Source: https://jobdiscrimination.wordpress.com/tag/restrictive-covenants/
Timestamp: 2019-04-20 11:02:37+00:00

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Pennsylvania courts continue to carefully scrutinize restrictive covenants. In a recent non-precedential decision, First National Bank of Pennsylvania v. Nagle, Superior Court of Pa. (No. 441 WDA 2015) (April 8, 2016), the Superior Court reversed and remanded a trial court order enjoining a former employee from dealing with customers that the employee had acquired prior to the commencement of his employment.
The employee was terminated for alleged improper conduct and the employer filed a Complaint and Petition for Preliminary Injunction alleging that the employee violated the Non-Solicitation Agreement by improperly contacting and soliciting customers after his termination. The employee admitted that he had contacted or was contacted by the customers at issue; however, the employee maintained that the customers were his own preexisting customers and as a consequence, no violation of the Non-Solicitation Agreement had occurred. The trial court entered an Order granting the employer’s Motion for Judgment on the Pleadings and enjoined the employee from continuing to violate the terms of the Non-Solicitation Agreement by contacting the customers. The employee filed an appeal to the Superior Court of Pennsylvania arguing that the trial court improperly enjoined the employee from engaging in business with customers whom he had developed prior to his employment with the employer.
In Nagle, the court noted that a Pennsylvania Supreme Court decision, Hess v. Gebhard & Co., stands for the proposition that an employer does not have a protectable business interest in pre-existing customers. In addition, Pennsylvania courts have historically viewed such covenants as contracts in restraint of trade that prevent a former employee from earning a livelihood, and, therefore, have disfavored such provisions in the law and that covenants not to compete are strictly construed against the employer. However, the Pennsylvania Supreme Court has also recognized an employer’s right to protect, by a covenant not to compete, its interest in customer relationships acquired through the efforts of its employees, thus, while Pennsylvania law looks with disfavor upon restrictive covenants, covenants may be enforced if (1) they are incident to an employment relationship between the parties; (2) they are supported by adequate consideration; (3) the restrictions imposed by the covenant are reasonably necessary for the protection of legitimate interests of the employer; and (4) the restrictions imposed are reasonably limited in duration and geographic extent. The court found that the issue is whether barring the employee from contacting his preexisting customers is reasonably necessary for the protection of the employer. The court noted that keeping in mind that Pennsylvania law disfavors restrictive covenants, it would be unreasonable to extend the Non-Solicitation Agreement to include personal customers of the employee who came to the customers of the employer solely to avail themselves of the employee’s services and only as a result of his own independent recruitment efforts which were neither subsidized nor financially supported by the employer. As a consequence, the Superior Court reversed the trial court’s Order and remanded the case for further proceedings.
Today, in Socko v. Mid-Atlantic Systems of CPA, Inc., No. 142 MAP 2014, the Supreme Court of Pennsylvania reaffirmed that the enforcement of an employment agreement containing a restrictive covenant not to compete, entered into after the commencement of employment, may be successfully challenged as unenforceable by an employee for a lack of consideration. Such an agreement is unenforceable even where the agreement, by its express terms, states that the parties “intend to be legally bound,” which language implicates the Uniform Written Obligations Act (“UWOA”).
In Socko, while already employed, the employee signed a third, more restrictive Non-Competition Agreement which, by its terms, superseded all prior agreements. Pursuant to the agreement, the employee was not permitted to compete for two years after the termination of his employment in any of the following locations: Connecticut, the District of Columbia, Delaware, Maryland, New Jersey, Pennsylvania, New York, Virginia, West Virginia, or any other jurisdiction in which the employer did business. The Agreement also expressly provided for the application of Pennsylvania law, and stated that the parties intended to be “legally bound.” In Socko, the employee filed a motion for partial summary judgment, asserting that the non-competition clause in the agreement was unenforceable, as it was not supported by sufficient consideration. It was not disputed that the agreement was signed during the course of the employee’s employment and the employee did not receive any benefit or any change in his existing employment status in exchange for signing the new agreement.
The Supreme Court of Pennsylvania noted that while a covenant not to compete may be desirable and justified in some circumstances on the part of an employer, Pennsylvania courts have historically viewed such covenants as contracts in restraint of trade that prevent a former employee from earning a livelihood, and, therefore, have disfavored such provisions in the law. While generally disfavored, Pennsylvania law, however, has recognized the validity and enforceability of covenants not to compete in an employment agreement, assuming adherence to certain requirements. Currently in Pennsylvania, restrictive covenants are enforceable only if they are: (1) ancillary to an employment relationship between an employee and an employer; (2) supported by adequate consideration; (3) the restrictions are reasonably limited in duration and geographic extent; and (4) the restrictions are designed to protect the legitimate interests of the employer. The Court noted as with other contracts, for an employment agreement containing a restrictive covenant to be enforced, consideration is crucial, whether the covenant is entered into prior to, during, or after employment ends. Thus, to be valid, a covenant not to compete must be consummated with the exchange of consideration.
