Restrictive Covenant Enforcement Involves Four Requirements
Obtaining an employee's signature on a post-employment restriction is simpler than restrictive covenant enforcement. By the way, I detailed the types of restrictive covenants in this post. For example, the former is like a level road with a few curves; the latter is like a twisting mountain highway. Consequently, courts do not view post-employment restrictive covenants 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 it. However, a Pennsylvania court will look only at the terms if the ex-employer sues for damages, not an injunction. It will not consider the reasonableness of the agreement.
There's an easy acronym for the four requirements for restrictive covenant enforcement -- ACRE. It stands for Ancillary, Consideration, Reasonable Terms, and Equitable to Enforce.
A non-compete or non-solicit must be ancillary to an employment or legally enforceable relationship. But the vast majority of restrictive covenants accompany employment relationships. Other associations that support restrictive covenants include independent contractor agreements, sales of businesses, franchises, distributorships, and joint ventures.
For restrictive covenant enforcement, consideration must support the non-compete or non-solicit. Commencement of employment helps determine consideration, 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 insufficient; "sign or hit the road" is inadequate.
In the case of Socko v. Mid-Atlantic Systems, the Pennsylvania Supreme Court has just held that consideration is still needed for restrictive covenant enforcement when a current employee signs a restrictive covenant that the parties intend to be legally bound. However, 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.
The non-compete or non-solicit must be reasonably necessary to protect the employer's legitimate interests and reasonable in length and geographic scope. For example, 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. Restrictive covenants of one year are generally reasonable for employees. Longer (sometimes much longer) durations are appropriate for the sale of a business. Reasonableness of geographic scope depends on the area necessary to protect the employer's business.
Generally, a restrictive covenant that covers the territory served by the employee will be reasonable. However, greed does not pay: An employer who asked the court for protection everywhere except "the North Pole and Tibet" left the court without restrictive covenant enforcement.
Finally, the court will look to the case's facts to ensure that restrictive covenant enforcement is fair. 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 fault
- the employer's past violation of a restriction in hiring the employee it now seeks to restrict.
Pennsylvania's Blue Pencil Rule for Restrictive Covenant Enforcement
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 restrictive covenant enforcement, there is no complete guarantee the court will enforce a restrictive covenant fully.
For more information, including what it takes to draft and enforce a valid restrictive covenant, feel free to contact Thomas Rees via email at firstname.lastname@example.org. The employment lawyers at our Doylestown and Norristown law firm are here to help.
The information above is general: we recommend you consult an employment lawyer regarding your circumstances. The content of this information is not meant to be considered legal advice or a substitute for legal representation.