Without the protection of a non-competition agreement, most courts are reluctant to prevent a former employee from working for a competitor. However, even when a company has a non-compete agreement with an employee, it may be unenforceable if it is not drafted in accordance with the laws of the state in which the company seeks to enforce it, says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia, LLC.
“There’s a perception that Pennsylvania courts do not enforce non-compete agreements, but that’s incorrect,” says Goldblum. “Covenants not to compete are routinely enforced by Pennsylvania courts to the extent they are reasonably necessary to protect the legitimate business interests of the employer.”
Smart Business spoke with Goldblum about the importance of having properly drafted non-compete agreements in order to best ensure that they will be enforced by a court.
Why are non-compete agreements important?
In conjunction with other restrictive covenants such as a non-solicitation of customers and employees, confidentiality and inventions clauses, non-compete agreements are the best way a company can protect itself from the harm it can potentially suffer in the event an employee leaves the company and then solicits the company’s customers on behalf of a competitor. Although non-compete agreements are fairly common for executives and managers, they are not utilized as frequently as they should be for salespeople and other employees that regularly communicate with a company’s customers.
How does Pennsylvania law differ from other states regarding non-compete agreements?
Many states are less inclined to enforce non-compete agreements than Pennsylvania. For example, California has a statute that prohibits non-compete agreements except in very limited circumstances. Generally, Pennsylvania courts will enforce a non-compete agreement as long as the agreement is narrowly drawn and the company seeking to enforce the non-compete agreement can meet the threshold requirement of having a legitimate, protectable business interest such as customers and customer goodwill, confidential information, specialized training or trade secrets. Pennsylvania courts will not enforce covenants aimed at repressing or eliminating competition to gain an unfair economic advantage.
What should employers know when entering into non-compete agreements with employees?
In Pennsylvania, the offer of employment is sufficient consideration for a non-compete agreement entered into between a company and an employee at the outset of employment. In Pennsylvania, there are four requirements for an enforceable non-compete agreement. The non-compete agreement must be:
- Ancillary to an employment relationship.
- Supported by adequate consideration.
- Reasonably necessary to protect a legitimate business interest of the employer.
- Reasonably limited in duration and geographic scope.
There is no precise formula for what makes a covenant not to compete reasonable. A court will evaluate the circumstances and make a factual determination as to whether it will enforce a non-compete agreement on a case-by-case basis.
If an employer has employees in multiple states, it can include a provision that ensures Pennsylvania law will govern the interpretation and enforcement of the non-compete agreement.
What common mistakes do employers make when entering into non-compete agreements with existing employees?
The most common mistake is to fail to give additional consideration and simply demand the employee sign the noncompete agreement. Continued employment alone is insufficient consideration for a non-compete agreement entered into subsequent to the commencement of the employment relationship.
If the company seeks to enter into a non-compete agreement with an existing employee, it must give additional consideration, which could include many different items such as a promotion, an increase in salary or benefits or a monetary payment.
How can employers determine when and how to enforce non-compete agreements?
When an employee resigns or is terminated, the company should remind the employee of his or her non-competition obligations and provide the employee with a copy of the signed non-compete agreement. If it is subsequently determined a former employee is in violation of the agreement, the company has the right to proceed against the employee in court. The company may seek preliminary injunctive relief to prevent employment in violation of the non-compete and file a breach of contract action against the former employee and seek permanent injunctive relief and monetary damages. Typically, a case against a former employee also includes the new employer for interfering with the company’s contractual relationship with its former employee.
When hiring, a company should always inquire whether potential employees are bound by agreements that could restrict them from accepting employment or limit the performance of their duties. Otherwise, the company could be inviting a lawsuit if it hires an employee who is contractually bound not to compete with a former employer.
How often should an employer review its non-compete agreements?
Noncompete agreements should be reviewed no less frequently than every two years because the laws that govern their interpretation and enforceability change. Legal counsel that is up to date on the ever-changing landscape of employment law in Pennsylvania should review non-compete agreements to determine their compliance with existing law, which will best ensure their enforceability.
