As a law firm that represents both small businesses and aggrieved employees, one of the questions we hear most from both employers and employees is: Is my non-compete agreement enforceable?
The question comes in many forms. Employees ask, “can my prior employer enforce my non-compete agreement and prevent me from working for someone else?” Employers also ask, “is my noncompete agreement strong enough to protect my business?” Unfortunately, in almost every case, the answer is a lawyer answer… IT DEPENDS.
This blog deals specifically with the enforceability of non-compete agreements in Pennsylvania and our experience arguing both for and against enforcement of a non-compete restriction in the Philadelphia area and its surrounding counties.
What is a Non-Compete Agreement?
Generally, a non-compete agreement is a contract between a company and an employee that prevents the employee from working for a competitor. The restriction usually applies to the time when the employee is working for the company and some period of time after the employee no longer works for the company.
There are many ways to prevent an employee from working for a competitor. Sometimes a non-compete will specifically list companies that are competitors. Some agreements may even ask an employee to stay out of a certain industry altogether.
Other times, there will be a distance restriction. A distance restriction of several miles can make it hard for an employee to find new work.
The image on the left is a 10 mile radius from our 207 Buck Rd. Southampton Office. As you can see, it covers most of southeastern Bucks County and extends into New Jersey.
For employers, a non-compete agreement is a way to make sure that an employee does not learn the secret inner workings of your business and then uses them to compete with your company. For employees, a non-compete agreement may prevent them from earning a living in their specialized trade or field of expertise.
As a result, non-compete agreements must be carefully written to protect an employer’s business interests without imposing too harsh of a restriction on an employee that would prevent them from earning a living.
Whether a non-compete agreement is reasonable depends on the specific facts about the company, the proposed restriction, and the employee’s role for both the old company and the new employer.
A Non-Compete Agreement must be Reasonable
A non-compete agreement must be reasonable in time and scope. Said another way, the restriction can’t be for too long a time and it can’t be for too great a distance. Unfortunately, whether some amount of time or distance is reasonable is also fact specific and depends on the circumstances.
According to the Pennsylvania Supreme Court a non-compete will be enforceable if “the restrictions imposed by the [restriction] are reasonably necessary for the protection of the employer; and the restrictions imposed are reasonably limited in duration and geographic extent.” Hess v. Gebhard & Co. Inc., 570 Pa. 148, 157, 808 A.2d 912, 917 (2002). Put simply, in Pennsylvania a non-compete agreement must be “reasonably necessary for the protection of the employer.”
What type of competition is restricted?
One of the most important questions that a non-compete agreement should answer is “what type of competition is being restricted?” Different restrictions are reasonable for different businesses. It could also be reasonable to have different restrictions on different roles within the same company.
For example, a cashier working for a big box store like Walmart is unlikely to have secret competitive information about Walmart’s operations. For that reason, preventing the cashier from working for another big box store would most likely be unreasonable.
However, a cashier working for a small service business, like a commercial cleaning company, may have information about the cleaning company’s customers, their decision makers, their pricing, and their cleaning schedules. If the employee left and used that information they could try to steal those customers. That information is arguably trade secret and protectible. Preventing that employee from working for another local commercial cleaning company might be reasonable. (A separate, but relevant, blog on trade secrets and non-solicitation agreements is on the way soon.)
Is the duration of the non-compete reasonably limited?
There is no bright line on a reasonable amount of time to restrict an employee from competing. “Restrictive covenants are not favored in Pennsylvania and have been historically viewed as a trade restraint that prevents a former employee from earning a living.” Jacobson & Co. v. Int’l Env’t Corp., 427 Pa. 439, 235 A.2d 612 (1967).
In our experience litigating non-compete agreements, we have not seen courts in Philadelphia, Bucks County, or Montgomery County enforce a non-compete agreement with a duration of more than two years–without a very good reason. (We will draft a separate blog about non-compete agreements for shareholders splitting a business, as Pennsylvania’s courts have ruled that a shareholder buyout is a good reason for a longer non-compete agreement. For now here is a link to our shareholder disputes practice area.)
