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Practical Guide to Restrictive Covenants in PA and NJ

Businesses invest time and money to develop their business procedures, relationships and information, such as marketing strategies, customer information, pricing strategies, and future business development initiatives. These models and information provide businesses a competitive edge, and employers have a strong incentive to guard such assets and protect their businesses by all means reasonably necessary. Employers can typically accomplish this through using a combination of nondisclosure agreements, nonsolicitation agreements, and other restrictive covenants.

Though permitted, restrictive covenants can vary in their enforceability, if at all. Courts recognize that while protecting confidential information or other protectable business interests is important, an employee’s right to work and make a living is just as important, if not more. The courts in Pennsylvania and New Jersey will not enforce agreements they find to be unreasonable. So, how does a business draft enforceable restrictive covenants?

  • Identify a geographical and temporal restriction that is narrowly tailored to protect an employer’s legitimate business interests.

One of the most commonly identified business interests covered in a restrictive covenant is a business’ customer relationships. Restrictive covenants typically seek to prevent a departing employee from working for customers of her former employer. As Pennsylvania and New Jersey courts generally view restrictive covenants as a restraint on trade, such covenants are strictly construed against the employer.

Accordingly, employers should ensure that the terms of their restrictive covenants are clear, unambiguous, and not overly broad—that is, the geographical and temporal restrictions must be no more than what is necessary to protect the employer’s legitimate business interest.

Geographical restrictions should only pertain to areas where the employee worked, not the entire territory of employer’s business operation, as in Trico Equipment v. Manor, Civil No. 08-5561 (D.N.J. 2009). As such, a national company should not ask its employee to sign a nationwide restrictive covenant just because the company does business nationwide unless the employee would actually be working nationally. Moreover, courts also seek to tailor the restrictions to reasonably balance the interests of the business and the public, as held in Solari Industries v. Malady, 264 A.2d 53, 56 (N.J. 1970); and also Karlin v. Weinberg, 390 A.2d 1161, 1169 (N.J. 1978). For example, some courts have enforced statewide geographical restrictions while other courts have found that a 30-mile restriction is unenforceable (based upon public policy concerns relating to physician-patient access).

With regard to temporal restrictions, a one-year restriction should be sufficient to protect the interest of most businesses, though courts on occasion have found a two-year restriction to be reasonable, as in Aamco Transmissions v. Romano, Civil Action No. 13-5747, E.D. Pa. 2016) (holding that a two-year temporal restriction is enforceable under Pennsylvania law); and in Bettinger v. Carl Berke Association, 314 A.2d 296, 298 (Pa. 1974) (holding that a one- year temporal restriction is reasonable); and also in The Community Hospital Group v. More, 838 A.2d 472, 484–85 (N.J. Super. Ct. App. Div. 2003) (listing cases that have upheld a two-year temporal limitation).

  • Remember to define the term “solicitation.”

Many employers fail to clearly define the term “solicitation” in restrictive covenants. This is a mistake, as it leaves to the courts to define the meaning of the term “solicitation” while deciding whether a former employee has engaged in “solicitation” during litigation. The time to define this term is well before the need for litigation arises.

The definition of “solicitation” is a fact-sensitive inquiry. Pennsylvania courts have specifically found that the following activities did not constitute solicitation: accepting business from a client of the former employer; informing a former employer’s customers of a change of employment; placing an advertisement in a newspaper or trade paper advertising a change in employer; and the mere hiring of former employees, as held in Merrill Lynch, Pierce, Fenner & Smith v. Moose, 528 A.2d 1351, 1355 (Pa. Super. Ct. 1987) (accepting business from a customer of the former employer, without further conduct, does not constitute solicitation); in Bro-Tech v. Thermax, 651 F.Supp.2d 378, 414 (E.D. Pa. 2009) (holding an employee informing employer’s customers of new employment is not solicitation); Family Doctor v. Nguyen, (Lehigh Cnty. Ct. Com. Pl. 2006) (holding that general advertisements in newspaper and commercial publication did not constitute solicitations), aff’d 943 A.2d 327 (Pa. Super. Ct. 2007); American Pool Management of Pennsylvania v. Queen, (Pa. Super. Ct. 2014) (nonprecedential) (mere hiring of former employer’s employees, alone, does not constitute solicitation).

