Many companies use restrictive covenant agreements with key employees to guard against economic harm to the company by an employee who takes a job with the company’s competitor and/or tries to persuade the company’s customers to stop doing business with the company. These are particularly common with sales staff. In Pennsylvania, these covenants will generally be upheld if they are narrowly drawn to protect the employer’s legitimate business interests and if the employee has been given meaningful consideration in exchange for agreeing to be bound by the covenants. To learn more about Noncompetes, visit our Navigating Noncompetes blog series  in the AMM Employment Law Blog.

Companies recognize that merely doing business with other firms can also be risky when it comes to protecting their interests in employees and customers. Consequently, it has become customary to include “no hire” provisions in contracts to prohibit a party from hiring away the other party’s staff. These clauses are particularly common in agreements in the technology field and in non-disclosure agreements that parties often enter into when evaluating whether or not to begin a business relationship. The viability of these provisions is in doubt in Pennsylvania, where the Pennsylvania Superior Court struck down a no-hire clause in a service agreement earlier this year. The Pennsylvania Supreme Court has agreed to hear the case.

In Pittsburgh Logistics Systems, Inc. v. BeeMac Trucking, LLC, the trial court held that the no-hire clause was unenforceable because it prevented individuals from seeking employment with certain companies even though those individuals had not agreed to or been compensated for the restriction. It is important to note that in a separate action, Pittsburgh Logistics Systems (“PLS”), the company attempting to enforce the restrictions against BeeMac, was unsuccessful in its efforts to enforce the restrictive covenants contained in four employees’ employment agreements, each of whom left to work at BeeMac. The trial court concluded that the covenant not to compete was oppressive and overly broad since it had an unlimited geographic scope. The court viewed PLS as having “unclean hands” and refused to enforce the restriction at all.

The Superior Court agreed with the trial court and held that the no-hire clause was unenforceable as a matter of law. The Superior Court was influenced by the lower court’s holding that the non-compete covenants in the employment agreements were not enforceable, noting that it would be unfair for PLS to achieve the same result by using a contractual no-hire provision in its contracts with other companies.

Two Superior Court judges dissented, drawing a distinction between a no-hire provision in a contract between two companies and a non-compete clause binding employees. They reasoned that the no-hire clause did not restrict the employees’ actions; rather, the clause was a bargained-for restriction in recognition of the fact that BeeMac would have access to PLS employees and know-how. The dissenting opinion suggests that the correct analysis is whether the no-hire clause was a reasonable restraint on trade. Using that test, the dissenting judges would have enforced the clause and granted the injunctive relief requested by PLS to prevent BeeMac from “enjoy[ing] the benefit of its purported breach” and “leverag[ing] the specialized knowledge that PLS’s former employees acquired while under its employment.”

It will be interesting to see how the Pennsylvania Supreme Court views these issues when it hears this case. Stay tuned for further developments.

In the last segment of this series, we focused on concerns for employers in drafting and enforcing restrictive covenants.  The choices for employees are fewer, and none of them are good.   Employees are generally asked to sign restrictive covenants at two points:  either at the beginning of their career or upon a promotion or other significant improvement in employment status.  Such agreements diminish employees’ choices should they want to move on from their current employment, whether or not the restrictions are actually enforceable.

Some employers require employees to sign a restrictive covenant at the outset of their employment.  If the employee was recruited and has other employment choices, the employee has some bargaining power to reduce the duration or scope of the restrictions.  But this is seldom the case, and the law recognizes that employees generally have limited (or no) bargaining power in these situations.  The law disfavors restrictive covenants for precisely this reason:  the agreement imposes a post-employment restriction that may hinder the employee’s ability to earn a living at a time when the employee has little or no bargaining power to negotiate the restriction.

This calculus changes a little when the employee is required to sign a restrictive covenant in conjunction with a promotion or other benefit, such as participation in a stock option or bonus program.  Then the employee has to decide whether the value of the promotion or other benefit is enough to justify agreeing to the post-employment restriction.  Where it is not, the employee can refuse to sign, forcing the employer to decide how valuable this employee is to the employer.  However, the employee should factor into this decision that the employer is free to terminate the employee for refusing to sign.  And, this might be a good thing, as the employee will be leaving the employer without a noncompete. 

Frequently, employees breach the restriction without consulting an attorney first based on the widely held, mistaken, belief that courts do not enforce noncompetes.  Let’s be clear:  courts will enforce noncompetes where the law permits them to do so.  More importantly, the old employer will sue the employee and the employee’s new employer for breach of the agreement.  The new employer may terminate the new employment to avoid the costs of litigation.  Litigation regarding these matters is expensive, time-consuming and stressful.  Practically speaking, most employers will refuse to hire an employee with a restrictive covenant even if it is unenforceable for any number of technical reasons we have discussed in this series. 

At the very least, employees should consult an attorney prior to signing, even if they have limited bargaining power, to understand the restrictions in place.  We can help employees with that review, and we can help employees navigate the minefield of finding new employment when they have a noncompete in place. 

