Is the non-competition agreement in your Pennsylvania employment agreement legal?

(NOTE: New law to be voted on in 2018 may change legality of non-competes in Pennsylvania.)

Pennsylvania does not have a general state statute governing the enforceability of covenants not to compete, but has enacted the Uniform Trade Secrets Act.[1]  However, the protection under a non-competition agreement is greater than that provided by the UTSA because it is not necessary to show misappropriation of any information where there is a non-compete.[2]

Enforceable Non-Competes.  To be enforceable in Pennsylvania, a restrictive covenant must (1) be ancillary to an employment relationship or other lawful transaction between the parties (including a contract for the sale of goodwill[3]); (2) be supported by sufficient consideration; (3) be reasonably necessary for the protection of legitimate interests of the employer; and (4) be reasonably limited in duration and geographic extent.[4]

Reasonableness.  As in most jurisdictions, Pennsylvania courts “balance the interest the employer seeks to protect against the important interest of the employee in being able to earn a living in his chosen profession” to determine the appropriate time and territory restrictions.[5]

Length of Restrictions.  Temporally, courts routinely uphold one-year covenants not to compete.[6]  Two-year and three year covenants not to compete have also been upheld.[7]  Where the restrictive covenant involves a sales employee, courts look at the type and frequency of the contact between the sales person and the customer and the complexity of the products sold.[8]

Geographic Scope.  Geographically, the restrictive covenant should be limited to the employer’s business or the employee’s territory.[9]  Courts will uphold restrictions that are broad or unlimited if the employee’s conducted duties in a broad area, or the customers are geographically broad.[10]  The geographic area may also be expanded where the employee has knowledge of confidential information beyond the geographic area in which he or she was responsible for.[11]  Finally, internet businesses have the strongest argument for a nationwide covenant because “transactions involving the Internet, ‘unlike traditional ‘sales territory’ cases, are not limited by state boundaries.”[12]

Legitimate Protectable Interests. Covenants not to compete must be reasonably necessary to protect the employer’s legitimate business interests to be enforceable.[13]  Legitimate business interests include the employer’s goodwill and relationship with its customers, specialized training and skills[14] that the employer provided to its employees, trade secrets, and confidential information.[15]

Non-disclosure agreements can bolster the claim that there is confidential data being protected, but are not definitive.[16]  Employer trade secrets are also a protectable legitimate business interest, and include customer lists that cannot be easily obtained from another independent source and meet other requirements to constitute a trade secret.[17]

Protectable customer good will includes any “pre-existing relationship arising from a continuous course of business which is expected to continue indefinitely,” and it includes good will acquired by the employee for the company.[18]

Extensive, specialized training in the methods of a business can be a justification for a covenant not to compete.[19]  However, training that is publicly available or was received by an employee prior to being employed will not be sufficient.[20]  Courts have also said that techniques employed by salespersons in various industries, such as passing out golf balls and shirts to potential customers, do not qualify as unique and extraordinary skills and do not require specialized training.[21]

Employers have a protectable interest in enforcing non-competition agreements against employees who have been terminated for misconduct.[22]  However, courts will not enforce noncompetition agreements where the employee is terminated without any cause or fault (i.e., for poor performance or because of the employer’s financial limitations, assuming the employee did not intentionally perform poorly to avoid a non-compete).[23]

Note that eliminating competition is not a legitimate business interest.[24]

Franchise[25] and license[26] agreements may appropriately include covenants not to compete to protect legitimate business interests.

Scope of the Agreement.  Pennsylvania courts have found that the scope of the non-compete varies depending on the business interest. For example, one court noted that the employer may not need protection beyond a sales employee’s territory to protect customer relations, but may need to cover all of its competitor’s areas to protect its specialized skills or training.[27]

Consideration.  Employment, including the commencement of at-will employment, is sufficient consideration for a covenant not to compete.[28]

By contrast, continued employment (after the inception of the employment relationship) is not sufficient consideration for a covenant not to compete.[29]  However, “a beneficial change in an employee’s status [is] sufficient consideration to support a restrictive covenant agreed to after the taking of employment.”[30]  New consideration could include additional stock options[31], a promotion, and pay raises or other employment benefits.

Severance pay after termination can constitute new consideration for a non-competition agreement.[32]

Blue Penciling.  Pennsylvania courts will blue pencil and reform unreasonable noncompetition agreements to enforce only the reasonable provisions in the agreement.[33]

Drafting.  Restrictive covenants should be carefully drafted, as they are disfavored as a restraint on trade and any ambiguity will be construed against the employer.[34]

[1] 12 Pa. Const. Stat. § 5301 et seq.  As in many states, restrictions on covenants not to compete related to attorneys are governed by professional responsibility rules.

