Covenants Not to Compete

In today’s corporate world, a Darwinistic climate has developed where corporate officers and directors will take whatever actions they believe are necessary for their companies to survive. These actions may include requiring new employees to sign covenants not to compete upon termination of employment.

An employer may require an employee to be bound by a post-termination covenant restricting where the employee may work after termination of employment. The employer must take care in drafting such provisions, as Pennsylvania courts generally disfavor them. Historically, our courts have viewed covenants not to compete as a trade restraint that may prevent a former employee from earning a living. Accordingly, Pennsylvania courts have held that covenants not to compete are only acceptable if the restrictions imposed by the covenant are reasonably necessary for the protection of the employer and where the restrictions imposed are reasonably limited in geographic scope and duration.

As with many aspects of the law, the determination of whether a particular covenant not to compete is sufficiently limited in geographic scope to be upheld is fact specific, and this may depend upon the particular industry or profession at issue. Courts have held that if an employer does not operate in a particular geographic area, enforcement of the covenant in that area will be denied. Likewise, the duration element of a covenant not to compete is fact specific. Given that courts construe such covenants narrowly, the harder it is for the employee to secure similar employment without having to relocate from his or her community, the more likely it is that a court will require a shorter duration for the restrictive covenant to be enforceable.

If a court finds the covenant not to compete is not reasonable as to geography, duration, or both, the court may modify the terms of the covenant. Alternatively, if the court finds that the covenant is over-broad, not reasonably necessary for the protection of the employer or imposes an undue hardship on the employee, the court may refuse to enforce it altogether.

Another important factor in determining whether a court will enforce a covenant not to compete is whether the employee received sufficient consideration for signing the covenant. Courts have held that employment itself is sufficient consideration at the outset. However, existing employees must receive an additional benefit or change in status for the covenant to be enforceable. The mere continuation of the employment relationship at the time the employee signs such a covenant is not sufficient consideration. An example of additional consideration would be a promotion to a new position with an increase in responsibilities and compensation.

— Andrew Berenson

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