NON-COMPETE AGREEMENTS AND RESTRICTIVE COVENANTS
Non-Compete Agreements, also referred to as Restrictive Covenants, are often contained within employment contracts, or in some instances where employees do not have formal employment contracts, employees are required to sign separate documents which contain non-compete or non-solicitation agreements. Employers use these agreements to attempt to protect business interests. Laws regarding non-compete agreements and restrictive covenants are unique to each state and the likelihood that a court would enforce an agreement is a matter of state law.
The most common example of a restrictive covenant is a non-compete agreement which restricts a former employee's future employment opportunities. Other restrictions include protection for trade secrets and non-solicitation agreements, which seek to prohibit former employees from soliciting customers of the employer or attempts to hire former colleagues.
There are several different ways that non-compete agreements impact an employee once an employee leaves a business. If the employee finds another job, the former employer may have a claim or file a lawsuit against the employee to attempt to force the former employee to quit the new job. If an employee takes a position which the former employer believes is in violation of a non-compete agreement, it may sue the employee seeking a court order to prevent the employee from working. An employer must show that the employee has in fact taken or threatened to take an action in violation of the non-compete agreement.
Pennsylvania courts have generally found non-compete agreements to be enforceable if the agreement is incident to an employment relationship between the employer and employee; the restriction imposed is reasonably necessary for the protection of the employer's business interest; and the restrictions imposed are reasonably limited in duration (time) and geographic area. Nevertheless, the Pennsylvania Supreme Court has made it clear that non-compete agreements and restrictive covenants are not favored in Pennsylvania and are viewed as a trade restraint that prevents a former employee from earning a living. As a consequence, courts scrutinize restrictive covenants in employment agreements to determine whether the burden placed on the former employee is unreasonable. Even when courts decide to enforce an agreement, when an employer imposes restrictions broader than necessary to protect the employer, courts may limit restrictions to those that are reasonably necessary for the protection of the employer.
There are several principles which have developed as part of Pennsylvania case law in determining whether non-compete agreements / restrictive covenants are enforceable.
- Protection of a Legitimate Business Interest: An employer may not enforce a post-employment restriction on a former employee simply to eliminate competition; the employer must establish a legitimate business interest which is seeks to protect.
- Consideration for Signing the Agreement: In order for a restrictive covenant to be enforceable, there must be consideration exchanged for its execution. In other words, the employee must receive something in return. For instance, if an employee is already employed by the employer and asked to sign a restrictive covenant, the employer may need to increase the employee's salary, provide a lump sum payment or offer some other material consideration for an agreement to be enforceable.
- Termination of Employment or Voluntary Departure: Another important factor in determining enforceability is if an employee against whom the covenant is being enforced was terminated by the employer or left employment voluntarily. While a restrictive covenant can still be enforced even if an employee is terminated, the fact that an employee is terminated without cause is a factor that courts consider. The reasoning behind this law is that if an employer deems the employee worthless, the need for the employer to protect itself from the former employee is presumably insignificant.
- Assignment to a New Employer: In Pennsylvania, a restrictive covenant not to compete contained in an employment agreement, is confined to the employer with whom the agreement was made, and is not assignable to a new entity which acquires the former employer unless there is specific language permitting assignment in the original agreement.
- Non-Compete Agreements Incident to the Sale of a Business: Courts recognize that parties entering into agreements for the sale of a business generally possess equal bargaining power and these agreements are treated differently and are much more likely to be enforceable.
Trade Secrets and Confidential Information
The kinds of business interests that courts consider to be legitimate and protectable under a restrictive covenant include trade secrets and confidential information. A trade secret may be a formula, pattern, device or compilation of information which is used in a business and which provides the employer an advantage over competitors who do not know the trade secret or do not use it. Examples include a formula for a chemical or a manufacturing process or a customer list. For a trade secret to be recognized it must be substantially secret and provide competitive value to the employer owner. The question of whether information is a trade secret is determined on a case-by-case basis. If a competitor could obtain the information by legitimate means, it will not be given injunctive protection as a trade secret.
Non-solicitation Agreements are designed to restrict former employees from taking an employer's customer or employees to the former employee's new employer. There are two types of non-solicitation agreements. Customer non-solicitation agreements prohibit former employees from initiating any contact with customers of the employer. Employee non-solicitation agreements prohibit former employees from soliciting former colleagues to leave the employer and join a new employer. In the absence of a non-solicitation agreement an employee is generally free to leave an employer and solicit the former employer’s customers and recruit the employer's employees.
In Pennsylvania non-solicitation agreements are enforceable if the agreement is incident to an employment relationship between the employer and employee; the agreement is supported by consideration which may include an initial offer of employment or a beneficial increase in the terms and conditions of employment; the agreement is reasonably necessary to protect the employer's legitimate interests; the agreement is reasonable in duration and geographic scope.
Preliminary Injunctions and Non-Compete Agreements / Restrictive Covenants
There is most often a unique expedited litigation process when an employer seeks to attempt to enforce a non-compete agreement / restrictive covenant. Employers argue that they will suffer immediate harm by an employee who violates a non-compete agreement. Consequently, employers file preliminary injunctions to attempt to obtain immediate relief. Preliminary injunctions are temporary court orders during the pendency of litigation which courts sometimes enter until a final decision regarding a cause of action is made. In order for an employer to obtain a preliminary injunction against former employee, the employer must establish that: (1) the injunction is necessary to prevent immediate and irreparable harm that cannot be adequately compensated by money damages; (2) greater injury will occur from refusing to grant the injunction than from granting it; (3) the injunction will restore the parties to their status quo as it existed before the alleged wrongful conduct; (4) the employer is likely to prevail on the merits; (5) the injunction will reasonably serve to enforce a restrictive covenant; and (6) the public interest will not be harmed if the injunction is granted.
We frequently consult with clients when issues arise concerning a Non-Compete Agreements, Restrictive Covenants, Trade Secrets, Non-Solicitation Agreements and Preliminary Injunctions. Call us today at 267-470-4742 or contact us online to discuss your legal options.