Pennsylvania Supreme Court Rules on Non-Compete Agreements

Update provided by PIA Association Counsel, Nick Fiorenza, Ferrara Fiorenza PC

It goes without saying that graphic arts employers have business secrets to keep. Unique production methods, internal processes, customer lists/marketing plans, and more, can present a genuine need for protection. But when employees with knowledge of our business secrets leave to work for a competitor, even employers who had them sign a non-compete agreement are often unsure of the agreement’s value. Legal actions to enforce non-compete agreements are expensive, and many arguments can be raised attacking the validity of such agreements. Employers using these agreements need to be as certain as possible that they have been prepared in a fashion that maximizes the likelihood of enforcement.

As context, Pennsylvania, like many jurisdictions, starts with the premise that any “restrictive covenant“ – noncompete agreements, nondisclosure agreements, etc. – must meet a standard of reasonableness. The employer must in fact have a legitimate business interest to protect and may only seek protection of truly unique business information or secrets. The employer must further be reasonable in the timeframe for which a former employee will be restricted, as well as with regard to the geographic location to which the restriction applies. As a general rule of thumb, the more specific and targeted the agreement’s restrictions, the more likely it is to be enforced.

Beyond this context, disputes over whether a basic element of any contract are present in a restrictive covenant are common. That is, did the employee receive sufficient “consideration” – something significant in return  — for the promise to restrict their own work activity in the future? Even where a restrictive covenant meets the “reasonableness” standard discussed above, it can fail from the outset because an employee was not given something sufficiently valuable in return to legally support the restriction.

There is usually little question that an otherwise proper covenant not to compete signed when the employment relationship starts will be enforced.  But what about an agreement signed during employment? Are these enforceable simply because the employee is receiving the ability to stay employed? Does other additional “consideration” have to be given, like a raise or a bonus?    Pennsylvania lower courts had ruled that once employment starts, noncompete agreements must be supported by new consideration – mere continued employment is not enough.

But in the Rullex company case reported on June 16, 2020, the Pennsylvania Supreme Court rejected that hard and fast rule. Deciding that the intent of the parties is determinative, the Court ruled that where the noncompete restriction was always intended to apply, the fact that an agreement was executed during employment will not automatically render it void. The Court also stressed, however, that noncompete agreements presented by employers after-the-fact or as a “belated addition”, will fail for lack of consideration.

The Rullex decision is instructive for Pennsylvania employers. They will do well to make any non-compete, non-disclosure or other restrictive covenant they wish to enforce a condition of employment at the outset. At the very least, offers of employment should specify any restrictive obligations that will be required in the future, should employment be accepted. Bottom line, while the Court did not rule out post-employment covenants as a matter of course, employers are still better served taking care of such agreements upfront.

For more information or assistance with any employment-related matter, contact:

Tim Freeman, President
Printing Industries Alliance
tfreeman@PIAlliance.org
Office:  (716) 691-3211
Cell: (716) 983-3826

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