Stephen C. Goldblum is a member at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-5961 or email@example.com.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
If an employee leaves your company, is there anything you can do to stop that employee from taking your customers to his new employer?
Many business managers already know that a noncompete agreement can help stop that from happening because it can preclude the employee from competing for a period of time after he or she leaves. But new developments in the way courts apply noncompete agreements could change how much protection they afford employers, says Steven Ciszewski, a partner with Novack and Macey LLP.
“In Illinois, courts have typically enforced noncompete agreements only if the employer could establish that it has a legitimate business need for the noncompete agreement,” says Ciszewski. “However, one of our appellate courts recently broke ranks and held that the employer does not have to establish a legitimate business need in order to enforce its noncompete agreement.”
The issue is currently being reviewed by the Illinois Supreme Court, and the analysis provided by that court could dramatically change how noncompete agreements are enforced in Illinois.
Smart Business spoke with Ciszewski about these new developments and the effect that the Illinois Supreme Court’s ruling could have on employers in the future.
What new developments in the law governing noncompete agreements should employers be aware of?
The general rule in Illinois has been that noncompete agreements are enforceable only if there is a legitimate business need to preclude employees from competing freely after they leave the company. To satisfy this requirement, the employer typically had to show that the noncompete agreement was necessary to protect either its near permanent customer relationships or its confidential information or trade secrets.
One of the state’s appellate courts recently ruled that an employer no longer needs to make this showing to enforce its noncompete agreement. This has created a conflict among Illinois courts that the Illinois Supreme Court should resolve in the coming months.
What effect will the Supreme Court’s upcoming ruling have on employers?
There are a number of things that could happen and a number of possible effects. One possibility is that the Supreme Court affirms the general rule that has been in place and requires the employer to continue to show a legitimate business reason for its noncompete agreement.
That outcome would essentially leave the law in Illinois the same as it has been in the past.
A second possibility is that the court will agree with the appellate court’s new way of thinking and determine that the employer does not have to show that its noncompete agreement is necessary to protect near-permanent customer relationships or confidential information/trade secrets. If that happens, noncompete agreements could be more broadly enforceable in Illinois.
Another possibility, although less likely, is that the Supreme Court announces an entirely new way of interpreting noncompete agreements that is more strict or more lenient than anything adopted by our appellate courts in the past.
Will there be restrictions on the enforceability of noncompete agreements if the Supreme Court does adopt the appellate court’s new way of thinking?
In all likelihood, yes. Illinois courts still seem to unanimously hold that, in order to be enforceable, the noncompete agreement has to be reasonable in duration and geographic scope. Generally speaking, noncompete agreements that last up to a couple of years and cover a reasonable geographic territory are enforceable. There is no reason to think that these limitations will change, regardless of how the Supreme Court rules on the case currently before it. But the Supreme Court can make new law if it wants to, so this could change if the court decides to go in an entirely new direction.
How would employers be affected if noncompete agreements are enforceable in more situations?
The knee-jerk reaction is to think that all employers will be happy because they want their noncompete agreements to be broadly enforced in order to protect their business when their employees leave. In many cases, that might be the right reaction, but it can cut both ways because employers often find themselves on both sides of this issue over the long run.
One year, the employer might want its own noncompete agreement to be enforced because it needs to protect its business when its employee leaves. The next year, the same employer might want to hire an employee from a competitor. In that situation, the employer would want its competitor’s noncompete agreement to not be enforced so that it can improve its business by hiring talent away from that competitor.
A business might have the best legal arguments in the world to win the case it has today, but how might that win impact the situation it faces in a year? From the employer’s standpoint, this tension is present in almost every noncompete case and needs to be thoroughly considered before any type of legal action is initiated.
Steve Ciszewski is a partner with Novack and Macey LLP. Reach him at (312) 419-6900 or firstname.lastname@example.org.