Navigating the Murky Waters of Non-Compete Agreements

How to Avoid Stormy Seas and Promote Smooth Sailing to Protect Your Business

As captain of the figurative ship, you want to prevent your sailor employees from leaving one day to sign up at a competing port of call. A non-compete agreement, restricting an employee from going adrift and joining a competitor for a reasonable period of time after she leaves your voyage, can effectively shore up customer goodwill and proprietary business information, provided that the agreement is enforceable under Pennsylvania law.

The following currents on non-compete agreements will help steer a course that avoids litigation and provides a safe harbor for your business:

The best time to have an employee sign a non-compete agreement is the period before he sets sail. Pennsylvania courts are likely to hold that executing a covenant not to compete prior to the employee’s tour of duty in the employment relationship provides sufficient consideration to support the restrictive covenant.

To enter into a non-compete agreement mid-stream with an existing employee, Pennsylvania courts follow the minority rule in requiring new consideration. To avoid paying a pirate’s ransom in additional compensation or in legal fees, the employer must nonetheless provide the employee with some sufficiently beneficial change in status.

While no surefire rule exists in this state to dock how much new consideration is enough, a recommended approach is to offer multiple benefits. Bundling the benefits in sufficient degree to include incentives such as a bonus, a promotion, a raise, and an increase in benefits enables the employer to show that meaningful consideration was provided to buoy the agreement.

For a non-compete agreement to sail through the Pennsylvania courts, the restriction on employment must be reasonable as to both the time period of the covenant and its geographic reach. The anchor balancing the many factors of the individual cases is the rule of reasonableness. Courts ask whether beaching the employee as to the designated time and area is reasonably necessary to protect the legitimate business interests of the employer.

To assess whether the time and area restrictions are reasonable, an employer should consider what it wants protected in the event that the employee jumps ship. Courts are more likely to turn the tide in favor of enforcing the restrictive covenant where the employer is seeking to protect a legitimate interest such as a trade secret or confidential information, a specific customer base, or a certain market territory, rather than simply seeking to punish an overboard employee.

An employer should craft the area restriction in a way that best benefits its business. It is wise to scrub the deck of the preconceived assumption that a limitation on the number of miles in which an employee can compete is the only means of rowing this boat. The compass may more appropriately point to a restriction, for example, listing particular counties or states, spelling out a specific product line or market, or stating the names of certain customers or competitors.

The employer should log the time restriction as the length of time necessary to protect the business. In drafting the time restriction, an employer should consider questions of duration such as how long it will take to chart a new course to protect the business, to bring another employee aboard, and to have the confidential nature of the protected information cast off.

Tailoring the non-compete agreement to the specific responsibilities of the employee, rather than using a form covenant, may make an ocean of difference with both the courts and the employee. Drafting the covenant to reflect, for example, whether a departing employee is more likely to hurt the employer locally or nationally not only enhances the covenant’s enforceability, but also diminishes the employee’s desire to challenge a stem to stern restriction.

Informing the employee up front of the time and geographic restrictions helps prevent a shipwreck later on. The employee is more likely to go along with the ebb and flow of the restrictions if she is aware of them at the pier, before she boards the vessel.

Including an express assignability provision in a non-compete agreement is the best way to avoid being blown off course by the courts in a situation involving a successor company. The prevailing winds favor specific consent by the employee to assignment.

In the event of a breach of a restrictive covenant or a misappropriation of confidential or trade secret material, both equitable and monetary relief for the victim may be available under Pennsylvania law. Relief at the helm may take the form of money damages or an injunction restraining the poor seamanship of the former employee and potentially his new employer.

While careful advance use of restrictive covenants and confidentiality provisions can often avoid opening up the floodgates of wrongful conduct by the employee and unfair competition from competitors, a latitude of remedies is available through litigation when necessary.


Posted In: Litigation