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 regularly assists and advises clients with business formation, business planning and succession planning. His clients gain value from his insights on taxation in their business and estate planning endeavors, enabling them to make better-informed decisions. Mr. Koury is active in the communities which OWM Law serves, and he holds leadership positions on the Boards of various local nonprofit organizations. He resides in northern Chester County with his wife and two daughters.
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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
By: Joseph K. Koury, Esq.
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 a 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:
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.
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.
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.
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.
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 firstname.lastname@example.org. 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.
In December 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Among other things, the 2010 Act made significant changes to the Federal estate tax exemptions and rates.The significant changes which I want to highlight are (1) the increase in the federal tax exemption to $5 million in 2011 and (2) the new concept of spousal portability. However, this increase in the federal tax exemption and spousal portability was set to sunset at the end of 2012. Then, on January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (Act), which in part addressed the dramatic sunset of favorable federal estate, gift, and generation-skipping tax exemption limits. This extended the spousal portability and increased the federal tax exemption to $5,120,000 (2012), $5,250,000 (2013) and now $5,340,000 (2014).
Spousal portability provides the ability for a surviving spouse to take advantage of a deceased spouse’s unused tax exemption. In the past, when someone passed away and his or her estate was less than the federal exemption, a federal estate tax return (Form 706) was not required to be filed. However, if your spouse passes away and his/her estate is under the federal estate tax exemption, the unused portion of the exemption can be used towards your estate when you pass away. Consequently, when you pass away, your spouse’s unused exemption is available to your beneficiaries and could potentially save the beneficiaries of your estate significantly in federal estate tax. Think of it as a coupon, a “tax coupon.”
In order to take advantage of the spousal portability available to you, a federal estate tax return (Form 706) must be filed. The IRS has stated that by filing a timely and complete Form 706, you are considered to have elected to use the decedent’s unused tax exemption.
If you do not file the Form 706 within nine (9) months from the date of your spouses’ death, you waive your right to elect preserve the unused exemption. By filing a Form 706, you would be providing your beneficiaries with as high as a 10.68 million dollar exemption (for instance $5.34 million for your spouse’s estate and $5.34 million for your estate). The deceased spouse’s unused exemption, the “tax coupon”, is meaningful only if your estate is worth more than the federal exemption in the year that you pass away. The unused exemption from your spouse’s estate is then stacked on top of your exceeded exclusion. For example, if when you pass away your estate is worth $7 million, and the federal exemption is $5 million, then your $5 million exemption is first exhausted and then your spouse’s unused exemption is tapped into. So if your husband’s estate was worth $1 million, then you would have another $4 million to stack onto your exclusion and the beneficiaries of your estate would not pay any federal estate tax.
As the future is unknown, we recommend that all individuals that have a spouse pass away consider filing a Form 706 to preserve your spouse’s unused exemption. It is important to take advantage of the spousal portability even if you anticipate that your estate will be well below the federal exemption. If you should come into wealth that you did not anticipate such as an oil and gas lease/royalty interest, lottery winnings, an inheritance, etc. the beneficiaries of your estate could be required to pay federal estate tax at a rate as high as 55%.
If you would care to discuss the above in detail, please call me at 610-323-2800 or email me at email@example.com.
Rebecca A. Hobbs, Esq., teaching a 3-part series at the Phoenixville Public Library on 2/20/14 regarding "An Overview of Planning for Long-Term Care," on 2/24/14 regarding "Medicaid 101 and VA Benefits," and on 2/27/14 regarding "Estate Administration and the Department of Public Welfare Estate Recovery" (contact Phoenixville Public Library at 610-933-3013).
Michael B. Murray, Jr., Esq., speaking on Real Estate Assessment Appeals at Representative Mark Painter's tax day on 3/3/14 at 1 p.m. and 4 p.m., 146th Legislative District, 600 Heritage Drive, Suite 102, Sanatoga, PA (contact Representative Mark Painter's office at 610-326-9563).
James C. Kovaleski, Esq., and Rebecca A. Hobbs, Esq., speaking at Atria Woodbridge Place, Phoenixville, PA on 3/4/14 at 10:30 a.m. regarding "Estate Planning: The Three Key Documents" (contact Atria Woodbridge Place at 484-302-0005).
Kathleen M. Martin, Esq., co-planner and presenter of Pennsylvania Bar Institute's “What Every Attorney Needs to Know About Alzheimer's Disease” on 3/12/14 in Mechanicsburg, PA, and on 3/19/14 in Philadelphia, PA (contact PBI at 1-800-247-4724).
David A. Megay, Esq., speaking at Chester County Night School Seminars at Owen J. Roberts High School, Pottstown, PA, on 3/26/14 entitled "Ask the Lawyer: Starting Your Own Business" and on 4/30/14 entitled "Ask the Lawyer: Buying and Selling Real Estate in PA" (contact Chester County Night School at 610-692-1964 or online at www.chestercountynightschool.org).
David A. Megay, Esq. speaking at SCORE Business Planning Seminar on 4/21/14 at 7:00 p.m., New York Plaza Building, Basement, 244 East High Street, Pottstown, PA (contact SCORE at 610-327-2673).
Kathleen M. Martin, Esq., speaking at Chester County Night School Seminars at Owen J. Roberts High School, Pottstown, PA, on 4/9/14 entitled "Elder Law Issues" and on 4/30/14 entitled "Beyond the Simple Will," and at West Chester B. Reed Henderson High School, West Chester, PA on 4/16/14 entitled "Elder Law Issues"(contact Chester County Night School at 610-692-1964 or online at www.chestercountynightschool.org).
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