In a recent decision US District Judge Stewart B. Dalzell ruled on a covenant not to compete of an employer in Telford, PA. (Fresco Systems USA, Inc. v. Bodell). Fresco, which supplies packaging supplies for companies that roast and package coffee, enters into written employment agreements with all employees before they commence working for the company. The covenant barred the employee from working after termination: (a) for anyone who competes not only with the employer but also all of its subsidiaries which sell a wide variety of products, and (b) in a geographical area which included the sales areas of the employer and all of its subsidiaries ( many states and areas outside of the United States). Bodell left Fresco in 2005 to work for a competitor.
It is almost routine in the sale of a business in which the owner has been a key employee for a buyer of the business to insist upon including in the sale agreement a covenant from the owner/employee not to compete with the business. As with Fresco, such covenants also are frequently imposed upon employees of a business as a part of an employment contract. The covenants vary widely but almost always contain a specific number of years and a geographical area during which and in which the key employee will not engage in any activity which is similar to that of the business he or she is selling or that of the employer’s business (e.g., “the seller shall not compete for a period of two years within a radius of ten miles of the office of the business”).
Very often the sale of a business would not be consummated or an employee would not be hired but for the existence of the covenant; and the insistence of the buyer or employer can be reasonable. For example, a buyer could be using his or her life’s savings and going into substantial debt in order to complete the purchase, and the last thing he or she needs is for a former employee to set up shop directly across the street in the same business. Not only does the former owner/employee have a unique knowledge as to how the business operates, but he or she knows all of the customers. It could destroy a buyer’s newly-acquired business before the ink on the sale papers dries to have to compete directly with the former owner.
The seller of a business or a potential new employee is usually aware that the sale or employment will not occur without such a covenant, and the negotiation of the non-compete covenant is generally not terribly contentious.
A serious question with every non-compete covenant is how enforceable it is. Pennsylvania (and most other) courts have always looked askance at these covenants primarily because they might keep an otherwise able-bodied person from being gainfully employed, something that is never encouraged in our culture. Having said that, under proper circumstances the courts will enforce covenants so long as they are (let’s hear it for all attorneys’ favorite word!) reasonable. (Asking “what’s reasonable?” is a bit like asking “how long is a piece of string?”)
What is reasonable will vary broadly depending on the nature of the business. For a restaurant in the middle of a major city, a radius of more than a couple of miles could be deemed unreasonable while for a company that manufactures and sells a highly specialized and technical device to a relatively small number of companies across the country (or globe even) geographic limits which encompass several states might make sense.
How long a non-compete covenant shall remain in effect is also a factor in trying to determine reasonableness. Most covenants will run for one to five years, although it is not unusual for them to go out as long as ten years. Again, the courts will look to the nature of the industry involved, the circumstances involving the consideration that was given in exchange for the covenant, and, perhaps most of all, the amount of damage that the business will suffer if the covenant is not enforced.
Most of the litigation involving enforcement of these covenants will be in the courts of equity (as opposed to courts of law which can only award monetary damages), as the owner of the business will seek to enforce a non-compete covenant by asking the court to grant an injunction against the former owner’s/employee’s competing. Courts in equity are not limited to money damages and will in certain circumstances “reform” such a covenant by, for example, shortening the number of years it is in effect or reducing the geographic area covered by the covenant. The goal is to find a result which will be equitable to both parties under the conditions extant.
In the Fresco case, the court ruled that the covenant was unenforceable because it was far too broad geographically, it was imposed on the employee without proper consideration, and it covered many more products than those the employee was involved with as an employee; the injunction was denied. The court reiterated all of the reasons non-compete covenants are not favored. These covenants can be useful and enforceable devices, but they must be carefully drafted to be valid. The key for the seller or new employer is not to ask for too much; a covenant which is modest (reasonable!) is much more likely to be enforceable.
— Ken Butera