to compete that prohibited a
fund-raising sales representative from competing with his former employer, a chocolate products distributor,
for twelve months in a five-county area was “reasonable and not unduly oppressive”).
Unger v. FFW Corp., 771 N.E.2d 1240 (Ind.App. 2002) (a covenant not to compete that prohibited a
financial products sales representative from competing with his former employer, a bank, for one year in a
seven-county area was “reasonable in terms of time, geography, and types of activity prohibited”).
Hoff v. Mayer, Brown and Platt, 331 Ill.App.3d 732, 772 N.E.2d 263, 265 Ill.Dec. 225 (1 Dist. 2002) (a
covenant not to compete that denied retirement benefits to a “retired” law firm partner, who continued to
practice law in competition with the firm from which he “retired,” was not overbroad, even though it was
unlimited in time, place, and scope of practice).
First Allmerica Financial Life Insurance Co. v. Sumner, __ F.Supp.2d __ (D.Or. 2002) (a covenant not to
compete that prohibited an employee from soliciting other employees and any customers to terminate their
relationship with the employer was void, because it was not signed on the commencement of employment or
on the employee’s advancement with the employer: “such provisions restrained competition among
employers for talented employees, and also restricted competition for customers’ business”).
Ozark Appraisal Service, Inc. v. Neale, 67 S.W.3d 759 (Mo.App. S.D. 2002) (a covenant not to compete
that prohibited an employee from competing with her employer, a real estate appraisal service, for one year
within ninety-five miles, was unenforceable, because the employer breached the parties’ employment
agreement ).
c. Enforcement Issues
The laws governing the enforceability of covenants not to compete vary from state to state. If a
covenant is unreasonable in time or geographic area, to prevent undue hardship courts in
some states convert the terms into reasonable ones and enforce the covenant.
2. Unconscionable Contracts or Clauses
In some circumstances, bargains are so oppressive that a court will relieve an innocent party of part
or all of the contractual duties.
a. Procedural Unconscionability
Procedural unconscionability concerns how a term becomes part of a contract. It may involve
a party’s lack of knowledge or understanding of a term due to inconspicuous print,
b. Substantive Unconscionability
Substantive unconscionability describes contracts or terms that are oppressiveprovisions
that deprive one party of the benefits of the agreement or leave that party without remedy for
 
Anyone with an e-mail address has undoubtedly received scores of messages offering to sell prescription
medications, such as Viagra, online. In the past, someone who wanted a prescription for a certain
medicationwhether it was for allergies, weight loss, or sexual enhancementhad to see a physician and,
normally, undergo a physical examination to see if that medication was appropriate. Today, however, it is
possible to enter into a contract to obtain a prescription for, and order, many medications via the Internet
without ever setting foot in a physician’s office. Contracting with a physician online to receive prescription
drugs may be ill advised, but are such contracts unconscionable?
The hallmark of an unconscionable contract is that its terms are so oppressive, one sided, or unfair as to
“shock the conscience” of the court. Thus, the issue is whether Internet prescription contracts are so unfair
that they “shock the conscience” of the court. After all, physicians are trained to examine patients, diagnose
medical conditions, and evaluate possible treatments. A physician who is prescribing medication for a person
online, however, has no objective way to determine the person’s health status or whether the person
understands the risks involved. For example, in the online context, a physician cannot tell if a person is
truthfully reporting his or her age and weight, which can significantly affect whether a medication is
recommended. In addition, physicians who prescribe drugs online cannot monitor the use of these drugs and
evaluate their effectiveness.
To date, only a few courts have addressed this issue, and no court as yet has held that prescribing drugs
online is unconscionable. For example, in 2003, in a case before the Kansas Supreme Court, the state
attorney general claimed that it was unconscionable for an out-of-state physician to contract with residents to
prescribe drugs via the Internet. The case involved three Kansas residents, including a minor, who entered
contracts on the Web to obtain prescription weight-loss drugs (Meridia and phentermine).a
If the physicians are not deceptive, should the courts allow all types of medications to be
prescribed over the Internet? Why or why not? Might the practice of prescribing medications via the
Internet reach the point at which it “shocks the conscience” of the court?
