Month: September 2022

You are the CEO of Company A, a cutting-edge developer of new software.  Over golf (or sushi), you agree with the CEO of equally advanced Company B that each of you will not hire or try to hire away the other’s top talent through an anti-poaching agreement.

Is anything wrong with this?  Yes!  The Sherman Antitrust Act prohibits contracts in restraint of trade or competition.  And an agreement with no purpose besides conspiring to limit talent competition is a per se violation of the Sherman Act.  The Sherman Act carries severe criminal and civil penalties.  So the two CEOs should re-think their approach, to put it mildly.

Both CEOs have tried to enter into non-hire and anti-poaching agreements. In such an agreement, competing employers agree to refrain from hiring or recruiting (poaching) each other’s employees.  A typical agreement prohibits cold calling and bidding wars for employees and requires notification when recruiting each other’s employees.

Anti-Poaching Agreements Present Serious Concerns

Non-hire and anti-poaching agreements raise several key policy and economic concerns.

First, the agreements make it hard for employees to move between employers.  Most employees are at-will employees who may leave one employer for another at any time, for any reason or no reason.

Second, these agreements operate to suppress employee salaries. For example, competition for talent drives wages up, and restraints on competition have the opposite effect.

Third, the agreements may not even be known to employees who try to find a new job (or recruit from other companies), only to find they have violated a policy set by those at the top.

Anti-Poaching Agreements Serve Little Purpose

Non-hire or anti-poaching agreements are also unnecessary.  Employers can use less harsh measures to protect against a talent drain by using contracts that are ancillary to a business relationship and reasonable in scope.  Post-employment restrictive covenants for non-competition and non-solicitation may limit an employee from working for a competitor or accepting or soliciting business from customers.

Restrictive covenants are enforceable if supported by consideration. For example, the restrictions must reasonably relate to legitimate business interests. They must also be reasonable in time and geographic scope. Employers may also contract to restrict a departing employee from soliciting or hiring former co-workers to join a new employer during a short post-employment period.

This type of anti-raiding agreement is enforceable in Pennsylvania to prevent a competitor from crippling or destroying another business. However, it does not prevent a competitor from hiring away talent.  And courts are reluctant to find that an ex-employee has solicited anyone absent active pursuit of a former colleague. For instance, it is not a solicitation to tell someone about an opportunity or a job posting.

Beyond that, courts have allowed anti-poaching agreements in limited circumstances where one employer places a consultant or expert with another business.  An employer may also require employees to repay training costs where an employee receives training and then leaves shortly afterward.  Unions have the same power where a trainee takes a non-union job after training.

Case Law Relating to Poaching Clauses

Like many employment law trends, scrutiny of anti-poaching agreements seems to have started in California.  The courts first addressed a class action by employees in the technology industry. Employees complained of a concerted effort to prevent poaching.

The following major class action dealt with the animation industry.  But non-hire agreements have also arisen in less high-flying or glamorous industries.  For example, earlier this year, the U.S. Department of Justice negotiated an antitrust settlement that banned non-hire agreements by two significant competitors in the rail equipment industry.  This settlement led to a private civil antitrust class action by employees of the two competitors.

And in March 2018, a Pennsylvania Superior Court panel affirmed a lower court order invalidating a no-hire agreement in the trucking industry as contrary to public policy.  The Superior Court has since granted the reargument en banc and has withdrawn the panel decision.  The en banc decision will tell us whether Pennsylvania will join those who have rejected no-hire agreements, like Wisconsin, or permit suitably narrow agreements like many other states.

And finally, the fast food industry has come under fire for using anti-poaching agreements prohibiting employees from working simultaneously at more than one chain location.  Early in July, attorneys general in 11 states demanded documents from eight well-known fast food chains regarding the use of these no-poaching provisions.  So non-poaching agreements are seemingly in use, and under attack, in both the economy's high-end and more basic sectors.

Talk to Our Employment Lawyers

If you have questions about anti-poaching agreements, please contact Thomas D. Rees at 610-275-0700 or trees@highswartz.com. Our employment lawyers provide businesses and nonprofit organizations throughout the Pennsylvania region, including Bucks County, Montgomery County, Delaware County, Philadelphia, and Chester County, with sound advice and excellent representation. Our employment law attorneys deal with workplace issues in an ever-changing environment. They seek to minimize the risk of employee lawsuits for our clients.

The information above is general: we recommend you consult an attorney regarding your circumstances.  The content of this information is not meant to be considered legal advice or a substitute for legal representation.

