What is a Non-Compete Agreement?
A non-compete agreement is a contract between an employer and employee that restricts the employee from competing with the employer for a defined period of time, within a defined geographical area, after the employment relationship has been terminated.
The purpose of a non-compete agreement is to protect the legitimate business interests of the employer. Most commonly, an employer will assert the following reasons for requiring non-compete agreements from its employees: In Pennsylvania, this type of contract is generally referred to as a restrictive covenant because it restricts a person’s ability to conduct business within a given territory or field of business (a trade restriction).
Although competition is a fundamental part of our economy and has proven itself to be beneficial for our society, it goes without saying that excessive competition can be harmful. In reading between the lines, such an argument states that the ability to compete (in this case for employees) is healthy for the economy but when the level of competition reaches such an excessive point where it impairs the ability of an employer to conduct business, that is no longer healthy for either the employer or for society as a whole . While all contracts are designed to control or restrict behavior in some fashion, this restriction must be reasonable. Pennsylvania courts have routinely expressed "public policy" concerns where the post-employment restraints go too far and restrict free enterprise to an unreasonable level. The question then becomes, ‘How much restriction is too much?’ Generally and in the cases that we have examined, a reasonable and valid restriction in Pennsylvania is one in which the trade secret or trade secret formula is protected; that is, allowing the employer to maintain their customer base or prevent misappropriation of confidential information. Above that level of restraint, it becomes an attempted equally unfair restraint that is not in the public’s best interest. Although a non-compete agreement may seem very beneficial and necessary from an employer’s standpoint, allowing certain restrictions to remain in place while other restrictions are deemed unreasonable and unenforceable (to the extent that they restrict fair business practices) is a question only for a court.
Pennsylvania Non-Competes and Their Enforceability
The enforceability of non-compete agreements in Pennsylvania is assessed based on a combination of statutory law and relevant case law. The state’s high court, along with the Superior Court, consistently evaluate whether a non-compete agreement is enforceable by taking into account whether it is reasonable in both its duration and scope.
Pennsylvania courts also examine the legitimate business interests that are served by the non-compete agreement. If the employer can demonstrate an even greater purpose for its non-compete agreement beyond the protection of whatever is considered company confidential and might otherwise end up with little to no enforceability of its agreement. If the court finds that a company’s non-compete agreement is overly broad or violates any other facet of Pennsylvania’s non-compete law, the agreement would be ruled unenforceable.
Properly drafted and legally sound non-compete agreements are certainly enforceable in Pennsylvania. The Supreme Court of Pennsylvania has also held that non-compete agreements may not be so inflexible that they would unreasonably interfere with the signing employee’s ability to find work after the employment is terminated. The court has followed this precedent by holding that an employee may only be restrained from using the former employer’s trade secrets, which must be properly defined within the non-compete agreement.
Even under circumstances where an employee is likely to land on his or her feet after the former employment ends, the agreement could still be considered unenforceable. A reasonable non-compete agreement in the Commonwealth of Pennsylvania is one that does not impose too great of a burden on the signing employee.
Among the factors courts for determining whether a non-compete agreement is reasonable, include:
• Its purpose and whether the agreement serves a legitimately protectable interest;
• The nature of the restraint as to time and geographic location; and
• Whether the non-compete agreement violates public policy.
Another important factor that can influence whether a non-compete agreement is enforceable is the manner in which the agreement was executed. Courts generally look at whether the non-compete agreement was supported by adequate consideration. That consideration can be proven by the jobs and duties that an employee undertook at the time the non-compete was executed. Courts also look at whether an employer and employee cited when the non-compete was executed.
Crucial Non-Compete Provisions
Essential Provisions of Non-Compete Agreements
As common as they are, non-compete agreements are not standardized. They can vary greatly in terms of legal requirements, scope, intent, purpose and enforceability. The specific provisions of a non-compete agreement—and the likelihood of any one provision being upheld in any one case—hinges on a number of factors related to the relationship between the parties to the agreement, not the least of which is the negotiating power of the parties and, if the agreement is with an employee that of the employer. Pennsylvanians must also keep in mind that the enforceability of a non-compete agreement will be affected by its geographical reference, employer size and industry, employee class, the underlying Pennsylvania or federal law (such as the Lanham Act) that gives rise to the potential liability against which the non-compete agreement seeks protection, among other factors.
A non-compete agreement typically includes the following:
Duration
While there is no set duration under Pennsylvania law during which a non-compete agreement is enforceable, the duration is typically reasonable and within what a court is likely to uphold if challenged.
Geographic scope
A non-compete agreement will define the geographic area in which an employee is prohibited from competing and may be broad or narrow depending on the contract and the applicable laws. Pennsylvania courts have upheld a statewide radius, but may invalidate a wider territory (like nationwide coverage).
