Restrictive Covenants in Employment Agreements - Non-Compete and Confidentiality Clauses
As our society moves more and more in a direction where people change jobs more frequently than in prior generations, employers are increasingly utilizing non-compete and confidentiality agreements to protect their customer base and investments in developing their employees. This Article discusses requirements under Pennsylvania law for the implementation and enforceability of such restrictive covenants. It addresses the separate legal pre-requisites for enforceability of employee non-compete and confidentiality agreements and reviews the relative advantages and disadvantages of each type of covenant from the different perspectives of the employer and employee.
Because non-compete covenants are considered restraints of trade, certain specific requirements must be satisfied in order for such restrictions to be considered legally enforceable in an employment situation. Under Pennsylvania law, a non-compete covenant must either be entered into at the commencement of the employment relationship, or if entered at a later point, the employer is required to give the employee new consideration or value in exchange for agreeing to the restriction.
Additionally, the post-employment duration and geographic scope of the non-compete restriction must both be considered "reasonable". In other words, if a non-compete covenant goes for too long a period following the end of the employment relationship, or covers too wide an area, it can be found unenforceable in whole or in part.
Reasonableness in terms of geographical scope and duration are determined with reference to what is necessary for the employer to protect its legitimate business interests in preserving its investment in training and developing the employee involved and protecting its customer base from post-employment activities on the part of the former employee that would compete with the former employers business. Generally, the reasonableness of the post-employment duration of the covenant varies depending upon the level and importance of the particular employee in the employer's business organization. While a non-compete covenant with a duration of a year or so might be the maximum period that is legally enforceable with a lower level employee, non-compete restrictions pertaining to a higher level or management employees can be enforceable even though they extend for a period of several years following the end of employment.
The permissible geographic scope of the non-compete restriction is generally determined with reference to those locations where the employee provided services for the former employer, or where customers of the employer that the former employee had some connection with are located. Again, as with the reasonableness requirement applicable to the duration of the restriction, a non-compete covenant that extends over too great a geographical area may be found by a court to be legally impermissible and consequently unenforceable, either in whole or in part.
A second mechanism which employers utilize to protect their business interests visa via former employee is the confidentiality agreement. Unlike non-compete agreements, a post-employment restriction protecting the employer's business information from unauthorized use or disclosure by their former employee is not required to be reasonable in terms of geographical scope and duration. Accordingly, at least in theory, a post-employment restriction protecting the employer's confidential information could go on for an indefinite period following the end of employment. Pennsylvania case law, however, does indicate that for a confidentiality agreement to be enforceable, the employer generally must have a proprietary interest in the information involved, such as is the case with an employer's trade secrets. Once the employer looses a proprietary interest in the information involved because it has become stale, or has otherwise become generally known to the public, the confidentiality restriction as a practical matter will no longer have any binding legal effect.
A contract drafting approach that is often times used to expand the usefulness of a confidentiality agreement from an employer's prospective is to specifically restrict the employee from approaching the former employer's customers for a period of time following the end of the employment relationship. Courts in Pennsylvania have found that such customer specific restrictions are considered confidentiality covenants (which do not require the satisfaction of those pre-requisites discussed above which apply to non-compete covenants), even though these types of clauses often operate in a fashion that is similar to the restrictions contained in a non-compete agreement.
In conclusion, if present trends continue, employers will continue to increase their use of non-compete and confidentiality restrictive covenants and correspondingly, employees increasingly will have to face whether the employment involved is worth the post-employment limitations that such restrictions would impose upon them.