Throughout your professional career, you may have signed a non-compete. But, if you haven't yet, now is an excellent time to learn about these common and important documents.

Typically, you'll receive a non-compete agreement when you start a new job. Your temptation may be to skim the pages without paying attention to the details or restrictions. After all, the non-compete only applies after you leave this job, and you're likely thrilled about the new position at the moment of signing. But it's later, when a headhunter contacts you or you're ready for a career change, that you begin to worry about the implications of your non-compete.

What is a Non-Compete?

A non-compete agreement is a restrictive covenant limiting your ability to work in a particular field or industry. Generally, it includes a timeframe and defines the geographic area where you can work. It differs from a garden leave agreement, commonly used for companies in financial sectors.

Some states, like North Dakota, Oklahoma, and California, don't enforce non-competes. Pennsylvania has no general statute or regulations governing them.

That said, plenty of case law guides interpreting, understanding, and enforcing non-competes. However, Pennsylvania courts disfavor tools used to restrain trade. As a result, they tend to construe non-compete agreements against an employer seeking enforcement.

Accordingly, the courts will only enforce a  non-compete agreement that is:

1. Incidental to an employment relationship between the parties
2. Reasonably necessary to protect the employer's business interests
3. Reasonably limited in scope, duration, and geography

Courts require that you affirmatively agree to the terms of a non-compete - such as by reading and signing it. So, for example, an employer can't just tell you it is there and bind you to its terms.

In addition, you're not required to sign a restrictive covenant. However, your employer may rescind the job offer by failing to do so. Moreover, your employer may fire you if you are already employed. You can contest the employer's decision.

Whether you win or not depends on the facts of each case and state employment laws. In addition, the reasonableness of the proposed non-compete may be relevant.

Non-Compete Agreements Require Consideration

Like any other contract, a non-compete agreement requires sufficient consideration. Generally, your employment represents appropriate consideration. So, your employer will ask you to sign a non-compete before or after your employment begins. Accordingly, you'll want to keep an eye out for a non-compete in the packet of papers you get on your first day.

After beginning work and being asked to sign a non-compete, the consideration can be either an increase in pay or a beneficial change in your employment status. However, an employer telling you to "sign or get out" is not sufficient consideration in Pennsylvania.

Restrictions on Your Employment

Once you satisfy yourself that consideration exists, you'll want to look at the agreement's actual terms. Since every non-compete and restrictive covenant is unique, the terms analysis will be highly fact-specific. Nonetheless, there are some rules of thumb to keep in mind.

Courts rarely uphold any types of restrictive covenants with non-competes combining excessive timeframes with a broad geography.

Pennsylvania courts have usually upheld restrictions for durations of one to three years. Regarding geographic scope, Pennsylvania courts look to the range of the employee's duties in defining a reasonable territorial limitation. For example, your position is sales-related and in a relatively defined territory. In this instance, a non-compete agreement prohibiting you from selling a competitor's product or service would likely be appropriate.

A Pennsylvania court may, at its discretion, modify the terms of the agreement. For example, it can assign a more reasonable scope or duration if determining the more appropriate course of action. Indeed, some non-competes go overbroad with their restrictions. As a result, a court may nullify the non-compete entirely if an employee challenges the agreement.

Is It Possible to Challenge a Non-Compete Agreement?

If you ignore a non-compete, you risk a lawsuit or termination by your employer. However, there are ways to challenge the validity of your restrictive covenant.

Here are five ways to beat your non-compete agreement:

1. Breach of Contract: Sometimes, employers bury a non-compete in an employment contract. So, ensure your employer lived up to other contractual obligations such as insurance or compensation. If your employer breached the contract, courts might relieve your non-compete obligations.
2. Legitimate Interest: Not all positions require a restrictive covenant. For example, suppose your work isn't privy to trade secrets, confidential information, specialized training, or other proprietary materials. In that case, there's no reason to include a non-compete as a condition of employment.
3. Reasonable Term: As mentioned, courts determine the reasonable timeframe for non-competes. If your employer includes an unreasonable period, courts may not uphold your non-compete. But, again, it depends on your state, job, and industry.
4. Confidential Information: If you have access to information available to everyone, it's not secret. Courts may not enforce the non-compete if you can prove that information is public domain.
5. Short-Staffed Positions: Some industries need workers, for example, in health, science, and safety positions. If you're in a short-staffed place, courts typically won't enforce a non-compete.

Talk to an employment lawyer to determine if you have appropriate grounds for challenging your employment agreement.

