Prepare To Consider Your Former Employees Your New Competition

by LeClairRyan
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business_negotiationThere’s nothing that gets employers more fired up than a former employee jumping ship to join a competitor. But, in an effort to prevent such future angst, you’ve had your employees sign a non-compete. You’re golden, right? Perhaps not.

When an employer has a non-compete in hand, it can mistakenly think it is fully protected from post-employment competition. Such a mistake can be costly. First, you may have to litigate the enforceability of the agreement. Then, you stand to lose a bunch of business when it turns out the agreement is worth less than the piece of paper it’s typed on. (And not just for the employee in question – you’re stuck with an unenforceable agreement, all-around.)

In Socko v. Mid-Atlantic Systems of CPA, Inc. (Pa. Super. May 13, 2014), a decision that came out of the Pennsylvania Superior Court last week, the employer made such a mistake. Specifically, on an issue of first impression, the court held that a post-employment non-compete was unenforceable due to lack of consideration, even though the parties explicitly agreed to be bound by the document.

As a result, the employee was entirely free to compete (i.e., not good).

Pennsylvania Non-Compete Law
In Pennsylvania, courts largely have frowned upon non-competes. That’s not to say they won’t enforce them, but it does highlight the need for employers to get it right if they want their interests protected down the line.

Generally speaking, in Pennsylvania, an enforceable restrictive covenant: (1) relates to the employment relationship; (2) is supported by adequate consideration; (3) is reasonably necessary to protect a legitimate business interest; and (4) is limited in time and territory.

In Socko, the Court focused on whether the consideration was valuable enough to count. (Note that a non-compete is different from a run-of-the-mill contract, which just requires the existence of any old consideration – courts don’t care how valuable it is.)

So, Do I Have “Adequate Consideration” or Not?
The million dollar question: what is “adequate consideration” under Pennsylvania law?

The way to go if you want to avoid any doubt on this issue is to enter into the non-compete when the employment relationship begins.

Beyond that, it’s much easier to state what is not “adequate consideration.”

In Pennsylvania, anyway, if the only consideration you have to offer is continued employment, you’ll need to come up with something additional to make that bad boy enforceable.

What that something additional needs to be? Good question (i.e., the lawyer’s ever-so-unhelpful “it depends”).

Lots to consider, indeed.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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