Non-competes have received national attention in the past year with President Biden asking the chair of the Federal Trade Commission (the “FTC”) to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” This sentiment reflects a bipartisan reluctance to enforcing non-competes which may impede upon mobility and free trade. As it stands, most non-competes and other restrictive covenants are determined by application of state contract law, and Pennsylvania remains a state which will enforce restrictive covenants under the right circumstances.
Restrictive Covenants in Pennsylvania In General
Many folks think solely of the word “non-compete” in this context, but that is not the only kind of post-employment covenant. Restrictive covenants include promises not to solicit customers or employees of a company. In Pennsylvania, post-employment restrictive covenants are enforceable if: (1) they are incident to an employment relationship between the parties; (2) the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and (3) the restrictions imposed are reasonably limited in duration and geographic extent. Pennsylvania courts are generally reluctant to enforce restrictive covenants. This reluctance stems from the recognized public interest in free trade and the mobility of employees.
With all restrictive covenants, courts will look to see if the restrictive covenant is supported by valid consideration and is limited in duration and geographic area. In Pennsylvania, this means that unless the restrictive covenant is signed on the first day of work or the substance of agreement is determined before the person starts working, then there must be some new consideration. What is “new consideration”? It is something that the employee was not already getting, such as a new bonus or raise or promotion. Furthermore, courts will look to see if such a covenant seeks to protect the employer’s legitimate business interest (i.e. disclosure of trade secret, confidential information, customer lists, etc.).
Even if the aforementioned requirements are met, the enforceability of restrictive covenants is determined on a case-by-case basis with an analysis of the relevant facts and circumstances surrounding the employment agreement.
Restrictive Covenants and Termination for Poor Performance
Typically, the enforceability of non-competes does not depend on whether an individual resigns or is terminated as the language of the restrictive covenant is drafted to include either scenario. When an employee is terminated for poor performance, however, courts are more wary of enforcing restrictive covenants that would restrain an individual from earning a living in his or her chosen profession.
In Insulation Corp. v. Brobston, the employer sought enforcement of a restrictive covenant that included a non-disclosure clause along with a non-competition component. The former employee had worked for the employer for ten years before being terminated for poor performance. When the former employee accepted employment with a competitor, the employer sought to enforce the restrictive covenants in the employment agreement. The trial court initially enforced the covenants; however, on appeal, the employee argued that the covenant was unenforceable as it “bears no reasonable relationship” to the protection of any business interest of his former employer.
Accordingly, the Superior Court of Pennsylvania affirmed the trial court’s injunction as to the non-disclosure clause, but reversed the trial court’s injunction against the non-compete clause. The court reasoned that by firing the employee it had deemed said employee “worthless” to the business. Consequently, the court held that “it is unreasonable as a matter of law to permit the employer to retain unfettered control over that which it has effectively discarded as worthless to its legitimate business interests.” Thus, the Insulation Corp. v. Brobston majority confirms that the circumstances surrounding termination are additional items for consideration in determining the enforceability of restrictive covenants.
This decision makes sense. While there are certain risks in voluntarily resigning from one’s employment, this is most often a decision arrived at after careful consideration and perhaps even with a new opportunity already in place. On the other hand, termination from employment is often unexpected and could leave an employee jobless for an indefinite duration. To further restrict a terminated worker’s employment prospects after been deemed “worthless” could substantiality impact the employee’s ability to earn a living. Since the Insulation Corp v. Brobston decision, Pennsylvania courts have allowed employees terminated for poor performance to escape restrictive covenants
Advice for Employers
The Insulation Corp. v Brobston decision is not all encompassing and its impact has been somewhat watered down by more recent decisions. In fact, it does not address what would happen if there was willful action by a former employee or termination for some form of cause. Employers should have restrictive covenants reviewed by an attorney well versed in the area of employment law. Employers should be sure that the employee is aware of his or her non-disclosure obligations at the time the employment terminates.
Advice for Employees
Before signing an employment agreement, employees should be sure to read through the entire agreement and understand the implications of the various provisions. It is wise to consult an employment attorney to review the terms of an employment agreement when seeking to make a move or at the earliest time possible. Post termination, employees may also be able to find recourse under a theory of breach of contract by an employer. If an employer has otherwise breached the employment agreement, this may serve as grounds to relieve a terminated employee from a restrictive covenant he or she may not be bound by the contract. After any termination it may be wise to consult an employment attorney to discuss your rights and negotiate a severance agreement.
Brendan D. Hennessy is an experienced employment law attorney. His practice represents and counsels employers and employees in employment law matters. He can be reached at (484) 875-3111 or bhennessy@hennessylawfirm.com.