If a noncompetition clause is executed at the inception of the employment, the consideration to support the covenant may be the award of the job itself. A restrictive covenant is not required to be included in the initial employment contract to be valid. However, when a non-competition clause is required after an employee has commenced employment, it is enforceable only if the employee receives new and valuable consideration that corresponds with a benefit or a favorable change in employment status. In Pennsylvania sufficient new and valuable consideration has been found to include a promotion, a change from part-time to full-time employment, a compensation package of bonuses, insurance benefits or severance benefits.
Socko confirms that without new and valuable consideration, a restrictive covenant is unenforceable. More specifically, the continuation of the employment relationship at the time an employer and employee enter into the restrictive covenant is insufficient by itself to serve as consideration for the new covenant, despite the fact that there may be an at-will relationship terminable by either the employer or the employee. As a consequence, in Socko the Court held that in “light of the clear and unambiguous language of the UWOA, and consistent with our prior case law, we reject Mid-Atlantic’s (the employer’s) view and conclude that a contract containing a written express statement of intent to be “legally bound” does not supply the necessary consideration to support the enforceability of an agreement.
Employment law attorneys are frequently retained to advise employees on the enforceability of non-compete agreements / restrictive covenants under Pennsylvania law. In Socko v. Mid-Atlantic Systems of CPA, Inc. 2014 Pa. Super. LEXIS 702 (May 13, 2014), the Superior Court of Pennsylvania recently set forth a thorough analysis of the current state of Pennsylvania non-compete law.
Restrictive covenants not to compete have always been disfavored in Pennsylvania because they have been historically viewed as a restraint on trade that prevents a former employee from earning a living. This follows the principle set forth by the Pennsylvania Supreme Court that contracts in restraint of trade made independently of a sale of a business or contract of employment are void as against public policy regardless of the valuableness of the consideration exchanged therein. Restrictive covenants entered into at the sale of business or a contract to commence employment where none existed previously have been found to constitute consideration supporting that covenant. However, when a restrictive covenant in an employment contract is executed after the beginning of employment relationship, courts have found the agreements unenforceable for lack of consideration.
Forty years ago in Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279 (Pa. 1974), the Pennsylvania Supreme Court held that restrictive covenants in restraint of trade are enforceable only if the employer satisfies three requirements: (1) the covenant must relate to (i.e., be ancillary to) either a contract for the sale of goodwill or other subject property or to a contract of employment; (2) the covenant must be supported by adequate consideration; and (3) the application of the covenant must be reasonably limited in both time and territory. Each of these requirements must exist before a restrictive covenant is enforceable.
As to the nature of the consideration which is required to support a covenant not to compete, Pennsylvania law requires the presence of “valuable consideration.” Two types of consideration support a restrictive covenant in an employment contract. When the restrictive covenant is contained in the initial contract of employment, consideration for the restrictive covenant is the job itself. When the restrictive covenant is added to an existing employment relationship, however, it is only enforceable when the employee receives a corresponding benefit or change in status. An employee’s continued employment is not sufficient consideration for a covenant not to compete which the employee signed after the inception of his employment, where the employer makes no promise of continued employment for a definite term.
In George W. Kistler, Inc. v. O’Brien, 464 Pa. 475, 347 A.2d 311 (Pa. 1975), the Pennsylvania Supreme Court again found unenforceable a restrictive covenant set forth in an employment contract executed after the employee had previously entered into a binding oral employment agreement and commenced work, without any corresponding benefit or change in job status. In Kistler, the Supreme Court excluded three forms of consideration it found inadequate to support a covenant not to compete. First, the Court held that continued employment does not constitute sufficient consideration even if the employment relationship was terminable at the will of either party. Second, the execution of the employment agreement under seal did not constitute valuable consideration to support the restrictive covenant. Lastly, the recitation of nominal consideration ($1.00) was inadequate consideration for the restrictive covenant. Thus, when an employee enters into an employment contract containing a covenant not to compete subsequent to employment, the covenant must be supported by new consideration which could be in the form of a corresponding benefit to the employee or a beneficial change in employment status.
In Socko, the court held the restrictive covenant was not enforceable because the employer conceded that the non-competition restrictive covenant in an employment agreement was entered into after the commencement of employment, thus, there was a lack of consideration and the employer provided the employee with no benefit or change in job status at the time of execution. The court flatly rejected the employer’s contention that the insertion of language in the agreement which states that the mere insertion of language that the parties “intend to be legally bound” by itself is adequate consideration under the Uniformed Written Obligations Act. Thus, in Socko, the Superior Court of Pennsylvania concluded that the restrictive covenant was unenforceable for lack of valuable consideration.
