Friday, December 11, 2009, 1:14 PM

NC Supreme Court Affirms COA Opinion Finding That Forbearance of a Third Party Is Insufficient Consideration for Employment Contract

Today the N.C. Supreme Court affirmed per curiam a decision by a COA majority holding that a forbearance by a third party was insufficient consideration for an employment contract. The case is Franco v. Liposcience, Inc. Read the COA opinion here.

Richard Franco, Jr. was the VP of marketing at Liposcience, and his dad, Franco, Sr., was Chairman of the Board. Franco, Sr. was removed by the Board of Directors, and in connection with that removal Franco Sr. entered into a severance agreement with Liposcience through a severance letter. In December 2002 the incoming Chairman sent a "no retaliation letter" to Franco, Jr., stating that Liposcience wouldn't take any adverse employment action against him based on this relationship with Franco Sr.

Sure enough, Franco, Jr. was let go from Liposcience in February 2004. He claimed that his termination was due to his connection to his dad, who had allegedly begun making "accountability inquiries" to Liposcience employees. Franco Jr. sued Liposcience, claiming that the no retaliation letter formed a binding agreement between him and Liposcience, which Liposcience breached when they fired him.

The COA majority (Judges Wynn and Hunter) held that any promise by Liposcience that it wouldn't retaliate against Franco Jr. did not constitute any additional obligations on the part of Liposcience - Franco Jr. was already employed, and the letter didn't change any of his rights or benefits. Mere continued employment was thus insufficient consideration to form a binding agreement, and the no retaliation letter was not a valid contract.

Franco Jr. argued that consideration was supplied by Franco Sr. as a third-party beneficiary, because Franco Sr. negotiated for the no retaliation letter in connection with his severance agreement. But the COA majority noted that any promises in the no retaliation letter were not incorporated or made binding in Franco Sr.'s severance letter - the severance letter contained a merger clause but did not contain a reference to the no retaliation letter. The majority further noted that no applicable NC case law supported the notion that consideration could be found through action or lack of action by a third party, and that Franco Sr. was not a party to the action and had not sought to enforce his rights in any other lawsuit.

Judge Ervin dissented, saying that a forbearance of a third party may be sufficient to create consideration. Franco Sr. surrendered his right to pursue legal action against Liposcience related to his removal from the Board, and Judge Ervin explained that an email exchange between Franco Sr. and Liposcience showed that the severance letter referred to or included provisions of the retaliation letter. Judge Ervin reasoned that finding consideration here did not undermine the doctrine of at-will employment, but instead enforces freedom of contract. To the contrary, he explained, finding no consideration "substantially under[mines] a significant component of the bargain Franco Sr. made with Liposcience."

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