3. Exculpatory Clauses
a. Often Violate Public Policy
Often held to be unconscionable are contract clauses attempting to absolve parties of negli-
gence or other wrongs.
b. When Courts Will Enforce Exculpatory Clauses
Case 14.3: Holmes v. Multimedia KSDK, Inc.
Colleen Holmes signed an entry form for the 2009 Susan G. Komen Race for the Cure to be held in St.
Louis, Missouri. In the form, Holmes agreed to release any Event sponsors for any injury I might suffer in
connection with my participation in this Event * * * . This release applies to any * * * negligence of the
[sponsors].” Later, Multimedia KSDK, Inc., agreed to be a sponsor and to broadcast the race. While a
participant in the event, Holmes tripped and fell over an audiovisual box, and sustained injuries. Holmes filed
a suit in a Missouri state court against KSDK. The court entered a judgment in the defendant’s favor. The
plaintiffs appealed.
Notes and Questions
If KSDK had placed the audiovisual box on the ground surrounded by a barricade or posted
warnings, would the result in this case have been different? No. The courts held that the exculpatory
clause was binding without such precautions having taken place. It is not likely that they would have held
4. Discriminatory Contracts
Among other types of contract that are illegal on statutory or public policy grounds are
discriminatory contracts.
Other Contracts That Are Contrary to Law or Public Policy
Other contracts that are contrary to public policy or the law include contracts for the commission of a tort,
contracts injuring public service, and agreements that obstruct the legal process.
Contracts for the Commission of a Tort
Contracts that require a party to commit a civil wrong, or a tort, are contrary to public policy.
Contracts Injuring Public Service
Contracts that interfere or conflict with a public officer’s duties (for instance, a contract to pay a legislator
for favorable votes) are contrary to public policy. To prevent conflicts between public and private interests,
Agreements Obstructing the Legal Process
Agreeing to delay, prevent, or obstruct the legal process (agreeing to accept $1,500 to delay a trial, for
example) is illegal. Agreeing to suppress evidence in a legal proceeding or to commit fraud on a court is
  FOR SALE:
 
Lawrence Schaub, a former windshield repairman in Detroit, Michigan, was facing financial problems. He
was out of work. He was behind in his mobile home payments. He had three children to feed. Desperate to
obtain funds, he decided to sell the youngest of his three children. To that end, he created a videotape titled
“The Most Beautiful Baby in the World” to show to prospective buyers. Unfortunately for Schaub, his
babysitter informed the police of his plan, and he was caught in a “stingoperation when undercover police
officers posed as a would-be adoptive family. Schaub accepted $10,000 from the officers as a down payment
on the $60,000 contract price.
If a case involving a similar contract came before a civil court, the court would likely deem the contract
void as against public policy. Schaub’s was a criminal case, however, and a significant question immediately
arose: What statute had Schaub violated? Until September 1, 2000, Michigan was one of about twenty-five
Occasionally, bizarre cases such as this one alert state legislatures to loopholes in their laws. Note,
though, that the prosecutors in Schaub’s case found other ways to keep Schaub in jail for a while—at least
until his former wife claimed custody of the children. The prosecutors charged Schaub with child
abandonment, driving with a suspended license, and violating his probation stemming from an earlier drug
In general, an illegal contract is void. Exceptions include
1. Justifiable Ignorance of the Facts
2. Members of Protected Classes
3. Withdrawal from an Illegal Agreement
4. Contracts Illegal through Fraud, Duress, or Undue Influence
5. Severable, or Divisible, Contracts
If a contract is severable and the illegal portion does not affect the essence of the bargain, the legal
1. A minor’s right to disaffirm a contract is a well-settled principle. It may be pointed out that, nevertheless,
few businesses automatically agree to give money back when a minor who has bought something wants to
disaffirm the contract. Ordinarily, the response is likely to be “Sue me,” or an offer to “split the difference” or
otherwise settle, rather than to amicably rescind the contract.
3. In reading and studying cases, particularly those that involve complex circumstances, your students may
find it helpful to keep in mind that generally a case can have only one of three results:
The plaintiff proves his or her side of the case and wins.
The plaintiff fails to prove his or her side of the case and loses.