Typically, the court will look at what the employee receives not to compete. The amount of time deemed reasonable depends on the kind of information the employee could access, how fast that information becomes stale, and how much the employee was paid not to compete.
Pennsylvania’s courts hesitate to impose restrictions on low-to-middle class workers that prevent them from earning a living wage. Especially for a long time. Especially those that are laid off or fired by their job. However, a court could find that it is reasonable to restrict an executive who receives a large severance package.
What type of competitive activity can be restricted?
Should an employer be allowed to prevent an employee from working for certain types of companies altogether? Could an employee perform tasks for a competitor without actually competing? Like the other factors, the type of competitive activity that can be restricted–or scope of a non-compete–also depends on the type of company and the employee’s role.
There are many types of companies where a restriction is fair and makes sense. For example, if you are an engineer designing rockets for SpaceX, they probably wouldn’t want you to go design rockets for Blue Origin, one of their largest competitors. However, they shouldn’t be allowed to prevent you from being an engineer that works on Philadelphia’s SEPTA public transportation system. That would be an unfair restriction on your ability to earn a living as an engineer. Also, its pretty unlikely that rocket engineering will be used on Pennsylvania’s train system anytime soon.
On the other hand, it would probably be reasonable to prevent an employee that has access to customer lists, to internal pricing, or other proprietary company secrets from opening or going to work for a competitive company. Especially if the employee is hired into a position where they can use that information to get a competitive advantage for the new employer.
What is a reasonable distance?
A reasonable distance is different for different jobs and different industries. For example, the distance a barber would compete with another barber is probably a few miles, at most. Most people won’t drive very far to get a haircut. However, an online retailer’s largest competitor may be halfway across the United States, and their customers can shop online from anywhere.
A good non-compete agreement will take into account the type of business, the geographic region where competition is most likely, and narrowly tailor the restriction to that area.
The Employee Must Receive Valuable Consideration
In order for a non-compete agreement to be enforceable, the employee must receive something valuable in exchange for signing it. Too often we have had to tell employers that the process by which they had an employee sign a non-compete is insufficient and won’t be enforced by Pennsylvania’s courts.
Courts group employee non-compete agreements into two categories. The first is a non-compete agreement that an employee must sign when they start a job. The second is an agreement that gets presented to an employee after they have worked for a company for some time. The standard for consideration is different for each situation.
1) Non-Compete Agreement for New Employees
When an employee is asked to sign a non-compete agreement as part of the hiring process, the job acts as consideration for the agreement. The employer is basically saying, “if you don’t sign this, you don’t get a job” so the job is what the employee gets for signing the agreement. As long as these agreements are reasonable (like described above), they will most likely be enforced.
2) Non-Compete Agreement for Existing Employees
Existing employees need some “new and valuable” consideration for signing a non-compete agreement after they have already been working for a company. The new and valuable consideration has to be meaningful–it can’t be a $20 gift card to Starbucks. Courts have found that a raise, a bonus, a promotion, new benefits, a full time job, or a change over from contractor to employee all can serve as new and valuable consideration for a non-compete. The promise of continued employment alone is not sufficient.
Have a Lawyer Review your Non-Compete Agreement
If you are still reading this, you probably learned that the answer to the question “is my non-compete agreement enforceable?” is a frustrating “it depends…” Many of the non-compete lawsuits that we see result from agreements that are drafted and presented to employees without a lawyer’s involvement. This results in confusion and litigation about the non-compete agreement, its reasonableness and its enforceability.
We work with small businesses to avoid litigation and to help them draft non-compete agreements that are specifically tailored to their business, so they are reasonable in time and scope, and so they are presented to employees either at the start of employment or after the employee has been working for the company in exchange for new and valuable consideration.
We also work with employees to help them negotiate a reasonable non-compete. Or for those who have already signed, we have used the above arguments to get employee agreements deemed void and unenforceable because they were presented to an employee without adequate consideration or because they were unreasonable.
Whether you are a Pennsylvania employer that wants to make sure that the terms of a non-compete agreement are reasonable or a Philadelphia area employee that wants to make sure that your new job doesn’t violate a non-compete agreement, don’t hesitate to contact Kaminsky Law for a free consultation.
