Non-Competition Agreements Under Increasing Scrutiny

By Marc Tarlow, Esq.

There are continuing trends toward the limitation of Non-Compete agreements in an employment context versus the purchase and sale of a business. These agreements are ubiquitous and arguably used to bind employees who are not in critical and sensitive positions, and therefore where it is difficult to conceive of a reasonable business necessity for one.

A 2016 study by the Treasury suggests that a little under 20% of employees are covered by these agreements. While they may never completely disappear across the country, there are continuing trends toward limiting, if not completely prohibiting, these agreements. With that in mind, employers looking to lock in key employees need to at least be mindful of the issue and keep an eye on the trend line in the jurisdictions where they do business.

Pennsylvania has not prohibited or curtailed Non-Compete agreements as of yet. However, there are decisions beginning in 1995 limiting the applicability of post-employment injunctions where an employee was terminated for failing to benefit the interests of the enterprise. The rationale is that if the employee was terminated for not being a benefit to the business, how critical can their knowledge and skill be to the employer? For want of space, suffice it to say that the case law interpreting these decisions is hardly clear. In light of national trends, the question is whether the portends further complications in enforcing restrictive covenants on post-employment activities in Pennsylvania and the East in general.

For example, post-employment restrictions have been curtailed in California. The rationale for those restrictions has been ostensibly related to the economic needs of Silicon Valley, which it was believed required employee mobility to maintain its competitive advantage. There is a recognition that the protection of trade secrets is necessary for an economy rooted in the development of new technologies. Thus, employees are free to move from employer to employer and even to bring along other employees and clients. On the other hand, provisions prohibiting the use of, or copying, etc., of confidential employer information, in particular, technical data and confidential client lists, may be enforced. In the latter case, there is a distinction between customers who are readily known and customer lists that are difficult for one reason or another to compile.

The East Coast has not taken such a limiting view on these agreements, which some suggest gives Silicon Valley a competitive advantage. However, the trend line may well be pointed in the direction of increasingly limiting these agreements in the East as well. Maryland recognized that many of those covered by these agreements were not key employees. Maryland moved to limit the application of Non-Compete agreements to employees who earn in excess of $15 per hour or $31,200 annually. Md. Code, Lab. & Empl. § 3-716. The statute is silent on whether it also applies to provisions that bar solicitation of employees (which provisions California does prohibit).

Massachusetts has not banned Non-Compete Agreements but has taken steps in a statute passed in 2018 to borrow concepts from United Kingdom law to limit the economic impact of enforcement on employees. In the United Kingdom, an employer may, when appropriate, limit the ability of an employee to accept a job with a competitor. However, the employer must then compensate the employee for “being on the beach” by increasing the notice for termination. The employee remains employed during a period when they are barred from accepting employment elsewhere but remains at home without any duties, unable to access confidential information. Thus, they are free to tend their garden, hence the term “Garden Leave.”

The Massachusetts statute is, in effect, a post-employment benefit. (Their courts have resisted contracts providing for such benefits along the British framework because they forced employees to remain in an at-will employment relationship against their will). Under the statute, agreements entered into after Oct. 1, 2018, must provide “Garden Leave” during the period of the non-compete. It does not require a dollar-for-dollar payment, but rather something closer to half-pay. Thus, the employee is not faced with a year or more of unemployment with no income source, which often happens since few have skill sets that permit them to move between industries readily.

The information contained herein is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this blog should be construed as legal advice from Shumaker Williams P.C. or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. This blog is current as of the date of original publication.  

*This story appears in the Hometown Banker Magazine Pub 4 2022 Issue 8