Is a Non-Compete Enforceable if I'm Fired?

It depends. First, look at the terms of your non-compete to see if it addresses termination. If so, the next question is whether that's legal, which again depends.

For example, if your employer is guilty of misconduct and terminates you, most courts have held that a non-compete is no longer enforceable. The reasoning is that illegal conduct by the employer was not part of your expectations when agreeing to the contract. It holds if your employer conducted unlawful activities and you elect to leave your job because of it.

Even if the reason for your termination is your fault, it's likely not to be a significant determinant. Generally, courts are less eager to enforce a non-compete agreement where the employer, and not you, decides to terminate the relationship.

Talk to an Employment Lawyer Before Signing Any Restrictive Covenants

Ultimately, each non-compete agreement is specific to the employer, its business, and the employee's position. However, interpreting and determining their enforceability is daunting. If you have concerns about a non-compete you signed or your employer asked you to sign, it's wise to seek advice from an experienced employment lawyer. They can help you most effectively navigate the non-compete's terms.

If you have any questions about employment agreements relating to restrictive covenants or employment issues in general, please get in touch with us at 610-275-0700 or main@highswartz.com.

Our employment law attorneys provide clients throughout the Pennsylvania region, including Bucks County, Montgomery County, Delaware County, Philadelphia, and Chester County, with sound advice and excellent representation. Our employment lawyers deal with workplace issues in an ever-changing environment. They counsel and serve employers on general employment policies and handle individual employment matters.

The information above is general: we recommend you consult an attorney regarding your circumstances. You should not consider the content of this information as legal advice or a substitute for legal representation.

Post-employment restrictive covenants in PA come in multiple varieties. But the non-compete covenant is the most burdensome of all.

Most people have heard, and are likely familiar with, the term non-compete, which is one type of restrictive covenant. It's not uncommon for an employer to ask an employee to sign a non-compete clause, which limits competing for employment after the employee's current job ends. For example, you may have heard of non-competes because of high-profile cases involving executives or broadcast personalities invited to join a competing employer.

But, media spotlight aside, post-employment restrictions come in multiple varieties, and the non-compete covenant is the most burdensome of all post-employment restrictive covenants. Other limits that are easier to create and manage may serve an employer just as well.

What's the Purpose of a Restrictive Covenant?

At their core, restrictive covenants contain four types of promises:

1. A promise not to compete with a former employer
2. A promise not to solicit or accept business from customers of the former employer
3. A promise not to recruit or hire away employees of the former employer
4. The promise not to use or disclose the former employer's confidential information.

Typically, the duration of restrictive covenants ranges from  1-2 years for employment and 5-10 years for the sale of a business. In addition, covenants must be limited to where the company conducts business and the employee's responsibilities. However, no geographic scope is necessary for a non-solicitation of customers or employees.

A Restrictive Covenant Requires a Legitimate Purpose

Three states prohibit employers from asking their employees to sign restrictive covenants, including California, Montana, and North Dakota. In addition, California prohibits the non-solicitation of customers. Note that Pennsylvania recognizes only the first two types of non-competes presented below.

In the remaining jurisdictions, a restrictive covenant is enforceable only when serving a legitimate purpose. Moreover, the covenant must be reasonable in scope, geography, and time. Although limitations vary from state to state, most jurisdictions apply this framework for determining legitimate purposes:

• The covenant preserves confidential information
• It protects customer relationships
• And it preserves goodwill

For the most part, continued employment is sufficient consideration to support the covenant. But some states require an employer to offer additional consideration, for example, through a signing bonus or severance.

7 Types of Restrictive Covenants

From a broad perspective, we'll address seven types of restrictive covenants. Whether each is enforceable or not, and to what extent, depends mainly on state laws. However,  most states impose varying rules on what specific types of clauses are allowed in restrictive covenant agreements. You can learn more about the enforcement of restrictive covenants here.

1. Non-Compete Covenant

It prohibits an ex-employee from working for a competing employer for a stated period after leaving a job.

2. Specific Non-Compete Covenant

This restrictive covenant is narrower. It keeps the ex-employee from doing business with customers for a set time. But it does not prohibit working for a competitor.

3. Customer Non-Solicitation Covenant

A less strict type of restrictive covenant, the customer non-solicitation covenant, prevents the former employee only from initiating contact with customers (or even prospects) after leaving a job. However, a non-solicit does not bar an ex-employee from doing business with a customer that initiates contact with the ex-employee.

