November 20, 2015
In a previous post, I detailed the types of restrictive covenants. Click here to read that post.
Obtaining an employee’s signature on a post-employment restriction is easy work compared to court enforcement of a restrictive covenant. The former is like a level road with a few curves; the latter is like a twisting mountain highway. Courts do not view post-employment restrictions favorably, because the law prohibits restraints on competition. The courts will restrain an ex-employee from violating a restrictive covenant only when the circumstances make it reasonable to enforce the covenant. (However, if the ex-employer sues for damages, not an injunction, a Pennsylvania court will look only at the terms, not the reasonableness, of the agreement.)
There are four essential requirements that make post-employment non-compete and non-solicit covenants enforceable in the eyes of the court. It helps to use the word ACRE to remember these four elements: Ancillary, Consideration, Reasonable Terms, and Equitable to Enforce.
Ancillary – A non-compete or non-solicit must be ancillary to an employment relationship or other legally enforceable relationship. The vast majority of restrictive covenants accompany employment relationships. Other relationships that support restrictive covenants include independent contractor agreements, sales of businesses, franchises, distributorships, and joint ventures.
Consideration – The non-compete or non-solicit must be supported by consideration. Consideration is found in the commencement of employment, but an employer who extends a comprehensive pre-employment offer must include information about a restrictive covenant with the offer. For current employees, consideration must include a significant enough benefit to the employee to offset the burden of new post-employment restrictions. The test of what benefit is enough is very much a case-by-case analysis. Mere continuation of at-will employment is not sufficient; “sign or hit the road” is clearly inadequate. In the case of Socko v. Mid-Atlantic Systems, the Pennsylvania Supreme Court has just held that consideration is still needed when a current employee signs a non-compete stating that the parties intend to be legally bound, although Pennsylvania’s Uniform Written Obligations Act provides that a contract will not be unenforceable for lack of consideration where the parties recite that they intend to be legally bound.
Reasonableness – The non-compete or non-solicit must be reasonably necessary to protect the employer’s legitimate interests and reasonable in length and geographic scope. The employer’s legitimate interests include goodwill, customer relations, trade secrets, confidential business information, and specialized skills or training. Reasonableness of length depends on the time the employer needs to hire and train a new employee and restore customer relations and goodwill. Covenants of one year are generally reasonable for employees. Longer (sometimes much longer) durations are reasonable in the sale of a business. Reasonableness of geographic scope depends on the area that is necessary to protect the employer’s business. Generally a covenant that covers the territory served by the employee will be reasonable. Greed does not pay: An employer who asked the court for protection everywhere except “the North Pole and Tibet” left court without an enforceable covenant.
Equitable – Finally, the court will look to the case’s facts to ensure that it is fair to enforce a restrictive covenant. The court may refuse to enforce a non-compete if the employer has discharged the employee through no fault on the employee’s part. Examples of a no-fault discharge include a layoff or termination for poor performance despite the employee’s best efforts. Other facts that may lead a court to deny enforcement are
- sexual harassment of the employee
- failure to pay an employee
- poor handling of business that makes the loss of business the employer’s own fault
- the employer’s past violation of a restriction in hiring the employee it now seeks to restrict.
It is important to remember that Pennsylvania follows the “blue pencil” rule that allows courts to modify restrictive covenants so that the terms are reasonable to enforce. Therefore, before enjoining an ex-employee, the courts always consider whether it is necessary to limit the terms of the non-compete or non-solicit agreement. Even where the law and facts support enforcement, there is no complete guarantee that a restrictive covenant will be enforced fully.
The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.