Petock&Petock - ARE EMPLOYEE RESTRICTIVE COVENANTS ASSIGNABLE IN PENNSYLVANIA?

Are Employee Restrictive Covenants Assignable in Pennsylvania?

By Michael C. Petock, Esquire

As a business owner you are probably familiar with restrictive covenants and may have even utilized them in some of your employment contracts. The most common types of restrictive covenants are non-disclosure and non-competition covenants. The non-disclosure covenant limits the dissemination of proprietary information by the former employee, while the non-competition covenant precludes the former employee from competing with his prior employee for a specified time within a precise geographical area.

While the days of restrictive covenants in the employment arena being per se void and unenforceable are long gone, restrictive covenants are still not favored in Pennsylvania by our Courts as they have historically been viewed as a trade restraint that prevents an employee from earning a living.

One interesting context in which I have seen the enforceability of restrictive covenants come up is when Company A is buying the assets of Company B. The question being: after the deal closes will either party be entitled to enforce the restrictive covenants Company B has (or had) with its employees?

To the purchasing entity (Company A) the non- enforceability of these covenants can be a deal breaker (or at least a major factor resulting in a reduced purchase price), especially where there are numerous employees of the business being purchased with knowledge of the business’ proprietary information or that have strong relationships with the business’ customers. No purchaser is interested in finding itself the day after closing competing with a former employee of the business that possesses knowledge of the business’ prices, processes and customers, or worse, competing with a former employee that knows all your customer’s kid’s names.

In Hess v. Gebhard & Co. Inc., 570 Pa. 148 (2002) Pennsylvania’s Supreme Court answered in the negative the question of whether in the context of the sale of a business a restrictive convent such as a non-compete is assignable to the new owner. The facts were that Lawrence Hess worked for Eugene Hoaster Company, Inc. and signed a non-compete. When Hoaster Company sold its business (including purportedly assigning the restrictive covenant it had with Hess) to Gebhard & Co., Hess was informed that his job was being eliminated prompting him to commence job negotiations with a competing firm. When Gebhard & Co. learned of these negotiations it immediately contacted its competitor and advised it of the non-compete it thought it had with Hess causing the competitor to terminate the negotiations. Hess brought suit requesting that the Court declare the restrictive covenants he had entered into unenforceable. In ruling in favor of Hess the Pennsylvania Supreme Court held: “a restrictive covenant not to compete, contained in an employment agreement, is not assignable to the purchasing business entity, in the absence of a specific assignability provision, where the covenant is included in the sale of assets.”

There are several useful points that should be taken from this case:

1) If you have restrictive covenants in your employment agreements, make sure that the agreement expressly and specifically provides that the covenants are assignable;

2) If you are buying the assets of a business including employment contracts containing restrictive covenants, your due diligence should include a review of the language contained in the agreements to make sure the restrictive covenants are assignable;

3) If you are a former employee that is being threatened or interfered with on the basis of a restrictive covenant talk to a lawyer to determine whether the restrictive covenant is unenforceable due to an invalid assignment or for some other reason.

In sum, although Pennsylvania recognizes restrictive convents as important business tools to “allow employers to prevent their employees and agents from learning their trade secrets, befriending their customers and then moving into competition with them,” they are still viewed with a large degree of suspect and are thus ripe with pitfalls including but not limited to those discussed in this article related to assignability.

Michael C. Petock is an attorney with the Phoenixville law firm of Petock and Petock, LLC. Petock and Petock, LLC handles business, intellectual property and litigation matters. Please contact us to find out how we help you achieve the results you need.