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Career Resources - Non-Compete Agreements

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Non-Compete Agreements

In order to be enforceable, a non-compete agreement must be:

(a) incident to the employment relationship;

(b) reasonably necessary for the protection of the employer; and

(c) reasonably limited in duration and geographic extent.

Sidco Paper Company v. Aaron, 351 A.2d 250, 252 (Pa. 1976). But see Davis & Warde, Inc. v. Tripodi, 616 A.2d 1384, 1386-87 (Pa. Super. 1992), holding that the three requirements for the enforcement of a restrictive covenant are: (1) that the covenant must relate to a contract for the sale of business or for employment; (2) the covenant must be supported by consideration; and (3) the application must be reasonably limited in both time and territory. It seems, however, the courts will reconcile the two by referring to the Sidco test as a more specific statement of what must be established. See Insulation Corp. of America v. Brobston, 667 A.2d 729, 733 (Pa. Super. 1995).

(I) Incident to employment.

A non-compete agreement is incident (or ancillary as it is sometimes called) to an employment relationship if it is supported by consideration that is related to employment. See, e.g., Bryant, 369 A.2d at 1168-69 (finding that a non-compete was incident to an employment relationship where it was supported by consideration). See also Morgan's Home Equipment Corp. v. Martucci, 136 A.2d 838, 844-45 (Pa. 1957) (the fact that the consideration arises in the context of an employment relationship makes it ancillary). As a matter of law, accepting employment constitutes consideration for the non-compete provision. See Bryant, 369 A.2d at 1168; Morgan's Home Equipment, 136 A.2d at 845-46; Records Center, Inc., v. Comprehensive Management, Inc., 525 A.2d 433, 435 (Pa. Super. 1987) (courts have consistently held that the taking of employment is sufficient consideration for a covenant not to compete).

On the other hand, a post-employment agreement will generally not be enforceable unless it is supported by consideration separate and apart from continued employment. Davis & Warde, Inc. v. Tripodi, supra. However, it is unclear how significant the new consideration must be. Certainly, a promotion with an increase in salary and other perks would suffice. A nominal raise in accordance with the annual practice of the employer is a much closer question.

In Tripodi the Pennsylvania Superior Court stated in a footnote its agreement with the principal that the retention of employment where employment was at will is sufficient. However, it further acknowledged that is not the law of Pennsylvania. The Court found the noncompete enforceable in that case because of the existence of consideration (a small raise and increased job responsibilities) notwithstanding the fact that a dissenting opinion called the consideration nominal.

(II) Reasonably necessary for protection of employer.

Note that to the extent that defendants in an action to enforce a non-compete assert that the covenant was unreasonable, either for the protection for employer, or as to duration or geographic extent, the burden of proof shifts to them. Bryant, 369 A.2d at 1169-70; Davis & Warde, Inc. v. Tripodi, 616 A.2d 1384, 1393 (Pa. Super. 1992) (Cavanaugh, J., dissenting).

Pennsylvania cases have recognized that trade secrets of an employer, customer goodwill, and specialized training and skills acquired from the employer, are all legitimate interests which can be protected through a general restrictive covenant. Thermo-Guard, Inc. v. Cochran, 596 A.2d 188, 193-94 (Pa. Super. 1991) (citing Morgan's Home Equipment, supra.)

In discussing an employer's interest in protecting customer goodwill, the Court in Sidco stated:

In almost all commercial enterprises . . . contact with customers or clientele is a particularly sensitive aspect of the business. . . . In most businesses . . . as the size of the operation increases, selling and servicing activities must be at least in part decentralized and entrusted to employees whose financial interest in the business is limited to their compensation. The employer's sole or major contact with buyers is through these agents and the success or failure of the firm depends in part on their effectiveness. . . . [t]he possibility is present that the customer will regard, or come to regard, the attributes of the employee as more important in his business dealings than any special qualities of the product or service of the employer, especially if the product is not greatly differentiated from others which are available. Thus, some customers may be persuaded, or even be very willing, to abandon the employer should the employee move to a competing organization or leave to set up a business of his own. . . .

. . . When [the employee] leaves the company he should no more be permitted to try to divert to his own benefit the product of his employment than to abscond with the company's cashbox.

351 A.2d at 253-54 (citing Blake, Employee Agreements Not to Compete, 73 Harv.L.Rev. 625, 653-54 (1960)). See also Boldt Machinery & Tools, Inc. v. Wallace, 366 A.2d 902, 906 (Pa. 1976) (even absent specialized training or access to trade secrets, employer has interest in customer goodwill which can be protected).

In the case where the interest in need of protection is trade secrets, it seems unnecessary for the information to constitute enough of a trade secret so as to be entitled to independent protection as a trade secret. Cf. Davis & Warde, Inc. v. Tripodi, 616 A.2d 1384 (Pa. Super. 1992) (upholding non-compete entered into to protect trade secrets without finding that the information was entitled to independent protection as a trade secret).

(III) Reasonably limited in duration and geographic extent.

The reasonableness of the temporal and geographic aspects of a non-compete clause is determined in light of the nature of the employer's interest sought to be protected. Boldt Machinery & Tools, 366 A.2d at 907.

Temporal Limits

As stated in Boldt Machinery & Tools:

When the restraint is for the purpose of protecting customer relationships, its duration is reasonable only if it is no longer than necessary for the employer to put a new man on the job and for the new employee to have a reasonable opportunity to demonstrate his effectiveness to the customers. If the selling or servicing relationship is relatively complex, a longer period may be called for. Courts seldom criticize restraints of six months or a year on the grounds of duration as such, and even longer restraints are often enforced. . . .

366 A.2d. at 907 (citing Blake, 73 Harv.L.Rev. at 677-78). Furthermore:

Frequency of contact may also control or affect the permissible period of restraint. Paradoxically, if the contact is less frequent, a longer period of restraint may be reasonable. . . . The employer's new representative should be given a reasonable opportunity to demonstrate to the customer that he will perform satisfactorily and to establish a working relationship. Thus, the less frequent the contacts, other factors being equal, the longer the period needed by the new employee.

366 A.2d. at 907 (citing Blake, 73 Harv.L.Rev. at 659). See, also Boldt Machinery & Tools, supra (upholding 5 year non-compete duration involving sale of industrial tools where there was a range of contact between every week to once every six months); Bryant, supra (upholding 3 year non-compete in industrial lifting industry where there was continuous but infrequent contact); Robert Clifton Associates, Inc. v. O'Connor, 487 A.2d 947 (Pa. Super. 1985) (upholding 1 year non-compete in services industry where there were hundreds of clients that former employee had been servicing); and Records Center, supra (restriction of only twelve months is reasonably limited in time). Under the facts of this case, the one year restriction period is reasonable.

Geographic Limits

Not surprisingly, the geographic reach is reasonable only to the extent necessary to protect the employer's interest. An employer's interest in the customer relationships developed by an employee extends only to the sales territory to which the employee was assigned. Boldt Machinery & Tools, 366 A.2d at 908. Thus, a restrictive covenant is reasonable insofar as it is limited to area covered by the employee. Id. See also Sidco, 351 A.2d at 255-257.

To the extent that it might be determined that a non-compete agreement is overbroad, either in duration or geographic extent, the remedy is to reform it rather than to determine that it is completely unenforceable. See, e.g., Sidco, 351 A.2d at 254-55. However, in some cases the court will find the agreement is completely unenforceable if it finds that the overbreadth was egregious. Accordingly, reasonableness should be considered whenever a non-compete agreement is being prepared.