Non-Compete Agreements

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Is a Non-Compete Enforceable?  

In many cases, yes.  It must be (1) reasonably limited in scope, (2) necessary to protect the employer’s important business interest, (3) supported by consideration, and (4) reasonable as to not impose an undue hardship on the employee.

Our Pittsburgh lawyers sincerely appreciate the trust placed in us by our clients to litigate non-compete agreements.  This article is offered to answer some of the common questions posed to us daily.

What Really Matters?

A non-compete agreement (or the anticipated violation of it) creates an enormous challenge for both the employers (protecting their trade secrets) and the employee (seeking to earn a living even if it means the violation of a non-compete).

Each party to such an agreement will benefit from speaking with experienced commercial litigation counsel as early as possible because of the nature of how these disputes play out.  There may be a creative solution that saves the parties’ time and money.   The best lawyer for the job should have at least three qualities:

1. Experienceknowing the judge’s track record and how the court will likely decide the matter;

2. Problem Solving Skills the ability to craft a creative solution when one exists; and

3. Communication Skills – the ability to convince the opposing party why he should soften or back down from his position.

This area of law involves commercial litigation and is not something that general practitioners can easily handle, the way they might get involved alternatively in wills and a simple car accident case (“Was the light red or green?”)

Each non-compete case involves a detailed (but fairly simple) balancing of interests.  The lawyer has to realize that, judges are people, too.  Judges do not like to see any worker barred from working in his field to support a family, especially during a soft economy.   At the same time, a non-compete clause can play a vital function for the survival and growth of a business.  A company deserves the benefit of its trade secrets (such as proprietary procedures customer lists), but those can travel down the street and into the welcoming arms of a competitor if an important employee — who functions at a high level for the business — goes to work for the competition.

Zealous and experienced advocacy is needed in these matters.  The attorney should be experienced with commercial litigation, first of all.  Secondly, because the court is weighing factors and considering “fairness,” the Pittsburgh lawyer must look closely at all the evidence and be prepared to sway the court’s opinion to show that his client’s position is ”right” and “fair.”

This is not time to focus on the law, alone.  This is not a law school exam.  The lawyer should have a deep familiarity with the fact and equities of the particular case, and how the  judge assigned to the case has ruled in the past, so that the client can be best advised about the likely outcome.

A Time to Fight; A Time to Compromise

Each party to a non-compete should know when to fight aggressively, and when to compromise, if possible.  An experienced lawyer can make recommendations.  There may be room for compromise.  For example, the employer seeking to hire an employee (in possible violation of a non-compete) will often pay the employee’s defense costs and even offer to buyout the non-compete.

But let’s start at the beginning:  the case evaluation.

The Employer Side, First

A business will likely fail in the marketplace if other businesses are permitted to poach its trade secrets and/or staff of mid-to-high level employees and decision makers.  The employer has a right to prohibit certain types of  employees from going to work for competitors or starting their own business to compete with the employer.

Key employees.  Courts enforce non competes involving officers, managers, sales persons with knowledge about special relationships with particular customers (not just lists of public information), important reps, management,  innovators, policy makers, and those with intimate knowledge about what gives a business its special edge. A court will enforce a non-compete and restrain an  employee from working so long as the employer proves that:

1. The employer has a protectable interest in certain business  activity;

2. The geographic restraint of competition is reasonable;

3. Time period of the restraint is reasonable; ;

4. The absence of an undue hardship on the employee;

5. The employer paid good and valuable consideration for the  non-compete clause;

6. Most importantly, the court will balance or weigh the  employer’s protectable interest versus burden of enforcement  on the employee/former employee.

Claim Against the Employer. The employer must be careful to avoid acting  recklessly when attempting to enforce a non-competition agreement.  First, there must be a  reasonable suspicion that the employee is, in  fact, competing improperly. Otherwise, the  employer can be liable for commencing a frivolous lawsuit as a wrongful use of civil  proceedings codified at42 Pa. Cons. Stat. §  8351, i.e, Pennsylvania’s “Dragonetti Act.”

Employer Tort Liability. The employer should think twice before sending  a letter — or law suit — to the employee’s new  employer. This could expose the employer to a  suit based on intentional interference with the  employee’s new employment.

Before filing suit to enforce a non compete agreement, the employer should hire a  private investigator or have some other credible  evidence to form a belief that improper competition occurred. Plus, the  employer should be careful to avoid having its  investigator discover information by improper  means that could be a violation of privacy at  common law or by statute, such as HIPAA.

Once its burden of proof is met, the employer can obtain an “injunction.”  That’s when a court restrains an employee from working in a certain field or industry or communicating trade secrets. A court may award the moving party money damages and attorney fees, depending on the defenses available.

Drafting the Non-Compete.  It is virtually impossible to quantify the damages sustained from unfair “competition.” For this reason,  the courts will restrain or “enjoin” an employee from  improperly competing as there may exist no adequate  remedy at law. That said, the employer can and  should include in the non-compete agreement the  right to recover attorney fees and costs of litigation.  A savvy employer will build into the agreement the employer’s right to recover for estimated costs that the employer has (or will) spend to train the employee.  Those costs should be itemized as specifically as possible.

Avoiding Litigation.  As a practical matter, prior to litigation of a non-compete (and to avoid litigation), it helps to give the employee an incentive to obey  the non-compete, such as making severance  packages payable in stages based upon non-competition, for example.

Fighting in Court.  In court, when enforcing a non-compete, the employer should demonstrate exactly how it fully considered the interests of both the employer and employee at all times, and why it is crucial to the employer’s business that the restrictive covenant be enforced.