Business interests protected
A non-compete agreement should specifically define what the agreement protects (the business interests) and make these interests clear so that it forms the basis of the agreement and guides its scope, such as its length and geographical scope, among other things.
Workers’ and Employers’ Rights with Non-Competes
Given the expansiveness of this topic, it is not surprising that Pennsylvania does not extensively discuss the rights and obligations of employees and employers. There is no special Pennsylvania statute, regulation, or administrative rule that is specific to non-compete agreements.
As a practical matter, at-will employees may be required to comply with reasonably drafted non-compete agreements. It is worth noting that an employer may have a difficult time enforcing a non-compete agreement against an employee who has "blown the whistle," i.e. reported criminal or fraudulent conduct of the employer. In other words, Section 425.24 of the Pennsylvania Whistleblower Law protects an employee from discharge for certain types of allegedly disloyal, but lawful conduct (i.e. reporting criminal or fraudulent conduct). In other words, an at-will employee with a non-compete agreement may not lose their bonus for providing a police officer with information or cooperating with an investigation into a company’s potential criminal conduct. Similarly, a non-compete may not waive an employee’s right to participate in a class action with current/former employees that is based on the agreed monetary amount of the bonus.
A non-compete is not unlimited. As noted above, the non-compete must be in writing, and it must be reasonable in scope, geographic limitation, and duration of time. See e.g., Harlan v. Sunny Fresh Foods, Inc., 2003 PA Super 553, 836 A.2d 34 (Pa.Super. 2003) ("A restrictive covenant will not be enforced if the scope of the restriction exceeds the reasonableness necessary to protect the employer."). In addition, certain Pennsylvania courts conclude that a former employer may not be entitled to an injunction against a former employee where the confidential information relied upon by the former employer is easily discoverable from the public domain (e.g., certain insurance agents).
For an employee that considers a non-compete a "contract of adhesion," the employee may not have to accept what the employer imposes. As Pennsylvania courts note, "when [the terms of the non-compete] do not offer the possibility of any additional benefits of consideration beyond mere employment, [the term of the non-compete] is objectionable."
Section 425.24 of the Pennsylvania Whistleblower Law is an employee’s protection from being discharged for reporting criminal and/or fraudulent conduct. Similarly, Section 462(b) of the Pennsylvania Workers’ Compensation Act protects employees from being discharged or discriminated against because they filed a claim for workers’ compensation.
Unlike Pennsylvania, some states may protect an employee whose salary requires the employee to pay a penalty as a result of transferring employment, or "shortstopping." Under this theory, if the non-compete agreement violates public policy by penalizing the employee, the non-compete agreement will not be enforced.
A non-compete agreement cannot unduly limit an employee’s right to work and honest competition.
Fighting a Non-Compete Restriction
To successfully challenge an existing non-compete agreement, the employee must meet the burden of demonstrating that the non-compete is unenforceable as a matter of law or that the non-compete has been voided through an agreement as to its non-enforceability. Failure to timely review and understand the restrictions and remedies contained in the agreement may limit or forfeit the ability of the employee to challenge the enforceability of the restrictive covenant. The elements of the analysis include:
Timing
In most instances, prior to the execution of a non-compete agreement (and prior to promulgation of company policy), the employee will be presented with a non-compete agreement. In the instance of a post-employment non-compete agreement, the employee may be presented with a non-compete agreement at the time of employment termination. The employee must review the non-compete agreement as soon as possible making sure to forward the agreement to legal counsel for review. The timing involved in legal review is critical because the courts in Pennsylvania have demonstrated a willingness to strictly enforce the terms of an agreement, including the remedies available.
Burden of Proof
The employee seeking to invalidate a restrictive covenant contained in an agreement typically bears the burden of proof in demonstrating that the agreement should not be enforced. Note: your general counsel or HR person cannot effectively advise you if they lack experience in analyzing non-compete agreements.
Reformation
Most commonly known as "blue pencil" reform, the employee must demonstrate that the non-compete is egregiously outside the boundaries of established case law for a particular job, role and/or industry, and present to the court a reformation of the agreement . In some cases, a "red pencil" reform may be preferred by the employee and the court if the language is not so egregious and does not require substantial modification to render it enforceable. The risk to the employer or employee in this scenario is that the court may modify the non-compete agreement and find that it is otherwise reasonable and enforceable.
Reasonableness
The non-compete agreement must be reasonable and has multiple factors which the court will consider in evaluating its reasonableness. These factors can also preclude the court from enforcing a non-compete. Cases involving non-compete agreements often include consideration by the court of the geographical limitation and time limitation of the agreement (e.g., 1 year post-employment and within a 10 mile radius) and whether the former employer has a legitimate business interest in enforcing the non-compete.
