OWM Law

OWM NEWSLETTER
FEBRUARY 2013

ATTORNEY SPOTLIGHT

JOSEPH K. KOURY

Joseph K. Koury, Esq., Co-Chair of OWM Law’s Business Law Practice Group, is a business and estate planning lawyer whose clients benefit from his advanced law degree in taxation and his past experience as a member of the Delaware State Bar, which included a two-year clerkship with a respected trial judge. Mr. Koury regularly drafts and reviews business and estate planning agreements and documents for the personal and corporate clients whom he serves, clients which vary from the mom and pop store down the street to the more sophisticated business enterprise. Mr. Koury’s clients benefit from his insights on taxation in their business and estate planning endeavors, enabling those clients to make more-informed decisions. Mr. Koury is active in the communities which OWM Law serves, and he holds leadership positions o n the Boards of various local nonprofit organizations. He resides in northern Chester County with his wife and two daughters.

Phone: 610-323-2800
Fax: 610-323-2845
Email: jkkoury@owmlaw.com

 


The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

RESTRICTIVE COVENANTS? "NON-COMPETE" AND
"NON-SOLICIT" AGREEMENTS IN PENNSYLVANIA,
WITH A DASH OF "NON-DISCLOSURE" TOO

Chances are that if you’ve worked for someone else or sold a business you’ve owned, you have been party to what is popularly known as a “Non-Compete,” which occurs when a party, usually an employee, agrees not to enter into relationship with competing business both during the time of employment and for a period of time, and within a certain territory, after employment ends, in exchange for something from the employer. The non-compete clause should therefore be thought of as a contractual in nature that must be reasonably limited, both in time and in geographic scope, as Pennsylvania courts can judicially limit them as necessary, i.e., “blue pencil,” or rewrite, the agreement for the parties — a fact which weighs in favor of careful drafting.

Other “contractual” restrictive covenants you may have encountered include the “Non-Solicit,” by which an employee agrees not to solicit/accept business from the now-former employer’s continuing customers, and the “Non-Disclosure Agreement,” whereby a party (again, usually an employee) agrees not to use or disclose the other party’s “confidential” information (a shorthand example of which is illustrated by the Pennsylvania’s Uniform Trade Secrets Act definition of “trade secret”: “information, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process…”). If, however, the “confidential” information is generally known by the public or within the specific industry, then the non-disclosure clause should not apply.

An example combining all three of these restrictive covenants, non-compete, non-solicit, and non-disclosure clauses, is as follows:

If John Doe works an executive for PepsiCo providing soft drinks to the local sports stadium, gaining knowledge of PepsiCo’s price structuring strategies and awareness of the existence of PepsiCo’s multi-year exclusivity contract with said stadium, then John Doe, if subject to these restrictive covenants, could not then go to work for The Coca-Cola Company in the same capacity (non-compete), meet with stadium executives, and implore them to switch over to Coca-Cola products (non-solicit) by exposing PepsiCo’s confidential pricing strategies and then deliberately undercutting them (non-disclosure).

Even if you have been party to a restrictive covenant, you may still ask yourself “Do They Mean Anything?” In a nutshell, yes. Take for example the recent $6,890,000.00 verdict in Universal Health Services’ favor versus its former employees and Acadia Healthcare Co. Considering the fact that typically, a breaching party of a restrictive covenant must account for all profits derived from the breach, the dollars can really add up.

Requirements

The restrictive covenant usually relates to either a contract for the sale of a business or a contract for employment, and must be supported by “consideration.” Consideration simply means that both employer and employee have both bargained for an exchange in the transaction which is occurring, be it employment-related or as part of the overall sales transaction.

Geographic Scope

Here, as elsewhere, restrictive covenants must be tailored for the employee, in this case to the minimum necessary to protect the employer’s legitimate interests. But for an employee with a large territory, a geographically expansive non-compete agreement would be appropriate. Contrast this with the employee whose employer is a small business with a modest footprint.