By Patricia Collins

Reprinted with permission from the February 28th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.Further duplication without permission is prohibited

The Pennsylvania Superior Court, in Metalico Pittsburgh v. Newman, et al (No. 354 WDA 2016, April 19, 2017), dealt a blow to employees attempting to avoid the application of a non-solicitation covenant. 

In Metalico, two employees, Newman and Medred, executed employment agreements containing a covenant not to solicit customers, suppliers and employees during the “Post-Employment Period.”  The Post-Employment Period varied depending upon the manner of the termination of employment, and commenced upon the last day of employment with Metalico.  At the end of the three-year period, Metalico terminated the employment agreements, but continued to retain Newman and Medred as “at-will” employees, and recited new compensation and other terms of employment.  These terms differed from those contained in the employment agreement.  Newman and Medred were terminated one year later.  Metalico filed suit against Newman and Medred, alleging that they were violating the non-solicitation covenant in their subsequent employment. 

On the eve of a preliminary injunction hearing, Newman and Medred filed a Motion for Partial Summary Judgment, arguing that the employment agreements containing the non-solicitation covenants had terminated, and therefore the non-solicitation provisions no longer applied.  They argued that the agreement to continue as “at-will” employees acted as a novation of the employment agreement.

The trial court agreed with Newman and Medred, and granted their motion for partial summary judgment.  But the Superior Court did not agree.  Instead, the Superior Court found that the covenant remained in place pursuant to a survival provision in the employment agreement.  That provision stated that if employment under the agreement “expires,” the agreement continues in effect “as is necessary or appropriate to enforce” the non-solicitation covenant. 

The trial court found that upon converting Newman’s and Medred’s status to “at will” employees, the parties had stated new terms for the employment relationship going forward.  In so doing, the parties did not recite that the non-solicitation provision would stay in place.  The failure to continue the compensation and benefits provided in the employment agreement, in the trial court’s view, invalidated the non-solicitation covenant.  The trial court justly noted: “Metalico cannot claim the benefits of its bargain while denying its employees the same.” 

The Superior Court disagreed, noting that because the survival language was included in the employment agreement, it constituted the bargained-for benefit for the employees.  The Superior Court rejected any argument that there was a failure of consideration, because failure of consideration only applies if the consideration was never received – the employees here did receive three years of the promised compensation and benefits under the agreement.  The Superior Court refused to find that the parties to the employment agreement intended to terminate and extinguish the previous agreement, thus extinguishing the non-solicitation covenant as well.  In so doing, the Superior Court relied upon Boyce v. Smith-Edwards-Dunlap Co., 580 A.2d 1382 (Pa. Super. 1990).  However, the Boyce case dealt with the use of the restrictive covenant as a defense to a claim raised by the employee.

It is well-settled that restrictive covenants in employment agreements are disfavored under Pennsylvania law.  Courts, including the Superior Court, have refused to enforce such agreements on technicalities.  For example, in Socko v. Mid-Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa. Super. 2014), the Superior Court refused to enforce a covenant not to compete in an employment agreement entered into after the commencement of employment and not accompanied by any beneficial change in the employee’s status, but which recited that it was signed “under seal” under the Uniform Written Obligations Act.  The Court found that a seal does not provide adequate consideration to enforce a restrictive covenant.  Instead, the Superior Court noted, there must be “actual valuable consideration.”  The holding in Socko left employment law practitioners and litigators with the belief that there are no “gotchas” when it comes to restrictive covenants. 

Metalico appears to change that.  Metalico voluntarily agreed to let the employment agreement terminate and to continue employment on an “at-will” basis.  This change of status benefits Metalico, leaving it free to terminate the employees or change their compensation and benefits at will (thus the name) and without concern about the terms of a written agreement.  The employees lost these protections.  The practical result of the Superior Court’s holding is that the employees lost the protections of the agreement, but retained their post-employment obligations.  This is inconsistent with Pennsylvania’s historical animosity towards these restrictive covenants, and appears to truly represent a “gotcha” for these employees. 

Metalico expands the universe of enforceable restrictive covenants.  This is not an uncommon fact pattern, and one which might have given an employer’s attorney pause prior to filing for a preliminary injunction in the past.  The holding could have the impact of reducing the care required in drafting, terminating and enforcing disfavored restrictive covenants, and eliminating some of the defenses available to employees seeking to avoid the covenant.  Interestingly, nowhere in the opinion does the Superior Court recite the oft-cited language that such covenants are disfavored in the law.  It will be interesting to see if the Supreme Court takes the opportunity to do so on appeal. 

Patricia Collins is a Partner with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on commercial litigation, employment and health care law. To learn more about the firm or Patricia Collins, visit www.ammlaw.com.

Employers are now using a new strategy in an effort to keep their employees from leaving the company and working in a competitive enterprise. Traditionally, employers used restrictive covenant agreements, almost always built in to the employee’s written employment agreement. These covenants prohibit employees from engaging in competition with a former employer. Courts tend not to favor restrictive covenants because they impinge on the ability of a worker to earn a living – they are a restraint of trade.

