Non-Competes Losing Favor As the Economy Continues to Stumble

By Joseph H. Blum

You confidently drafted what you advised your client was an Employment Agreement containing an "iron clad" non-competition clause – reasonable as to scope, length of time, and geographical limitations – only to find the court has refused to enforce it. Law is not interpreted in a vacuum, and in today's sluggish economy, Pennsylvania courts are taking a more lenient view of post-employment non-competition agreement evaluations, deciding them on a case-by-case basis. As the job market stalls, courts are probing further into the likely impact of the non-compete on the employee and increasing the burden on employers to show there is truly a protectable business interest at stake.

Traditionally, Pennsylvania courts have upheld non-competes as long as they are reasonably fashioned to protect a legitimate business interest and are narrowly tailored. "Interests that a [non-compete] may legitimately protect include trade secrets, confidential information, good will, and unique or extraordinary skills." Victaulic Co. v. Tieman, 499 F.3d 227, 235 (3d Cir. 2007). "Under Pennsylvania law, the determination whether the restrictions imposed by a noncompetition covenant are reasonable, and hence enforceable, is a fact-intensive process that differs from case to case." Colorcon, Inc. v. Lewis, 2011 U.S. Dist. LEXIS 58637, 27-35 (E.D. Pa. May 31, 2011) (citing to Missett v. HUB Int'l Pa., LLC, 2010 PA Super 178 (Pa. Super. Ct. 2010)). Once an employer has shown that it has a protectable interest, the court is required to balance "the employer's protectable business interest against the interest of the employee in earning a living in his or her chosen profession, trade or occupation, and then balances the result against the interest of the public." Hess, 808 A.2d at 917. It is in balancing these values that the Court has developed a list of factors to be considered when determining whether or not a non-compete should be enforced. Due to the recent economic recession, these factors, when weighted, often tip the scales in favor of the employee and result in non-enforcement of the non-compete provision.

The most relevant factor in determining whether a non-compete should be enforced is whether the employee willfully left the employer for a new opportunity, in which case the enforcement of the non-compete will gain favor. Termination of the employee, on the other hand, creates a more difficult enforcement situation for the employer. A common reason offered by employers for dismissal of an employee is an employer's allegations that the employee "failed to promote his employer's interests." This acts as sufficient grounds for dismissal, but simultaneously "suggests an implicit decision on the part of the employer that its business interests are best promoted without the employee in its service. [Such an employer] deems the employee worthless. Once such a determination is made by the employer, the need to protect itself from the former employee is diminished by the fact that the employee's worth to the corporation is presumably insignificant." Insulation Corp. of Am. v. Brobston, 446 Pa. Super. 520, 667 A.2d 729, 734-735 (Pa. Super. 1995).

The Court in Brobston suggests that the terminating cause is important when balancing whether to enforce a non-compete, but that it is not determinative. In 2010, in Missett v. HUB Int'l Pa., LLC, it was held that "a court errs when it considers only the fact of termination in determining enforceability of a non-competition covenant." 2010 PA Super 178 (Pa. Super. Ct. 2010). The Missett Court pointed out that even in cases where the employee was terminated for failing to promote the business interests, the Court looked at other factors to weigh whether the non-compete should be enforced. These factors include:

• What is the situation of employee and his family?
• What is employee's capacity?
• Is employee handicapped or disabled in any way?
• What effect will the restraint have on the employee's life?
• Will it deprive the employee of the opportunity [to support] himself and his family in reasonable comfort?
• Will it tend strongly to impoverish the employee?
• Will it force the employee to give up the work for which he is best trained or be expatriated?
• What are the business conditions?
• Is there prevailing unemployment?
• Was the employment terminable at employer's will?
• Did the employee work for the employer for a very brief time?
• What were the circumstances of termination of the employment?
• Did the termination constitute a breach of contract by the employer?
• If not a breach, was it unreasonable?
• What is the character and extent of consideration to the employee?

Brobston, 667 A.2d at 737, citing to Arthur Murray Dance Studios, Inc. v. Witter, 62 Ohio Law Abs. 17, 105 N.E.2d 685 (1952).

Since the start of the current economic downturn, Courts in Pennsylvania have begun to give more weight to these additional factors when reviewing non-competes. Recently, in the case of Colorcon, Inc. v. Lewis, the United States Court for the Eastern District of Pennsylvania utilized this list of factors along with the conditions of the employment termination to determine whether to enforce a non-compete. The Colorcon Court looked at the Brobston decision and instead of minimizing the role of termination, the Court pointed to the termination as the main reason why the non-compete was unenforceable. Colorcon, 2011 U.S. Dist. LEXIS 58637 at *32. The Court in Colorcon, upon review of the factors, emphasized that the current market conditions "weigh against enforcement" of the non-compete. Id. at *34. The Court ruled that allowing the employee to find a job in the same area in which the employee is qualified to work, where the employee would receive similar compensation, and where the employee would be able to pay previous debt obligations was more important than the immediate interests of the employer.

In another recent case, the Third Circuit Court of Appeals remanded a decision granting preliminary injunction against an employee who was found to have violated a non-compete, enjoining the employee from soliciting the employer's customers, disclosing confidential information or disparaging the employer. PharMethod, Inc. v. Caserta, 382 Fed. Appx. 214, 219-220 (3d Cir. Pa. 2010). In Caserta, the preliminary injunction was overturned in large part because the District Court had focused solely on the language of the non-compete, without balancing whether the non-compete's "restrictions were necessary to [the employer's] legitimate business interests compared to [the employee's] interests and the interests of the public." Id. at 220. What the Third Circuit Court of Appeals wanted was the application of the balancing test of the factors enumerated in the Brobston case. 

Even more recently, in the case Shepherd v. Pittsburgh Glass Works, the Court upheld a preliminary injunction filed by an employee to prevent the enforcement of a non-compete. 2011 PA Super 156, 25 A.3d 1233 (Pa. Super. Ct. 2011). In this situation, like in the Colorcon case, the Court emphasized the importance of the reason for the employee's termination in whether or not to enforce the non-compete. In its decision, the Shepherd Court noted that the employee "had been searching for employment for nearly a year, he was in his late fifties, the job market was abysmal, and employers were hiring only individuals who precisely fit their needs, i.e., the purple squirrel." Id. at 1247. Again, this Court weighed the employer's protectable business interest against the employee's interest in earning a living, and came out on the side of allowing the employee to find a job in a tough economy.

In a job market in which unemployment rates stagnate at 9% or higher, Pennsylvania Courts are scrutinizing the factors surrounding enforcement of non-competes and finding in favor of employees even where some legitimate business interest exists. The difficulties employees face in becoming gainfully employed is minimizing the effectiveness of non-compete provisions. As such, lawyers and other advisors must counsel their clients as to the challenges of pursuing claims against terminated employees and the limitations of even the most "iron-clad" non-compete provisions.

Joseph H. Blum of Deeb Blum Murphy Frishberg & Markovich, PC focuses his practice on the trial of complicated commercial and tort matters in both State and Federal courts. Blum brings 25 years of experience in the litigation of adversary proceedings in bankruptcy court, high-profile lender liability cases, and employment law matters. He has recently won major decisions for clients involving arguments around the areas of fraud, forgery and racketeering, deepening insolvency, and the Federal Arbitration Act.