Best Practices
In order to challenge the validity of a non-compete agreement, legal counsel must first identify the attorney-client relationship with which to challenge the restrictive covenant, and second, the attorney must understand the role, function or industry that the non-compete agreement attempts restrict the employee from pursuing. From there, the employee must subsequently demonstrate that (i) the terms of the non-compete agreement are overly burdensome and not supported by the interests asserted by the employer in enforcing the agreement, and/or (ii) the non-compete agreement is so burdensome and overreaching that a reasonable reformation exists. Although it is wise to pursue all available defenses available to establish the non-compete should not be enforced, the best strategy is to consult legal counsel as early as possible to avoid factual or legal prejudice when challenging the agreement.
Developments and Trends in Non-Compete Agreements in Pennsylvania
Several recent cases have provided guidance on how enforceable restrictions may be in Pennsylvania, particularly with respect to lawyers and physicians. In 2016, the Pennsylvania Supreme Court ruled that a non-compete is reasonable if it protects a potentially legitimate business interest. In 2017, the Pennsylvania Superior Court denied an injunction enforcing any restrictions on employee client solicitation where the non-compete had expired. In 2018, the Pennsylvania Superior Court denied an injunction without notice to the party that was bound by the Court’s order.
The first case involved a non-compete by Pennsylvania attorneys. The Pennsylvania Supreme Court in Nicholas v. Evanchick, 2016 Pa. LEXIS 270 (Pa. April 25, 2016) had to determine if the non-compete at issue in the attorney-client contract was unreasonable. The Court explained that the agreement had to satisfy a three-prong test:
- (1) It must protect some legitimate business interest.
- (2) The restriction imposed on the employee must be reasonably necessary to protect that interest.
- (3) The restriction must not impose an undue hardship on the employee or undue hardship on the public.
The Supreme Court followed the same analytical framework employed by the lower courts.
The second case involved a contract provision forbidding the solicitation of former customers within one year of cessation of employment with the former employer. In Microtech Contracting, Inc. vs. Taylor, et. al., 2017 Pa. LEXIS 2491, the non-compete in question was included within the employee’s new job description. There the company sought to restrict an employee, Taylor, from working for his former employer on the theory that he violated the limitation on solicitation. The court determined that the company failed to prove that the employee violated the restriction when he started to work for a new employer and solicited work for the new employer from former customers.
The third case involved an injunction without notice. Here, Dr. Elshafei agreed to a covenant not to compete with his former employer, Jefferson, for a 24-month period. In Elshafei v. Jefferson Health Sys. N., 2018 Pa. Dist. & Cnty. Dec. LEXIS 195 (Pa. Commw. Ct. 2018), the trial court entered a preliminary injunction without notice to the defendant. The Commonwealth Court ruled that the trial court erred by granting an injunction without notice to the defendant and remanded the matter back to the trial court for further proceedings.
These cases extend the reasons courts will issue an injunction against an employee for breach of a restrictive covenant. While many understand that non-competes and other restrictive covenants are enforced by injunctions, in Pennsylvania, the failures in Microtech by the plaintiff makes it hard to understand in what circumstances an injunction will be granted.
Non-Compete Agreements and Their Substitutions
Employers may also consider utilizing other forms of restrictive agreements to advance their business interests. For example, Pennsylvania courts have upheld non-solicitation provisions that limit an employee’s ability to solicit an employer’s customers after the employment relationship ends. However, non-solicitation provisions are not without their limitations. Pennsylvania and nationally there is a trend toward limiting the scope and duration of non-solicitation provisions because they are generally not as reasonably related to protecting an employer’s interest as are non-competition restrictions. Many employers include non-solicitation provisions in their agreements to prevent former employees from seeking to exploit the goodwill the employee has developed with the employer’s customers during the course of their employment.
Employers may also seek to protect their confidential and proprietary information by requiring the employee to enter into a non-disclosure or confidentiality agreement . A non-disclosure or confidentiality agreement is designed to prohibit the former employee from utilizing, for his/her benefit, information that is proprietary and confidential to the employer. Under these circumstances, an employee generally is restricted from using or disclosing the employer’s confidential information or trade secrets, including customer lists, price lists, marketing data, confidential operational procedures or production methods, formulas, know-how and technical specifications. Companies are increasingly requiring their employees to enter into confidentiality agreements as a term of their employment. These agreements are often accompanied by other restrictive agreements, such as non-compete agreements or non-solicitation agreements, but at the very least, they are designed to protect a company’s proprietary technical information.