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Just in Case
Welcome to the first issue of our newsletter. You are
receiving this because we have been fortunate enough to meet you through my
travels. We recognize that you receive numerous e-mail newsletters, so we
will only cover topics we hope will be of interest to you. There is an
opt-out button at the bottom in the event you can't digest another
newsletter.
Although we keep the names of our client's confidential, we are
pleased to provide descriptions of two clients each month that we are
working with and how we are assisting them.
Internet
Securities Firm- The firm is assisting a client to establish a
Private Military Corporation to provide Internet securities services
overseas.
Purchase
of Retail Operation- The firm represented a client in the
purchase of a large and well established retail
establishment manufacturing company in California
through a bankruptcy in Philadelphia.
Over the last month, managing partner, Robert Bovarnick,
presented his talk "20 Lethal
Legal Small
Business Land
Mines to Avoid" to the following groups:
- Philadelphia Business Leaders Alliance
- Havertown Rotary Club
- Glenmills Rotary Club
In
April, Mr. Bovarnick will be speaking to the Pennsylvania
Society of Professional Engineers in Allentown.
THE ENFORCEABILITY OF CONVENANTS NOT TO COMPETE
In today’s world, information and knowledge represent
power and control in the marketplace. To obtain a competitive advantage,
employers often must disclose valuable proprietary and confidential
information to their employees. In an effort to protect proprietary and
confidential information from ending up in the hands of competitors, and
thus causing an employer to lose its competitive advantage, employers often
require employees to sign employment agreements containing covenants not to
compete.
A
covenant not to compete (also known as a non competition
agreement or restrictive covenant) is a document that limits or restricts
employees, upon leaving their employer, from working in a related or
competing business. It is meant to protect the employer from the former
employee directly competing with the employer after the employee leaves the
job (or while the employee is still employed by that employer). It is
generally enforceable, subject to certain conditions.
It
must be reasonable both in terms of time and geographic
scope. It would be convenient if the law provided a “bright line
test” as to what is reasonable time and geographic scope. Unfortunately,
it is not that simple. Reasonableness depends on the case. What may be a
reasonable geographic limitation in one business may be unreasonable in
another.
The
enforceability of covenants not to compete are
generally a creature of case law, also known as “common law.”
Some states, such as California,
have statutes regarding this issue.
In
determining whether a covenant not to compete is enforceable, court’s
look at what is reasonably necessary to protect the interests of the
employer. The court does not focus simply on whether the time frame is
reasonable, but whether the party seeking enforcement can establish that
the time frame is necessary to protect its interests.
Among
the factors courts look at are the nature of the business, the type of
information the departing employee has (such as trade secrets or customer
lists), the length of the employee’s employment and the
employee’s preexisting knowledge (such as did the employee already
know the customer base). Courts will also look at the interest of the
employee in earning a living.
With
respect to the geographic limitations, the analysis is similar. Courts will
look at the employer’s business, the market, the services provided by
the employee and the information received by the
employee. There are even cases where courts have determined that a
nationwide restriction is enforceable, such as where an employee is the
national sales manager for a company.
While
the agreements are valid and enforceable, they generally have to be entered
into at the beginning of the employment relationship. Once an employee
starts working, the employer cannot ask the employee to sign an agreement
unless the employee receives additional consideration for it. In other
words, the employee has to receive something of value in return for giving
up some of their rights.
Covenants
not to compete can also take the form of a non-solicitation agreement,
where the employee agrees to refrain, for a certain period of time, from
soliciting (a) the employee’s former co-workers to leave their job or
(b) the customers of the employer.
If an
employee signs a covenant not to compete, leaves the job
and violates the agreement, there will be a very quick hearing. What most
courts will attempt to do is strike a fair balance between the employee’s
right to make a living and the old employer’s right to protect its
business interest.
If the
agreement is not fair on its face, the court will not simply throw it out.
Rather, it will “blue pencil” it, which means, the court will
change it so it is reasonable. Also, even if the agreement was fair and
binding on the employee when it was signed, a court may throw it out for a
variety of reasons. For example, if the employer has permitted other
employees to compete, it would be unjust to treat this employee
differently.
Develop
a draft of what you want in the agreement and have your attorney, if he or
she has experience in employment contract law, review it and make sure it
is enforceable in the state you are doing business.
2007.
This publication is intended as a general guide only. This Client Alert does not
constitute legal advice of Bovarnick & Associates, a Pennsylvania
Professional Corporation, or any member of the firm with respect to the
subject matter hereof. The information presented and opinions expressed in
this Client Alert are intended for general guidance only. They are not
intended as recommendations for specific situations. As always, readers
should consult a qualified attorney for specific legal guidance.
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