[2] CertainTeed Ceilings Corp. v. Aiken, 2014 U.S. Dist. LEXIS 152446, 2014 WL 5461546, at *9-11 (E.D. Pa. Oct. 27, 2014); Intermetro Indus. Corp. v. Kent, 2007 WL 1140637, at *5 (M.D. Pa. Apr. 17, 2007).

[3] Wincup Holdings, Inc. v. Hernandez, 2004 WL 953400, at *2 (E.D. Pa. May 3, 2004).

[4] Hess v. Gebhard &’Co., 570 Pa. 148 (2002); Wellspan Health v. Bayliss, 869 A.2d 990, 997 (Pa. Super. Ct. 2005).

[5] Wellspan Health v. Bayliss, 869 A.2d 990, 999 (Pa. Super. Ct. 2005); Hess v. Gebhard &’Co., 570 Pa. 148 (2002).

[6] National Bus. Servs., Inc. v. Wright, 2 F. Supp. 2d 701, 708, 13 IER Cases 1793 (E.D. Pa. 1998)(noting that “Pennsylvania courts routinely uphold one[-]year covenants not to compete”); Diversey Lever, Inc. v. Hammond, 1997 WL 18711, at *1, 23 (E.D. Pa. Jan. 24, 1997) (one-year covenant not to compete upheld).

[7] Worldwide Auditing Servs., Inc. v. Richter, 402 Pa. Super. 584, 591-92, 587 A.2d 772, 776 (1991) (two-year covenant not to compete); Coventry First, LLC v. Ingrassia, 2005 WL 1625042, at *8 (E.D. Pa. July 11, 2005) (three-year restriction upheld).

[8] Robert Clifton Assocs., 388 Pa. Super. at 257, 487 A.2d at 952.

[9] Wellspan Health v. Bayliss, 869 A.2d 990, 1000 (Pa. Super. Ct. 2005).

[10] PharMethod, Inc. v. Caserta, 382 Fed. Appx. 214, 219 (3d Cir. 2010); Quaker Chem. v. Varga, 509 F. Supp. 2d 469, 479 (E.D. Pa. 2007).

[11] Intermetro Indus. Corp. v. Kent, 2007 WL 1140637, at *7 (M.D. Pa. Apr. 17, 2007).

[12] National Bus. Servs., Inc. v. Wright, 2 F. Supp. 2d 701, 708, 13 IER Cases 1793 (E.D. Pa. 1998)(quoting in citing Kramer v. Robec, Inc., 824 F. Supp. 508, 512 (E.D. Pa. 1992)(finding nationwide restriction reasonable where company “and its competitors market their product in all fifty states”).

[13] Diodato v. Wells Fargo Ins. Servs., USA, Inc., 44 F. Supp. 3d 541, 568 (M.D. Pa. 2014) ; Capsicum Grp., LLC v. Rosenthal, 2013 U.S. Dist. LEXIS 177293, 2013 WL 6667822, *8 (E.D. Pa. Dec. 17, 2013); Shepherd v. Pittsburgh Glass Works, LLC, 25 A.3d 1233, 1244 (Pa. Super. Ct. 2011) (legitimate, protectable business interest of the employer is a threshold requirement).

[14] Thermo-Guard, Inc. v. Cochran, 408 Pa. Super. 54, 596 A.2d 188, 193-94 (1991).

[15] See CertainTeed Ceilings Corp. v. Aiken, 2014 U.S. Dist. LEXIS 152446, 2014 WL 5461546, at *9-11 (E.D. Pa. Oct. 27, 2014); Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 424 (3d Cir. 2010) (confidential information, good will, unique or extraordinary skills, and specialized training that would benefit competitors).

[16] Morgan’s Home Equipment Corp. v. Martucci, 390 Pa. 618, 625 n.5, 136 A.2d 838, 843 n.5 (1957); Carl. A. Colteryahn Dairy, Inc. v. Schneider Dairy, 415 Pa. 276, 283 n.6, 203 A.2d 469, 473 n.6 (1964) (“presence of a nondisclosure covenant would be indicative of the confidential nature of the data protected”).

[17] 12 Pa. Cons. Stat. Ann. § 5301 et seq.; Mettler-Toledo, Inc. v. Acker, 908 F. Supp. 240, 246 (M.D. Pa. 1995) (case re customer trade secret nondisclosure, not non-competes)

[18] Wellspan Health v. Bayliss, 869 A.2d 990, 997 (Pa. Super. Ct. 2005) (citing Hess v. Gebhard &’Co., 570 Pa. 148 (2002)).