4. Employee Non-Solicitation Covenant

Sometimes called an anti-piracy clause, these agreements prohibit ex-employees from soliciting other former co-workers from joining the new employer. Unfortunately, the courts hesitate to enforce anti-piracy clauses without evidence of an intention to destroy a competitor.

5. Confidentiality or Non-Disclosure Covenant

This restrictive covenant prohibits ex-employees from using or disclosing the employer's confidential business information. Technically, these clauses are not essential to protect confidential information. For example, trade secret law, now embodied in the Pennsylvania Uniform Trade Secrets Act, does this job as well. But many employers also want an explicit prohibition on misuse of employer secrets to bolster any trade secret claim.

6. Garden Leave

The newest type of restrictive covenant is the "garden leave" requirement. This "pre-post-employment" restriction is most common in high-end financial services work. Once the employer has notice of an employee's impending departure, the employer sends the employee home to "the garden" for an extended period.

During garden leave, the employee remains on the old employer's payroll. However, they may not perform work for the old or new employer. In addition, they may not contact clients or customers. The employer uses the employee's garden leave to cement relations with the employee's clients, so the clients do not follow the ex-employee to the new employer. A variation on garden leave is "bench pay." Here, an employer has to pay an ex-employee who can show that the non-compete has prevented acceptance of a new position during the restricted period.

7. Assignment of Property Rights

The seventh restrictive covenant is the assignment of property rights. Generally, the rights to own, patent, copyright, or trademark items happen during employment. This assignment is essential where an employee develops inventions of possible value to the employer.

Have Questions About Restrictive Covenants?

This article serves as a basic introduction to the types of restrictive covenants. But, if you need more information, including what it takes to draft and enforce a valid restrictive covenant, contact Thomas Rees via email at trees@highswartz.com.

The information above is general: we recommend you consult an employment lawyer at our Doylestown and Norristown law firm regarding your circumstances. You should not consider the content of this information as legal advice or a substitute for legal representation.

Obtaining an employee's signature on a post-employment restriction is simpler than restrictive covenant enforcement. By the way, I detailed the 7 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. However, a Pennsylvania court will look only at the terms when the ex-employer sues for damages, not an injunction. It will not consider the reasonableness of the agreement.

The Four Requirements for Restrictive Covenant Enforcement

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. So, let's look at how each applies to enforcing covenants.

1. Ancillary

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.

2. Consideration

For restrictive covenant enforcement, consideration must support the non-compete or non-solicit. Consequently, the employee must receive something to execute the restrictive covenant. 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. For example, in some states, continued employment with the employer is sufficient consideration. That's not the case in Pennsylvania, however.

For example, in Socko v. Mid-Atlantic Systems, the Pennsylvania Supreme Court held that consideration is still needed for restrictive covenant enforcement when a current employee signs a restrictive covenant binding the parties. 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.

3. Reasonableness

The threshold requirement to enforce a restrictive covenant requires a protectable business interest. As a result, the non-compete or non-solicit must be reasonably necessary to protect the employer's legitimate interests and reasonable in length and geographic scope.

However, an employee's general knowledge of customer information is not a protectable interest. As a result, a company cannot restrict future employment for all employees.

Legitimate employer interests include:

• • Goodwill
  • Customer relations
  • Trade secrets
  • Confidential business information
  • Specialized skills or training

In addition to employer interest, restrictive covenants must include reasonable geographic and time limitations. Reasonableness of length often depends on the time the employer needs to hire and train a new employee and restore customer relations and goodwill. Restrictive covenants of one to two years are generally considered reasonable and enforceable.

However, longer (sometimes much longer) durations are appropriate for the sale of a business.

Generally, a restrictive covenant that covers the territory served by the employee will be reasonable. For example, some situations may preclude an employee from joining a competitor within twenty miles. In other instances, it could include preventing employment throughout the United States. However, greed does not pay.

For example, an employer who asked the court for protection everywhere except "the North Pole and Tibet" left the court without restrictive covenant enforcement. Courts have the final say to narrow the time or geography based on what they deem reasonable.

4. Equitable

Finally, the court will look to the case's facts to ensure that restrictive covenant enforcement is fair. For example, 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 making 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.

What Happens When the Restrictive Covenant is Enforced?

If enforced, the employer can seek injunctive relief and obtain a court order enjoining the former employee from violating the terms of the covenant. Generally, injunctive relief requires the employee to leave the new employer.

However, depending on the restrictive covenant's language, the court can direct the violating employee to reimburse the employer for its attorney's fees to enforce the covenant. Typically, the initial agreement spells out this outcome. In addition, it can require the employee to pay back any monies stemming from their violation of the restrictive covenant.