Consideration – Employment Context

While a restrictive covenant need not be part of original employment contract, if not, then the covenant can only be imposed at a later time if it’s supported by “new” consideration; Pennsylvania is of the view that continued at-will employment does not supply “new” consideration, whereas, if the covenant was entered into contemporaneously with initial employment, then employment itself is the consideration needed. It’s a fact-specific inquiry, as you would imagine. Whereas for a given employee, the additional consideration of a one-time “bonus” payment may be appropriate to enforce a post-employment non-compete agreement, another employee may require only a fraction, or, contrastingly, a multiple of that same “bonus” payment to be bound.

Consideration – Sale of Assets

Generally, courts are likely to uphold restrictive covenants given in connection with the sale of a business’ assets or its stock. There are associated, and important, tax consequences relating to this scenario which are beyond the scope of this article.

Injunctive Relief

Parties seeking to enforce the terms of a restrictive covenant often also seek “injunctive” relief from a court, which means that the court requires a party to do or refrain from doing specific acts, such as “return former-employer’s property” and “stop soliciting former-employer’s customers.” The party seeking the injunction (e.g., the employer) must however prove, among other things, a likelihood of irreparable harm and the unavailability of a fully adequate monetary remedy.

Conclusion

Bottom line, restrictive covenants that are longer or broader than necessary, or not supported by consideration, may be unenforceable. Propely drafted and supported, however, restrictive covenants should be enforceable. Keeping up with current trends in the trade and for specific types of jobs is critical.

If you would care to discuss the above in detail, please call me at 610-323-2800 or email me at jkkoury@owmlaw.com. Also, please watch OWM's February 2013 Legal Talk program regarding Restrictive Covenants: Non-Competition, Non-Solicitation and Non-Disclosure Agreements on our website here.

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Upcoming Events

David S. Kaplan, Esq., presenting at the National Business Institute course in Philadelphia, “Social Security Disability: From Start to Finish,” on 2/13/13 & 2/14/13 at the Radisson Plaza in Philadelphia (contact NBI at 1-800-930-6182).

David A. Megay, Esq., James C. Kovaleski, Esq., and Joseph K. Koury, Esq., presenting at the Phoenixville Area Chamber of Commerce 3-part course on 3/13/13, 3/20/13, and 3/27/13 - "Women in Investing" (See Phoenixville Chamber's website here or call 610-933-3070).

David A. Megay, Esq., speaking at Chester County Night School Seminars at Owen J. Roberts High School, Pottstown, PA, on 4/3/13 - "Ask the Lawyer: Starting Your Own Business: A Legal Standpoint," and on 4/10/13 - "Ask the Lawyer: Legal Tips on How to Buy and Sell Real Estate in Pennsylvania"(contact Chester County Night School at 610-692-1964).

David A. Megay, Esq. speaking at SCORE Business Planning Seminars on 4/22/13, 9/9/13 and 11/4/13 (contact SCORE at 610-327-2673).

Kathleen M. Martin, Esq., presenting at Chestnut Knoll, Boyertown, PA, on 3/7/13 regarding positioning your family members (or self) for long-term care and how to pay for it (contact Chestnut Knoll at 610-473-8066).

Kathleen M. Martin, Esq., speaking at Chester County Night School Seminars at Owen J. Roberts High School, Pottstown, PA, on 4/17/13 and 5/2/13 - "Elder Law Issues" and on 4/23/13 - "Beyond the Simple Will" (contact Chester County Night School at 610-692-1964).

Kathleen M. Martin, Esq., and James C. Kovaleski, Esq., presenting at the Pennsylvania Bar Institute 14th Annual Estate and Elder Law Symposium on 2/20/13 (contact PBI at 1-800-247-4724).

Kathleen M. Martin, Esq., presenting at the Pennsylvania Bar Institute's “Understanding the Basics of Elder Law” on 3/14/13 (contact PBI at 1-800-247-4724).

Watch Legal Talk, brought to you by OWM, on PCTV, Tuesdays at 8:30 on Channel 28, and Thursdays at 9:30 p.m. on Channel 98, or on our website at www.owmlaw.com/legal_talk/legal_talk.php.

Read Legal Ease every first and third Sunday in the Pottstown Mercury.

O'Donnell,Weiss & Mattei, P.C.

41 E. High Street
Pottstown, PA 19464
610-323-2800
Fax: 610-323-2845

347 Bridge Street, Suite 200
Phoenixville, PA 19460
610-917-9347
Fax: 610-917-9348

www.owmlaw.com