The Employee Perspective  

One question that employees ask is:  “What should I say to the employer seeking to hire me (in violation of the non-compete)?  Should I mention the non-compete?”  Doing so may jeopardize the new job opportunity.  However, by not disclosing the non-compete, you could expose your prospective employer to liability for tortiously interfering with your contract with your previous employer and/or civil conspiracy, because the previous employer will assume that the competitor knew about the non-compete.  Plus, the prospective employer may want to hire the employee more than she realizes, and offer to pay the employee’s legal expenses to battle with her former employer over the non-compete.

In terms of the law, absent a non-compete agreement or breach of a  confidential relationship,a worker may compete  with his employer while still in its employ, and an employee is free to leave his employment and  enter into competition with his former employer. Metal Lubricants Co. v. Engineered Lubricants  Co., 411 F.2d 426, 429-30 (8th Cir. 1969).

A covenant not to compete is binding, though the courts  will interpret it narrowly and strictly. A court will restrain an  employee from working so long as the employer proves the above elements 1-6 as set forth above.

Overall, covenants in restraint of business activity are not favored, will  be strictly construed, and in the event of an ambiguity, will be  construed in favor of the worker. Richardson v. Paxton Co., 203  Va. 790, 795, 127 S.E.2d 113, 117 (1962). It is the employer’s  burden to prove that the restraint sought is no greater than  necessary to protect a legitimate business interest, is not  unduly harsh or oppressive in curtailing an employee’s ability to  earn a livelihood, and is reasonable in light of sound public  policy. Roanoke Engineering Sales Co., Inc. v. Rosenbaum, 223  Va.548, 552, 290 S.E.2d 882, 884 (1982).

Defenses 

Consideration.  A non-compete is a contract;  as such, it may be rendered unenforceable for lack of consideration.  An employee’s acceptance of employment at-will is sufficient  consideration to support a restrictive agreement by an employee. Morgan’s Home Equip. Corp. v. Martucci, 390 Pa. 618, 136 A.2d 838, 846 n.14 (1957).  On the other hand, if the non-compete is totally one sided (in favor of the employer) and not created contemporaneous with acceptance of employment, the enforceability will be questionable.

In Pennsylvania, a non-competition agreement signed after an employee has  begun working can be sustained only if supported by promise or  payment. Insulation Corporation of America v. Brobston, 446 Pa.  Super. 520, 529; 667 A.2d 729, 733 (1995).  Here in PA, the courts look to whether the employee enjoyed a beneficial  change in status, and if so, sufficient consideration will exist to  support a restrictive covenant agreed to after employment  commences.  See the Pennsylvania Supreme Court’s decision in M.S. Jacobs & Assocs. v. Duffey, 452 Pa. 143, 303  A.2d 921, 922 (1973).

In certain other states, even though an employer fails to reference any restriction on post-employment  competition, a covenant signed after the employment  started provides sufficient consideration for an enforceable covenant. See, e.g., Herr v. Heiman, 75 F.3d 1509, 1514-15  (10th Cir.1996); Ellis v. James V. Hurson, 565 A.2d 615, 620  (D.C. 1989)(substantial period of employment following signing of  covenant); Paramount Termite Control, 380 S.E.2d at 926;  Marine Contractors Co. v. Hurley, 365 Mass. 280, 310 N.E. 2d  915 (1974)(subsequent covenant is ancillary to original  employment contract).

Still other jurisdictions hold that a non compete agreement that is not  included in the original employment contract, but added later in a  contract for ongoing employment, is voidable for lack of  consideration. Universal Hosp. Serv. Inc. v. Henderson, D. Minn.,  No. 02-951, 5/20/02 (there, the court denied an employer’s  effort to restrain a former employee from working for competitor,  finding non compete agreement may be invalid because not  signed until five days after employment commenced); Pacific  Veterinary Hosp. v. White, 72 Or.App. 533, 696 P.2d 570, 573  (1985).

Termination of Employee. Some jurisdictions deny enforcement following a  termination. Either way, unless the termination relates to the theft of trade secrets or disloyalty,  termination creates a tricky issue for the employer.  The employer will have a difficult time explaining why its interests would be impaired by the employee going to work for a competitor, if the employer no longer has use for the employee or the employee is incompetent (allegedly).

Material Breach By Employer. In some jurisdictions, courts will not enforce a  restraint included in an employment agreement if the  employer materially breaches that agreement in terminating the employee. In other states, courts  will refrain from enforcing restraints against  employees terminated without cause.

Where Enforcement is Likely 

There are at least two instances where enforcement of the non-compete (or non competition) clause will be likely in PA:  (1) where trade secrets are involved, and (2) where the non-compete agreement occurs in the context of the sale of a business.

(1) Protected Information. Covenants not to compete are enforced to prevent  the misuse of employer information such as trade  secrets, customer routes, client lists, and established  customer relationships. See Intelus Corporation v. Barton,  7 F. Supp. 2d 635, 638 (D. Md.1998); Becker v.  Bailey, 268 Md. 93, 299 A.2d 835, 838 (1973).  A trade secret is a formula, practice, recipe, ingredient list, customer list, process, design,  instrument, pattern, or compilation of information  which is not generally known or reasonably  ascertainable, by which a business can obtain an  economic advantage over competitors or customers.

(2) Sale of a Business. Non-competes are especially enforceable in regard to the sale of a business.  Even judges who have a reputation for never enforcing a non-compete against an employee may enforce a covenant not to compete entered into between businesses.  This accords with common sense.  A person or entity receiving payment for the sale of a business cannot then compete with a business it recently sold, business-to-business non-competes are treated differently.

We represent both plaintiffs and defendants in these matters at every stage in the courts in Allegheny County and throughout Western PA.

Contact our lawyers in Pittsburgh for free and confidential consultation.

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