Employers are requiring restrictive covenants much more frequently than they have in the past. This is because “knowledge” workers are able to move among competing companies and may cause damage to a prior employer by revealing trade secrets or enticing co-workers or clients to move.
In order for a restrictive covenant to be binding upon a new employee, it must be given in exchange for fair consideration. This is a basic law of contracts. If for example, an employee is hired without a restrictive covenant and one month later, is required to sign one, the restrictive covenant may be held to be void because it is not supported by independent or separate consideration. Traditionally, a restrictive covenant which is part of the employment process will be binding without a separate payment or without separate consideration. There has been a good deal of confusion over when and to what extent a restrictive covenant becomes binding.
In the recent case of Pulse Tech, Inc. v. Notaro, decided May 29, 2013, the employer provided an offer letter which specifically stated that the new employee had to execute an employment contract as a condition of employment. The employer, Pulse, sent the employee, Notaro, a two and one-half page formal offer of employment letter which contained a “summary” of Notaro’s intended position. The letter also stated “You will also be asked to sign our employment/confidentiality agreement. We will not be able to employ you if you fail to do so.” Notaro signed the letter and returned it to Pulse, and on his start date he signed the employment/confidentiality agreement which contained a non-competition provision.
Notaro later accepted a position with a competitor and Pulse was granted a preliminary injunction in the lower court enforcing the covenant. The Pennsylvania Superior Court declined to validate the restrictive covenant because it was not expressly referred to and laid out in the initial offer letter. However, the Supreme Court reversed and held that the offer letter was part of the hiring process. Since the offer letter showed that execution of an actual employment agreement was required, the Court found the restriction to be enforceable.
Much care should be taken in the employment process particularly if restrictive covenants are involved.
– Bill Brennan