July 9, 2013
Employers commonly use restrictive covenants to safeguard protectable proprietary information. However, the events and circumstances surrounding an employee’s termination may affect an employer’s ability to enforce restrictive covenants.
Restrictive Covenants In General
While broad and over-reaching covenants are per se invalid, employers still attempt to use restrictive covenants to dissuade employees from leaving or leaving or disseminating valuable business information. 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.[i] 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.[ii]
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. Furthermore, courts will look to see if such 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
When an employee is terminated for poor performance, courts are even more wary of enforcing restrictive covenants that would restrain an individual from earning a living in his or her chosen profession. While employers have an interest in protecting proprietary information, terminated employees typically face greater hardship under restrictive covenants than employers. This is especially true in today’s job market. Pennsylvania courts typically take a pro-employee approach to the enforcement of restrictive covenants.
Take Insulation Corp. v. Brobston for example.[iii] 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.[iv] The former employee had worked for the employer for ten years before being terminated for poor performance.[v] When the former employee accepted employment with a competitor, the employer sought to enforce the restrictive covenants in the employment agreement.[vi] 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.[vii]
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.[viii] The court reasoned that by firing the employee it had deemed said employee “worthless” to the business.[ix] 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.
Yet the dissent contends that there is “no need for heightened scrutiny in assessing the enforceability of post termination restrictive covenants because the court should look to the “adequacy of the consideration” as it would in other circumstances.
However, it seems that the dissent’s view ignores the obvious differences in an employee being terminated and an employee resigning; the latter is voluntary and perhaps even planned. 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. In fact, it does not address what would happen if there was willful action by a former employee. In other words, if an employee deliberately tried to get fired so as to avoid a restrictive covenant that one would be faced with if one voluntarily resigned. Under such circumstances, perhaps the court would allow a restrictive covenant to be enforced but this would be difficult to prove. Nevertheless, it is important for employers to keep records of the reason of termination. Moreover, Pennsylvania courts still generally uphold the non-disclosure clause to protect the employer’s interests. 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
Most employee contracts do not address the enforceability of restrictive covenants when an employee is terminated. Perhaps because in most employer-friendly agreements, employees do not have the bargaining power or leverage to suggest changes to these boilerplate agreements. 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 also 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.
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 firstname.lastname@example.org.
[i] PharMethod, Inc. v. Caserta, 382 Fed. Appx. 214, 219 (3d Cir. 2010).
[ii] Id. at 219.
[iii] Insulation Corp. of American v. Brobston, 446 Pa. Super. 520, 523 (1995).
[iv] Id. at 524.
[v] Id. at 538.
[vi] Id. at 526.
[vii] Id. at 528.
[viii] Id. at 540.
[ix] Id. at 532 (“Once such a determination is made by the employer, the need to protect itself from the former employee is diminished by the fact that the employee’s worth to the corporation is presumably insignificant.”).