To limit the scope of restrictive covenants, courts impose a reasonableness standard. Restrictions for a limited time, such as a year, and a small geographical area, such as a five mile radius, were favored. Long-term and broad covenants were not. The employee’s skill set and knowledge of the original employer’s enterprise are also key factors in assessing the business need for any restrictions. The more skill needed to do the work, the more knowledge an employee has of the employer’s business strategies, the more justifiable the non-compete clause becomes.

Why Employers Like the Employee Choice Doctrine

The strategy that employers are now using in some states, including Pennsylvania, is a little more artful. Employers are offering employees post-employment benefits such as stock options and deferred compensation with a condition – a catch. The catch is that the benefits are only available if the employee who leaves the company does not compete with the employer providing the benefits. The employee is given a choice to either accept the benefits and not compete, or compete, but forfeit the benefits and be subject to repayment, or "clawbacks” of benefits already paid. The choice has become known as the employee choice doctrine.

The employee choice option works better for the employer than the typical restrictive covenant because it enables the employer to shift the burden to the employee. In the classic non-compete case, the employer's remedy was to seek an injunction against the competing former employee ordering him or her to cease the competition. In employee choice cases, the employer can still seek an injunction. Better still, the employer can just terminate the benefits (the stock option or other post-employment benefit) thus shifting the burden to the employee to seek redress in the courts by demanding payment of the benefit.

In some states, like New York, there is no review of the employee choice option to assure that the choice offered to the former employee is reasonable. That is not the case in Pennsylvania. Pennsylvania law currently does allow employees to craft employment benefits that are tied to non-competition, but the tie has to be reasonable. The cases in Pennsylvania are evolving. As with restrictive covenants, the more reasonable, meaning less strict, the choice is - the more likely Pennsylvania courts will uphold it.

Key Drafting Issues in Employee Choice Benefit Contracts

When drafting employee choice benefit provisions, employers should keep in mind the following points:

• The Employee must have a real choice. The choice between competing in the new position and forfeiting the benefit or not competing and keeping the benefit should be clear. In short, the employee should understand that there is a trade-off.

• The Employee has to leave voluntarily. The choice option is likely only valid if the employee controls the decision about leaving the current employer. Some courts reason that the employee choice doctrine is not really a choice if the employer fires the employee without cause. In such a circumstance, the employer has little or no legitimate business interest in enforcing the non-compete obligation.

• Consideration.  For the employee to be forced to make a choice between forfeiting assets and working with a competitor, the employer has to give the employee additional consideration over and above that which the employee would have been entitled to receive in the normal course of working for the employer, including severance or other payments normally paid upon termination.

Why Legal Counsel Can Help

Experienced business counsel understand the evolving nature of the employee choice doctrine.  In particular, they keep current with the Pennsylvania and federal court decisions so they can craft documents which have the best chance of surviving attack by employees who seek to avoid them by claiming that the choice is invalid as a restraint of trade.

Before drafting, and certainly before presenting an employee benefit with a forfeiture provision – employers should seek to have their business counsel review the language of the benefit contract.

Restrictions against competition are frequently included in employment agreements and agreements for the sale of business assets or stock.  The restriction against competition is designed to secure a time period for the employer or buyer of business assets, as the case may be, during which the employer/buyer is free from competition for a departed employee or seller so as to facilitate the transition and better protect their own business assets and customer relationships.  If properly drafted and implemented, restrictions against competition are enforceable under Pennsylvania law.

The primary method of enforcement in the event of breach is a preliminary injunction in equity.  In order to prevail on a petition for preliminary injunction, a petitioner must demonstrate several factors including (1) the need to prevent irreparable harm which cannot be compensated by money damages, (2) that more harm will result from the denial of the preliminary injunction than from granting same, (3) that the injunction will restore the parties to the status quo, (4) the likelihood of success on the merits, (5) that the injunction is designed to abate the offending activity, and (6) that the injunction will not negatively impact public policy.   In most cases the issues of likelihood of success on the merits and irreparable harm incapable of compensation with money damages represent the contested issues.

In Bucks County, the petition for preliminary injunction must be accompanied by a verified complaint and an order for hearing.  The petition is often, though not always, heard by the initial pre-trial judge assigned to the case at the time of filing.  Court administration reviews all petitions for preliminary injunction and assigns the presiding judge, courtroom and date for evidence to be taken.  The order for hearing is an essential aspect of the petition; without it, no hearing will be scheduled.

The petitioner in any injunction matter bears a heavy burden.  Adequate evidence as to the need for enforcement of the covenant, the potential irreparable harm and right to relief must be presented.  Because the entry of injunctive relief is an extraordinary remedy, the evidence must be clear and persuasive.  In employment and business asset transfer cases, the language of the restriction in the applicable agreements must be constrained to those aspects of competition which are reasonably necessary for the protection of the employer/buyer.  For example, a covenant which is overbroad in terms of geography, time or scope will not be enforced.

Preliminary injunctive relief may be acquired in the Bucks County Court of Common Pleas if supported by the underlying agreement and if properly perfected under the practices and procedures employed in the County.