[19] Wellspan Health v. Bayliss, 869 A.2d 990, 997-98 (Pa. Super. Ct. 2005).

[20] Ride the Ducks, LLC v. Duck Boat Tours, Inc., 2005 WL 670302, *12 (E.D. Pa. Mar. 21, 2005).

[21] Turnell v. Centimark Corp., No. 1:13-cv-02660, 2014 BL 192458, at *3, 2014 US Dist. LEXIS 94092, 2014 WL 3396490 (N.D. Ill. July 10, 2014).

[22] Pulse Techs., Inc. v. Dodrill, 2007 WL 789434 (D.Or. Mar. 14, 2007) (applying Pennsylvania law).

[23] Sheppard v. Pittsburgh Glass Works, LLC, 25 A.3d 1233, 1246 (Pa. Super. Ct. 2011) (considering termination without reason as one factor in determining whether enforcing the non-compete would advance the employer’s interests); Labor Ready, Inc. v. Trojan Labor, 2001 WL 1807932, at *5 (Phila. Co. Jan. 25, 2001); Olympic Paper, Inc. v. Dubin Paper Co., 60 Pa. D. &’ C. 4th 102, 2000 WL 33711064, at *8 (Phila. Co. Dec. 29, 2000).

[24] Mattern &’ Associates, LLC v. Seidel, 678 F. Supp. 2d 256, 267 (D. Del. 2010) (citing Hess v. Gebhard &’ Co., 570 Pa. 148, 808 A.2d 912, 918 (2002)).

[25] Snelling &’ Snelling, Inc. v. Reynolds, MTX of Sw. Fla., Inc., 140 F. Supp. 2d 1314, 1319 (M.D. Fla. 2001) (applying Pa. statute) (citing Rita’s Water Ice Franchise Corp. v. DBI Inv. Corp., 1996 WL 165518, at *3, 1996 U.S. Dist. LEXIS 4551, at *8 (E.D. Pa. 1996).

[26] QVC, Inc. v. Starad, 2005 WL 742500 (E.D. Pa. Mar. 31, 2005).

[27] CertainTeed Ceilings Corp. v. Aiken, 2014 U.S. Dist. LEXIS 152446, 2014 WL 5461546, at *9-12 (E.D. Pa. Oct. 27, 2014).

[28] Geisinger Clinic v. DiCuccio, 606 A.2d 509, 513 (Pa. Super. Ct. 1992); Coventry First, LLC v. Ingrassia, 2005 WL 1625042, at *7 (E.D. Pa. July 11, 2005); Morgan’s Home Equipment Corp. v. Martucci, 390 Pa. 618, 630 n.14, 136 A.2d 838, 846 n.14 (1957).

[29] Perma-Liner Indus., Inc. v. U.S. Sewer &’ Drain, Inc., 630 F. Supp. 2d 516, 522-23 (E.D. Pa. 2008) (noting that “Pennsylvania, unlike Florida, does not recognize continuation of at-will employment as sufficient consideration” for a restrictive covenant); Wincup Holdings, Inc. v. Hernandez, 2004 WL 953400 (E.D. Pa. May 3, 2004); Fisher Bioservices, Inc. v. Bilcare, Inc., 2006 WL 1517382 (E.D. Pa. May 31, 2006) (detailing the circumstances under which a non-compete will be upheld where the covenant is signed at or after the outset of employment); In re Verdi, 244 B.R. 314 (Bank. E.D. Pa. 2000) (“when a restrictive covenant is executed after the commencement of employment, the covenant will not be enforced unless it is supported by new consideration provided at the time of the covenant”).

[30] M.S. Jacobs &’ Assocs. V. Duffley, 452 Pa. 143, 146, 303 A.2d 921, 922 (1973) (employee transferred from inside sales to outside sales and received increased compensation and opportunity to earn commission-based pay, consisting sufficient consideration for a restrictive covenant).

[31] Wainwright’s Travel Service, 347 Pa. Super. at 204, 500 A.2d at 478.

[32] Coventry First, LLC v. Ingrassia, 2005 WL 1625042 (E.D. Pa. July 11, 2005) ($25,000 severance pay after termination).

[33] Wellspan Health v. Bayliss, 869 A.2d 990, 996 n.2 (Pa. Super. Ct. 2005).

[34] Doyle Consulting Grp., Inc. v. Stoffel, 2004 WL 362316 (Phila. Co. 2004); Hess v. Gebhard &’Co., 570 Pa. 148, 808 A.2d at 917 (2002) (“not favored in Pennsylvania and have been historically viewed as a trade restraint that prevents a former employee from earning a living”).

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