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.
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. 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.
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:
- 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.
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 firstname.lastname@example.org. 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.