“One of my top salesman just left our Company, and I just found out that he is working for one of our biggest competitors! We had a non-compete agreement in place. He can’t do that…right?!”
Not so fast. Non-compete agreements are not akin to the well-versed contract theory that “you are bound by a contract that you signed.”
In Pennsylvania, our Courts have established an uphill battle for employers looking to enforce their non-compete agreements. We start with the principal that non-competition agreements are generally disfavored as a restraint on free trade and the ability of an individual to earn a living. In other words, Pennsylvania Courts generally do not want to enforce non-compete agreements. However, with the proper attention, an employer can be protected.
Employers should consider the following key components when creating a non-compete agreement:
- Provide adequate “consideration.”
- Is it for the protection of your legitimate business interests.
- Reasonable in duration.
- Narrow geographic scope.
You may be aware of the term “consideration” in the realm of contracts (for example: “As consideration for you giving me your TV, I will give you $100”). In the non-compete world, consideration is more tightly defined. There is adequate consideration if you have an employee sign the non-compete when they sign the offer letter, the employment agreement, or when they begin working for your company. In such a scenario, your hiring of the employee may be adequate consideration for their signing a non-compete. If you want your current employee to sign a non-compete, the employee must be provided a substantial change in his/her employment status. This may come in the form of a significant bonus (to which they were not already entitled) pay raise, or a promotion to a higher level position. $100 will not do, and neither will changing the employee’s title, without a true increase in job status or responsibility.
In the recent case of Lynch v. ADP, the Third Circuit Court of Appeals upheld a preliminary injunction against two former employees. During the course of their employment, the employees were offered stock awards, which, to accept, required the employees to access a webpage containing the “award documents.” Included with the award documents was an award agreement and a non-compete agreement, both of which expressly stated that the acceptance of the award was conditioned on agreement to the non-compete. By checking a box on the webpage that stated “I have read all of the documents below” (which was required to accept the award), the employees were found to be bound by the non-competes (despite the employees’ argument that they did not recall reading the non-compete and did not agree to its terms). The Lynch case provides an interesting, modern example for employers on effectuating “adequate consideration” in the context of current employees.
Legitimate Business Interest
Your non-compete agreement cannot be based solely upon the purpose of stifling competition. Employers must have a legitimate business interest that they are protecting. Interests that have been found by Pennsylvania courts to be legitimate are customer relationships, confidential information, trade secrets (i.e., pricing formulas, product methodologies) and good will in the community. Those interests should be proportional to the status of the employee. For example, an administrative employee or entry level employee is less likely to be privy to a company’s highly confidential pricing formulas than a Chief Operating Officer.
As an employer, think to yourself “if I had to explain it to a judge, what are my business interests in having my employee sign the non-compete, and are they legitimate?”
The length of time by which an employee is restricted from competition must be reasonable. Unfortunately, there is no black letter definition of what is “reasonable.” Employers should compare the level of the employee they are restricting and the business interests they are trying to protect. A 1 to 2 year non-compete is common, and a 3+ year restriction should only be considered when it applies to a high level official or employee of the company.
Like the durational component, the geographical extent of the restriction must be reasonable under the circumstances of that particular employee and the interests the employer is protecting. There is also no definition or concrete guideline for what geographical restriction is reasonable. A small employer may choose a smaller restriction radius, i.e. working for a competitor located within a 10 or 20-mile restriction of the employer’s office. Larger employers who maintain business in several states may warrant a broader restriction. However, given the unfavored nature of non-compete agreements, employers should be conservative when establishing geographical restrictions.
Interestingly, in the end, Pennsylvania judges have the power to modify the terms of your non-compete if determined to be overly broad. Following the criteria will go a long way to seeking an enforcement of your non-compete agreement if it is called into question.
John P. Henry, Esq. is an Associate attorney at Siana Bellwoar.