An Introduction To Restrictive Covenants In Pennsylvania

Posted in Business & Corporate, Employment

In today’s uncertain economic climate, it has never been more vital to protect your company and your customer base. With that said, it is critical to the success of your company to have properly drafted and appropriate restrictive covenant agreements with your employees which will adequately protect your company’s customer relationships.  Without having appropriate restrictive covenant agreements, your business risks the unfortunate consequence of losing customer relationships to departing employees. What follows is a brief explanation of the common types of restrictive covenants.

  1. Non-Competition —This is an agreement whereby the company generally seeks to prohibit the employee from accepting employment in the company’s industry for a certain period of time. It is common to have a non-competition agreement that is limited by geography (e.g., the employee cannot accept employment at a competing company for a period of two years in a particular state or geographic region, such as within a hundred-mile radius of the company’s offices, etc.). Non-competition agreements are disfavored in Pennsylvania. Therefore, non-competition agreements must be narrowly drafted to only protect legitimate business interests of the company.  Pennsylvania Courts are unlikely to enforce a non-competition agreement that the Court deems purpose is to eliminate or repress competition or to keep the employee from competing against the company so that the company can gain an economic advantage. Hess v. Gebhard & Co., 570 Pa. 148, 808 A.2d 912 (2002).
  2. Non-solicitation —This is an agreement whereby the company does not seek to prohibit the employee from accepting employment in the same or similar industry, but rather generally seeks to prohibit the employee for a certain period of time from soliciting to render or rendering services to company customers, wherever located. The non-solicitation covenant can be modified to limit or expand the customer prohibition to past and current customers, and prospective customers reasonably identified by the company prior to the employee’s termination.  Like non-competition agreements, non-solicitation agreements must also be reasonable. Pennsylvania Courts will look to limit or will not enforce non-solicitation agreements it deems unreasonable. Pennsylvania Courts have held that a covenant that an ex-employee may not "solicit, divert or take away" customers of a company allows the employee to accept business from the customers of the company, as long as the customers seek out the ex-employee. Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Moose, 365 Pa.Super.40, 528 A.2d 135 (1987).  Both non-competition and non-solicitation agreements are intended to protect the company’s legitimate business interests, most important among them being its customer relationships. The primary difference is whether the employee will be prohibited from seeking or accepting gainful employment in the same industry as that of the company (i.e., non-competition), or the employee will be permitted to become employed in the same industry, but not with the benefit of the company’s customers or employees (i.e., non-solicitation).
  3. Non-disclosure—This is an agreement that protects information that the company finds important to its business. Non-disclosure agreements prohibit the employee from disclosing or using information of the company, other than for purposes that benefit the company. Often non-disclosure agreements require that the employee return all property of the company upon termination of employment. While often used to define the scope of "confidential information", all states have laws that prohibit an employee or former employee from disclosing confidential information of the company, regardless of whether or not there is an agreement between the company and employee covering the confidential information.