The defendant proves his or her side of the case, and the plaintiff loses.
Cyberlaw Link
Are the common law principles relating to contractual capacity moreor lessimportant in the
context of e-commerce and online contracting than in the context of more traditional circumstances?
1. What is the minor’s right to disaffirm a contract? A minor can make any contract, except one prohibited
by law for minors (the sale of alcoholic beverages, for example). Generally, minors can also disaffirm any contract.
This means that they can legally avoid their contractual obligations. To avoid a contract, a minor need show only an
intent not to be bound, whether by words (telling the other party) or conduct (acting inconsistently with contractual
2. What is a minor’s obligation on disaffirmance? A duty of restitution arises when a contract has been exe-
cuteda minor can disaffirm but must return whatever he or she received or pay for its reasonable value. Generally,
a minor need only return whatever he or she received, if it is still in his or her possession or control. If it has been
3. What effect does a minor’s misrepresentation of age have on his or her right to disaffirm? In most
states, a minor can disaffirm even if he or she misrepresented his or her age. Also, in some states, a minor will not be
liable in tort for misrepresenting his or her age, because, indirectly, the judgment might force the minor to perform the
contract. In many states, however, under certain circumstances a minor will be bound to a contract despite the
4. What effect does contracting for necessaries have on a minor’s right to disaffirm? A minor who
contracts for necessaries may disaffirm but must pay the reasonable value of whatever he or she receives. A minor is
5. What effect does intoxication have on persons’ contractual capacity? The inhibition by alcohol or some
other drug of a person’s capacity to act or think is intoxication. A contract entered into by a person who is intoxicated
can be either voidable or valid. If the person was intoxicated enough to lack mental capacity (that is, so impaired as
6. When is a contract made by an incompetent person voidable? If a court has not adjudged a person
incompetent, any contract entered into by the person is voidable if the individual does not know that he or she is
7. If it were possible to reform a covenant not to compete, what might be changed, or how might it be
redrawn, to be reasonable? An employer’s legitimate business interests can be adequately protected by a
8. Should an employer be able to restrict a former employee from engaging in a competing business on
a global level? Why or why not? It could be acceptable to limit a former employee’s employment to a wide radius,
9. Does the Internet affect covenants not to compete? Explain. The Internet could impact the terms that an
employer might wantor might be permittedto include in a covenant not to compete by expanding their scope. The
Internet might affect the enforceabilityor the lack thereofof a covenant not to compete if the provision is construed
10. To determine the enforceability of a covenant not to compete, the courts balance the rights of an
employer against those of a former employee. What are these rights? A covenant not to compete must balance a
former employee's right to earn a livelihood with an employer's right to protect itself from a former employee's unfair
1. Historically, the principal categories of persons having no capacity or limited capacity to contract were minors,
mentally incompetent persons, and married women. At common law, a married woman had no capacity to contract,
although courts of equity recognized a limited power with respect to property conveyed to her separate use. In most
2. State statutes sometimes authorize the appointment of guardians for non-recovering alcoholics, narcotics
addicts, spendthrifts, and elderly persons and convicts in cases of mental illness. Even without the appointment of a
Footnote 6: The United Arab Emirates (UAE) held a competition for the design of an embassy in
Washington, D.C. Elena Sturdzaan architect not licensed in the District of Columbiawon. Sturdza and the UAE
exchanged proposals, but the UAE stopped communicating with her. About two years later, Sturdza learned that the
UAE had contracted with a District of Columbia architect named Angelos Demetriou to use his design. Sturdza filed a
Should there be an exception to the rule applied in this case for an architect who is licensed
elsewhere in the United States and who intends to become licensed in the District of Columbia? How might
such an exception have applied in this case? There might arguably be an exception for such an architector other
professional with respect to licensing in other professionsbut the exception would be narrow. An architect who
The architectural services at the center of this case were to be performed for a foreign embassy.
Should the court have made an exception for such a situation? Why or why not? No. The impact is local—“For
the safety and wellbeing of those who work in and visit such buildings, and of neighboring property owners, we would
Should the restrictions on the enforcement of contracts with unlicensed practitioners extend beyond
the performance of professional services to include negotiations to provide the services? Discuss. Yes. An

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