Other forms of monetary relief from restrictive covenant enforcement include the employee compensating the employer for lost profits. The original covenant may also include an amount for violating the agreement. The employee may face punitive damages when evidence of malicious conduct occurs.

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, contact Thomas Rees via email at trees@highswartz.com. The employment lawyers at our law firm are here to help. We have offices in Doylestown and Norristown, serving Montgomery and Bucks counties.

The information above is general: we recommend you consult an employment lawyer regarding your circumstances. You should not consider this information as legal advice or a substitute for legal representation.

Garden Leave Allows Some Protection for an Employer

The term sounds pastoral, but its use is practical. For example, garden leave is an agreed-upon period when an employer pays a departing key employee not to work before the employee joins a competitor. In essence, it's another type of restrictive covenant.

Originating in England, the employee is to stay "in the garden" for the leave's term.

Garden leave is similar, but not identical, to other contracts where an ex-employee is paid instead of working for a competitor. For example, an employer occasionally agrees to a "safety net" or "bench pay," paying the ex-employees salary for the length of a non-compete. However, the ex-employee must first show that the non-compete prevents them from obtaining suitable work.

Garden leave, by contrast, is unconditional. Also, on garden leave, the employee remains on the payroll. Conversely, the employee has already left in a "bench pay" situation.

While the employee is on garden leave, the previous employer has the opportunity to contact the departing employee's customers to retain them. The departing employee has what amounts to a paid vacation and must not work for a competitor during this period. Once this period ends and the employee starts with the new firm, it is an open season. The departing employee and the old employer may solicit and pursue business freely.

How Long Does Garden Leave Last?

Garden leave can range from several months through a year. During the leave period, the employee does no work for either the old or prospective employer. The employee defers the new employer's start date until the leave period's end.

What Type of Companies Use It?

Investment banking and financial service sectors often use this approach. In effect, it takes the place of non-compete agreements. Many firms using garden leave are in the Northeast and Mid-Atlantic regions. During the past ten years, courts have begun to pay more attention to its provisions, and the trend is likely to continue.

Pros of Garden Leave

On the surface, garden leaves appeal to courts more so than non-competes. These covenants lower the burden on employees. First, they get paid. Second, the length of the agreement is typically less than a non-compete. It's essential to note that case law is limited in many jurisdictions, leading to concerns about its enforceability.

For employers, garden leave allows them to remove an employee while ensuring they can't use company resources to further their agenda. It also offers the employer some protection as they investigate the situation.

During the leave, only the employer can contact the departing employee's clients without fear of competition from the employee. Courts allow the typical 30 to 90-day period of most garden leave agreements. And that's a critical time for employers following an employee's departure. In addition, employers can release departing employees from the contract if they present no threat.

On the other hand, the employee bears the burden of separation from customers and the possible stigma of not being active in the industry for a brief period. But, they get paid. And the employer can't hire a replacement during garden leave. In addition, employees know that the former employer's customers are fair game after a much shorter restrictive period expires.

Garden Leave Cons

Although the shorter timeframe may benefit an employer, it provides less protection than a restrictive non-compete covenant. Non-competes generally use terms of six months up to two years.

Equally important, the employer pays the employee without them performing work. However, from the employee's perspective, they remain employed and may be required to work during the garden leave period.

Employers can legally fire employees who refuse to take garden leave without explaining. So if employees are not prepared to risk losing their job, their employers can force garden leave upon them.

Employees must realize that the no-contact rule during garden leave is critical. Because the employee is still on the payroll, any attempt by the employee to divert business to a new firm would violate multiple obligations:

1. The restrictive covenant itself
2. The duty of loyalty that employees owe to employers
3. The commitment to preserve confidential employer information and trade secrets

Why Do Employers This Type of Restrictive Covenant?

As a restrictive covenant, garden leave is a less costly, more specific way to sever ties with an employee who poses a competitive threat.

Its use depends on an ex-employers motivation to pursue and secure business that might otherwise migrate with the departing employee. The goal for the employer becomes how to retain business, a more positive focus than non-compete litigation. With a non-compete, the goal is to keep the departing employee from retaining customers. It also prevents them from entering into competition against their former employer.

If you require legal advice regarding garden leave or any other employment law matter, don't hesitate to contact Thomas D. Rees at 610-275-0700 or trees@highswartz.com. The employment lawyers at our Norristown and Doylestown law offices are here to help.