New Jersey courts have similarly held that merely being in contact with former clients does not constitute solicitation as in ING Life Insurance and Annuity v. Gitterman, Civ. No. 10-4076 (DMC) (JAD).(D.N.J. Aug. 18, 2010) (unpublished) (holding that “merely being in contact with former clients does not constitute solicitation”); see also, U.S. Foodservice v. Raad, (N.J. Super. Apr. 12, 2006) (concluding that there is a distinct difference in situations involving active solicitation and those in which customers sought out the defendant).

  • Remember to define the term “customer.”

Much like the term solicitation, many employers fail to define the terms “prospective,” “former,” and “current” customer within their restrictive covenants. Neglecting to do so may subject a business to years of needless angst and litigation. By defining these terms early on, employers and employees alike can ensure that both parties understand the scope of the employee’s post-employment restrictions. Most employers want restrictive covenants to apply to the departing employee’s former and current customers. Additionally, employers typically prefer that the restrictions extend to “warm leads” and potential customers that the employer is attempting to “land.”

Employers can successfully include all forms of customers by drafting the provision explicitly to ensure that the employer’s intent is unambiguous and unmistakable. For instance, courts in Pennsylvania have banned former employees from soliciting their former employer’s current and former customers where the restrictive covenant defined customer as being all persons who the employer was servicing or had performed services for at some point during the departing employee’s tenure with the employer (see, e.g., Cooper v. Cerelli, (Phila. Cnty. Ct. Com. Pl. 2002) (holding that the defendant should be restrained from soliciting the plaintiff’s past and current clients where the agreement defined “customer, as any person or entity which at the time of termination shall be, or shall have been within one year prior to such time, a client or customer of the company”); and also, Robert Half of Pa. v. Feight, (Phila. Cnty. Ct. Com. Pl. 2000) (holding that the defendant should be restrained from soliciting the plaintiff’s past and current clients where the agreement defined “customer” as “any company for whom the [employer] performs or has performed services in the course of its business within the 12 months preceding the termination date”). Likewise, an employer should use specific language within the restrictive covenant to ensure that a departing employee knows whether a person constitutes a “prospective” customer.

The idea is that, for restrictive covenants to be construed as reasonable and therefore enforceable, the employee who is signing the covenants must understand what she is signing.

  • Remember to tailor the restrictive covenant to the position.

In practice, employers tend to use the same boilerplate language in every restrictive covenant. It is common to see employers use the same restrictive covenants for both top executives and entry-level employees.

Instead, employers should tailor the terms of a covenant to correspond with the duties and responsibilities of each particular position. Using specific, narrowly tailored restrictive covenants based on the level of access to confidential information or customers the employee has makes it more likely that a court will enforce the restrictive agreements.

On the other hand, employers who use the same boilerplate restrictive covenant for all employees are likely to face issues enforcing the covenant, especially against those employees who had little to no access to confidential information or customers. While there is no doubt these employers have confidential information or other business interests that they would like to protect, and that some entry-level employees may get access to such confidential information or customers, it is doubtful that the entry-level employees would cause them any harm—let alone irreparable harm—should they leave the employers and join their competitors.

  • Do due diligence and make rational business decisions before seeking help in court.

Not every employer has the time, energy, or money to file an action against every departing employee who violates his restrictive covenant. Any benefit received from pursuing a legal action could be marginal, if at all, when compared to the costs associated with pursuing the action. Furthermore, the practice of pursuing departing employees can damage the morale of the employer’s remaining workforce.

Before an employer runs to court with an emergent motion seeking temporary restraints, it should ensure that it has established clear and convincing evidence that a former employee has breached her restrictive covenant and that the breach is causing or will likely cause significant harm to the employer. In addition to using narrowly defined restrictive covenants tailored for those key employees with access to confidential information or customers, employers are advised to exercise restraint and pursue only those employees who are actually and unfairly harming the business. Employers should be reminded that the purpose of using restrictive covenants in the first place is to protect their legitimate business interests, not punishing those employees who leave them. •


By Edward T. Kang

Reprinted with permission from the May 24 edition of The Legal Intelligencer”© 2016 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com

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