Opinion ID: 3012663
Heading Depth: 2
Heading Rank: 4

Heading: Forfeiture-for-Competition Provision

Text: Section 11(f) of the Agent’s Agreement contains a forfeiture-for-competition provision, whereby an agent will forfeit deferred compensation by becoming associated with another insurance business in a twenty-five mile radius within one year of cancellation of the Agent’s Agreement. Fraser alleges that, because of financial hardship, he was forced to seek work with another insurance company and, as a result, forfeited several hundred thousand dollars of deferred compensation. The District Court held the provision enforceable under the three-part test set out in Bilec v. Auburn & Associates, Inc. Pension Trust, 588 A.2d 538 (Pa. Super. 1991). Under that test, a Pennsylvania court will uphold a forfeiture-for-competition provision if: (1) it “relate[s] to a contract for employment; (2) [it is] 13 supported by adequate consideration; [and] (3) [its application is] reasonably limited in both time and territory.” Id. at 541 (citing Piercing Pagoda, Inc. v. Hoffner, 351 A.2d 207, 210 (Pa. 1976)). Fraser argues that the provision is void because his termination was involuntary and inequitable and because forfeiture is disfavored in Pennsylvania. When the District Court issued its opinion, it did not have the benefit of the Pennsylvania Supreme Court’s opinion in Hess v. Gebhard & Co., Inc., 808 A.2d 912 (Pa. 2002), in which the Supreme Court held a forfeiture-forcompetition provision invalid as applied. While Hess involved a quite different situation — an insurance company that had sold its business was attempting to enforce a restrictive covenant not to compete even though it had no ongoing operating interest in the insurance business — the decision was written in broad terms and thus guides our analysis. The Court noted that we must “balance the employer’s protectible business interest against the oppressive effect on the employee’s ability to earn a living in his or her chosen profession, trade, or occupation.” Id. at 923. It went on to say that “pure financial gain at the expense of restricted competition is insufficient to constitute a protectible business interest.” Id. While the Court recognized that goodwill and trade secrets might in some cases justify restrictive covenants, it concluded that, on the facts before it, the selling company “ha[d] not demonstrated that the information it seeks to protect, mainly its prices and customer lists, is particular or unique to its business and deserves protection as a trade secret or confidential information.” Id. at 923-24. For example, lists of potential customers for an insurance business were available merely by looking in telephone directories. This context therefore could not justify a restrictive covenant. Id. at 924. Because the District Court did not have the benefit of Hess, we remand Fraser’s forfeiture-for-competition claim to it to apply the Hess analysis. On remand, the Court will need to balance the interests Nationwide seeks to protect (if any) against the harm to Fraser. In so doing, because the record is silent as to the precise amount of deferred 14 compensation that the clause would require Fraser to forfeit as well as the nature of Nationwide’s protectible business interests, the Court will need to make additional factual findings.