Articles, Newsletters and Advisories
(by Molly E. Meacham)
It is a familiar scene to many employers. After searching for the right individual to fill an important position, a promising candidate emerges. The new employee will have top-level access to confidential information and customers, and their offer letter anticipates that the employee will sign restrictive covenants including noncompetition and nonsolicitation agreements as a condition of employment. Current operations are a bit chaotic—including some remote work—so the agreement isn’t provided prior to the first day of employment. The employee knows they will have to sign eventually, but the employer doesn’t press the issue and allows time for the new employee to review the terms. Is this a valid and enforceable restrictive covenant agreement? According to the Pennsylvania Supreme Court’s June 16, decision in Rullex v. Tel-Stream, the answer is no.
A restrictive covenant such as a noncompetition or nonsolicitation agreement is a contract that must be supported by adequate consideration to be enforceable in Pennsylvania. Pennsylvania views starting a new job as sufficient consideration, provided that the agreement is executed at the start of the employment relationship. In Rullex, the subcontractor in question was aware that a non-competition agreement would be required as part of the relationship, in which the subcontractor would be performing cellphone tower work for a telecommunications company. Although the subcontractor was given a copy of the agreement on his first day of work, he was allowed to take time to review it and did not return a signed copy until at least two months later. The subcontractor later performed cellphone tower work for a competitor of the telecommunications company, resulting in a lawsuit seeking to prevent him from working with that competitor or any other competitors of the telecommunications company.
In its decision, the Pennsylvania Supreme Court considered whether these factual circumstances constituted an enforceable non-competition agreement. The court rejected a bright-line approach in favor of examining the timeline and circumstances of the inception of the relationship, finding that the test for whether or not an enforceable agreement has been reached is not whether it is physically signed on the first day. Instead, the facts must show that as part of beginning the employment relationship the parties contemplated and intended that the employee would be bound by the substantive terms. This means that the restrictive covenant agreement is not presented as an afterthought as the employee begins employment. Instead, there must be objective manifestations of consent. For example, under the reasoning in Rullex, a meeting of the minds is likely present if an employee receives the substantive terms of a non-competition or nonsolicitation agreement in advance of their first day and manifests assent by beginning the employment relationship under those known and accepted terms. Then, even if there is a brief delay in obtaining a physical signature, the agreement is still likely enforceable. If there was no meeting of the minds on the essential terms, then a restrictive covenant agreement signed after the first day of employment is not enforceable absent additional consideration.
The day before the Pennsylvania Supreme Court addressed the issue of how the onboarding process impacted the enforceability of a restrictive covenant, a federal court considered how the circumstances surrounding termination of employment can impact enforceability.
On June 16, in Schuylkill Valley Sports v. Corporate Images, the U.S. District Court for the Eastern District of Pennsylvania examined the enforcement of restrictive covenant agreements when the employees in question were let go as part of a COVID-19 temporary business closure.
A sporting goods retailer in the Philadelphia area temporarily closed in March 2020 as it was not considered to be a life-sustaining business. In doing so, it did not guarantee any employee continued employment upon its anticipated reopening. A group of the retailer’s employees therefore joined a screen-printing and embroidery company that competed against the sporting goods store in that it also produced and sold custom athletic apparel. The language in the restrictive covenant agreements at issue contained noncompetition and nonsolicitation clauses that, and by their plain terms, applied only after resignations or terminations for “just cause,” without mention of terminations without cause or layoffs. Under those circumstances the court denied the former employer’s request for a temporary restraining order and preliminary injunction, finding that the sporting goods retailer did not establish that the agreements were enforceable because the employees were laid off without cause.
Although the court’s analysis could have ended at enforceability, it went several steps further in the analysis and considered how the circumstances of the pandemic impacted the request for an injunction. To obtain injunctive relief, the party seeking the injunction must demonstrate that it will experience greater harm if denied an injunction, than will be caused to the other party if an injunction is granted. The court considered the stay-at-home orders issued by the governor of Pennsylvania and the resulting business closures, as well as the 70-year high in the national unemployment rate. The court found that the harm that would result by granting an injunction to prevent the employees from working at their new employer would be great, leaving them without jobs and income. In contrast, the harm to the former employer was much more limited, as it had laid off the employees and it was therefore no longer expecting to profit from their sales efforts. In balancing the equities, the court did not ignore the larger issues caused by the pandemic, but instead was careful to take them into account when examining the facts of the case.
Businesses and individuals alike continue to adapt to the unprecedented challenges and distractions that arise from the COVID-19 pandemic. However, the Rullex and Schuylkill Valley Sports decisions are reminders that, when dealing with restrictive covenant agreements, attention to detail is key to ensuring that the parties have achieved a meeting of the minds no later than the first day of employment when a new job is serving as the agreement’s consideration, and that the specific terms of the agreement are important to later enforceability. If a noncompetition or non-solicitation agreement will be part of the employment relationship, employers should provide a copy well in advance, making sure that a new employee understands that execution of the agreement as written is a condition of starting employment. Employees with questions regarding the terms of a restrictive covenant agreement or a desire to negotiate its terms should handle that circumstance before their first day, to avoid any delay in beginning employment. In the event that a party seeks enforcement of a restrictive covenant agreement and litigation results, all parties are well-served to remember that judges may consider global circumstances—not just those unique to the individual parties involved—when balancing the harms that may result from a requested injunction.
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Reprinted with permission from the October 25, 2020 edition of The Legal Intelligencer© 2020 ALM Media Properties, LLC. All rights reserved.