In De Lage Landen v. Thomasian, 2013 U.S. Dist. LEXIS 62639 (E. D. Pa. May 1, 2013) (Buckwalter, S. J.), the Defendant employee entered into an Employee Agreement with Restrictive Covenants and voluntarily terminated his employment with his former employer, one month after he had accepted an offer to work for a new employer, CoActiv. The employee admittedly breached his Employee Agreement by giving his former employer’s laptop and security credentials to his new employer which he subsequently returned. The Court declined to enter a preliminary injunction, finding that the plaintiff failed to prove irreparable harm (the difficulty in showing that damages can only be adequately compensated by granting an injunction”).
While the court found that the defendant breached a non-solicitation agreement by encouraging one of his former employer’s employees to work for CoActiv, the new employer; Coactive does not compete with the former employer on a national basis and the two companies “are not presently in the same ballpark.” In addition, the Defendant employee’s office was 40 miles from any of his former employer’s regional offices and the employee has not solicited former customers.
In a recent New York federal court case interpreting Pennsylvania law, the court refused to enforce a non-solicitation clause against an employee who was terminated. In Fenner Precision Inc. v. Mearthane Products Corp. 2013 U.S. Dist. LEXIS 15588 (W. D. N. Y. February 5, 2013), the former employee defendant was a salesman in the field of elastomeric precision products for more than 20 years. His original employer was acquired by a new company and he was required to sign a non-compete agreement with a Pennsylvania choice-of-law provision, containing various restrictive covenants, including confidentiality, non-compete, and non-solicitation provisions. The employee was employed by the new employer for 4 years and then was terminated at age 58 without any reason being provided. Thereafter, the employee accepted employment with a competitor of his former employer. The former employer filed a Motion for Preliminary Injunction, not attempting to enforce the non-compete covenant, but instead only seeking to enforce the confidentiality and non-solicitation provisions.
While the Court noted that Pennsylvania law has not expressly resolved whether pure non-solicitation clauses, which do not otherwise prohibit former employees from engaging in a particular occupation or field, should be subject to the test of reasonableness, the court relied upon a Pennsylvania Superior Court decision in Missett v. Hub Intern. Pennsylvania, LLC, 6 A.3d 530, 538-540 (Pa.Super. 2010), finding that a non-solicitation clause must be reasonable to be enforced. In Fenner Precision, the Court relied upon Pennsylvania cases clearly expressing a heightened scrutiny for employees who are terminated by their employers, on the theory that the employer views such employees as “worthless” and concluded that the Defendant employee is likely to prevail in demonstrating that enforcement of the non-solicitation clause against him would not be reasonable and denied the Motion for a Preliminary Injunction.
As we have commented before, there is a clear trend in Pennsylvania law not to enforce restrictive covenants. While they is an extremely positive development for all employees, the benefit of the trend is largely skewed only to high wage earners, due to the high initial costs associated with successfully litigating preliminary injunctions and restrictive covenants.
Employees confronted with non-compete agreements often face an impossible situation. Even though there is an emerging trend in Pennsylvania courts where non-compete agreements are being voided, the cost of litigation often precludes employees from taking affirmative action. A recent Allegheny County case, Bosses v. Servicelink, C. C. P. Allegheny City, G.D. No. 12-012206 (Ward J.), shows that where a Plaintiff has sufficient resources to take affirmative action, a plaintiff’s declaratory judgment may be granted based upon established law.
In Bosses, the plaintiff began working for one company in a clerical position and rose to a Vice President position by the time the company was acquired by another company. At the time of the acquisition, the Plaintiff received a number of documents but did not sign the noncompete agreement until one month later when he was told he would lose his job if he did not sign. Several years later the Plaintiff received a job offer from another company, contingent upon becoming unencumbered by the non-compete.
The Court relied upon many principals Plaintiffs can rely upon to invalidate restrictive covenants: the loss of a business opportunity may be characterized as an irreparable injury, Santoro v. Morse, 781 A.2d 1220, 1227-28 (Pa.Super. 2001); an employee has an important interest in being able to earn a living in his chosen profession.” All-Pak, Inc. v. Johnston, 694 A.2d 347, 351 (Pa.Super. 1997); and restrictive covenants are not favored in Pennsylvania, as they can be seen as a trade restraint preventing a former employee from earning a living. Hess v. Gebhard & Co, 808 A.2d 912, 920 (Pa. 2002). Ultimately, in Bosses, the court cited established law concluding that “a restrictive covenant will not be enforced if no consideration was exchanged for its execution.” Shepherd v. Pittsburgh Glass Works, LLC, 25 A.3d 1233, 1243 (Pa.Super. 2011.
Bosses shows that when an employee has the resources to take affirmative action, established appellate law in Pennsylvania can lead to positive results. Unfortunately, when an employee is not an executive, the end result can be much different, solely as a consequence of not having the resources to take on a well financed corporation. This is a key difference between non-compete litigation and a typical employment discrimination case, where the Plaintiff is solely seeking money damages. Fortunately, Plaintiffs in employment discrimination cases often have the support of attorneys willing to enter into contingency fee agreements which can make the playing field more equal.

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