Pennsylvania Covenants Not to Compete
March 21, 2022
With the recent realignment of business as a result of the pandemic, restriction over employee changes in employment have caused a rash or legal conflicts. It seems to be as a result of business owner and management attempts to protect against the hemorrhaging which occurred in sales and profitability because of the crisis of COVID.
Increasingly, the circumstances surrounding the employee’s separation or termination from employment are also a factor that must be considered to determine if the non-compete restriction should be enforced. As a general matter, restrictive covenants are considered a restraint of trade and are looked upon unfavorably
In Pennsylvania, there is no statute that specifically addresses restrictive covenants. Instead, courts decide the reasonableness of the restrictions under traditional contract law principles in deciding whether a non-compete and non-solicit agreement is valid and enforceable.
Employers engaged in enterprises that involve trade secrets and confidential or proprietary business information are increasingly entering into agreements with employees that include confidentiality provisions, covenants not to compete, and covenants not to solicit. But in these difficult economic times, when employees are involuntarily separated from their employers in a reduction in force or downsizing, is that non-competition agreement enforceable?
Increasingly, the circumstances surrounding the employee’s separation or termination from employment are also a factor that must be considered to determine if the non-compete restriction should be enforced. In Insulation Corporation of America v. Brobston. Brobston, a longer-termed salesperson, was knowledgeable about confidential corporate information such as overhead costs, profit margin, dealer discounts, and customer pricing, marketing strategy and customer contract terms of his employer. Information of this nature was a business interest able to be protected under the “non-disclosure” covenant of the employment contract.
The Superior Court reversed the trial court’s injunction against Brobston’s competing with the company, stating that the “salesman, discharged for poor sales performance, cannot reasonably be perceived to pose the same competitive threat. The employer’s business interests as the salesman whose performance is not questioned, but who voluntarily resigns to join another business in direct competition with the employer.”
Cases after Brobston find Pennsylvania courts suggesting that employees who leave their employers through no fault of their own may also escape the restrictions of their non-compete agreements. In All-Pak, Inc. v. Johnston, the Superior Court was sympathetic to employees terminated for reasons beyond their control, perhaps opening the door for employees affected by downsizing or layoffs to claim that their non-compete agreements should not be enforced. This is not to say that the attitude of the court will not be susceptible to countervailing arguments, since compelling arguments in challenging economic times, as have recently transpired due to COVID, maybe employers’ legitimate business interests are even more in need of protection from competition than ever.
In the end, there are two over-riding areas of conduct that may allow for a first impression analysis, two trends emerge from these cases. Terminating employment for poor performance relative to the company’s legitimate business interests cannot turn around and prevent that former employee from competing with them. On the other hand, an employee terminated for misconduct or disloyalty will not be able to avoid his non-compete obligations.