Preliminary Injunction Denied Where Employee’s Subsequent Employment Contracts Fail to Include Restrictive Covenant

In Pennsylvania, restrictive covenants are enforceable if they are incident to an employment relationship between the parties; the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and the restrictions imposed are reasonably limited in duration and geographic extent. Restrictive covenants are not favored in Pennsylvania and are viewed as a trade restraint that prevents a former employee from earning a living.

In order for a restrictive covenant to be enforceable, there must be sufficient consideration (something of value offered to the employee). The commencement of employment is sufficient consideration for a covenant not to compete and an employee’s promotion to a new position within the company also constitutes sufficient consideration, however, the covenant must be executed contemporaneously with the exchange of consideration. In construing a restrictive covenant, when writing is clear and unequivocal, its meaning must be determined by its contents alone. Courts will no re-write restrictive covenants or engage in interpretations which conflict with the accepted and plain meaning of the language used.

Assignability of a restrictive covenant can also be an issue. Strong public policy considerations underlie the conclusion that restrictive covenants are not assignable. Given that restrictive covenants have been held to impose a restraint on an employee’s right to earn a livelihood, they are construed narrowly; and, absent an explicit assignability provision, courts are hesitant to read one into a contract. Courts have also held that the employer, as drafter of the employment contract, is already in the best position to include an assignment clause and a successor employer is free to negotiate new employment contracts with an employee, or secure the employee’s consent to have the prior employment contract remain in effect.

In WMI Group, Inc. v. Fox, 2015 Pa. Super 25 (Feb. 6, 2015), the Court affirmed the trial court’s order finding that a former employer did not meet its burden of showing an enforceable restrictive convent and also did not demonstrate the existence of a trade secret. The Court held that while an initial employment agreement included a non-compete clause, when the employee was promoted and entered into two subsequent contracts with a related but different entity, each of which lacked a non-compete clause, the earlier non-compete was unenforceable.

In WMI, the court also considered the former employer’s assertion that trade secrets were taken from the former employer. Pennsylvania cases have recognized that trade secrets of an employer, customer goodwill and specialized training and skills acquired from the employer are all legitimate interests protectable through a general restrictive covenant. However, a court must examine and balance the employer’s legitimate business interest, the individual’s right to work, the public’s right to unrestrained competition, and the right to contract in determining whether to enforce a restrictive covenant. To obtain injunctive relief, a party must establish that the information at issue is a “trade secret,” which requires proof of a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process that: (1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. If a competitor could obtain the information by legitimate means, it will not be given injunctive protection as a trade secret.

In WMI, the former employer contended its pricing method is a trade secret and its network of customer contacts, information, and relationships are also trade secrets; the court denied each argument and held that the former employer was not entitled to any relief. In so doing the court found that currency hedging is common knowledge and can be obtained via legitimate means, therefore injunctive relief is unavailable.

For more information on Restrictive Covenants, Non-Compete Agreements and Abramson Employment Law, see

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Filed under Breach of Contract, Employment Law, Non-Compete Agreements, Restrictive Covenant

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