Non-competition agreements, also known as covenants not to compete or restrictive covenants, are employment contracts used by employers to limit the ability of an employee to compete with the employer by stealing customers or trade secrets. Enforceable agreements must strike a balance between protecting the employer's legitimate business interests from an unfair competitive advantage with the employee's right to work in a field for which he or she is trained. In general, courts decide what is considered reasonable or not reasonable by examining the type and size of the business, how long and over what geographic area the restrictions apply and whether adequate consideration, or benefit, was given the employee at the time the agreement was signed.
The Law In Pennsylvania
Pennsylvania courts have determined that restrictive covenants are enforceable if the terms are reasonable and necessary to protect legitimate business interests of the employer such as customer relationships, trade secrets, confidential information and specialized training and skills obtained during employment. Factors considered when determining reasonableness include the hardship an agreement puts on the former employee, its effect on the general public and the restrictions placed on time, territory and activity of the former employee.
With any contractual arrangement, both parties must be giving and receiving something of value, also known as consideration. Pennsylvania courts have determined that the offer of initial employment is sufficient consideration or benefit to the employee in exchange for agreeing to not compete with the employer should the employment relationship terminate. An agreement signed after the employment has begun may also have the requisite consideration only if it accompanied by a beneficial change in the employee's status such as a promotion or additional compensation.
Reasonableness in Time and Geographic Scope
Agreements may be deemed unenforceable if a court finds that they are unreasonable in terms of duration, geographic scope and the type of employment or line of business being restricted. If a court finds an agreement is unreasonable, it may modify the agreement so that it does not unduly infringe on the former employee's ability to work.
Examples of non-compete agreements that Pennsylvania courts have found to be reasonable include:
- A three-tiered restriction against a former employee of an intermodal transportation service company that included:
- A 3-year non-compete and customer non-solicitation clause;
- A 1-year employee non-solicitation clause; and
- A 5-year proscription on the use of proprietary information.
- A 1-year restriction against the solicitation of the former employer's customers that had no geographic limitation.
- A 1-year, nationwide restriction against the former employee of a health care records management company from being an owner of, being employed by or soliciting the customers of a competitor.
The courts have found the following restrictive covenants unreasonable:
- A restriction against a former sales representative of a coffee packaging materials and machinery from competing within the United States and Caribbean because it covered an area larger than the employee's sales territory and product line.
- A 5-county restriction against a perinatal care physician. The court modified the restriction to include only the two counties in which the physician actually worked.
- A 3-year, nationwide restriction against a former life settlement industry employee where the former employee's territory covered only five states.
Employers need to keep these issues in mind when asking employees to sign restrictive covenants. It is also important to know if potential new hires have a non-compete agreement with a former employer. In some cases, the new employer can be liable to the former employer if hiring the employee would put him or her in violation of the agreement. Different rules may apply to situations in which all or part of a business is being sold and a restrictive covenant is agreed to by the buyer and the seller.<