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

Employers have legitimate interests in protecting their confidential business information and key customer relationships developed at significant expense. Consequently, many employers require new employers to agree to contractual employment and post-employment restrictions on their activities and conduct. Such restrictive covenants may be a part of an employment agreement or set forth in a separate non-compete and non-disclosure agreement. New employees eager to start out on the right footing are inclined to sign whatever documents are presented to them in connection with the hiring process. Later, if the relationship ends questions arise as to the enforceability of the restrictions. Understanding the basic legal principles applicable to enforcement of restrictive covenants can help both parties.

Courts in most states that enforce post employment restrictive covenants recognize employers have legitimate protectable interests in (i) trade secrets and other confidential information; (ii) unique skills and knowledge developed at the employer’s expense and (iii) customer relationships and goodwill. Ultimately the enforceability of a restrictive covenant will be determined by courts on a case by case basis balancing the employer’s right to protect a legitimate interest against the former employer’s right to pursue a livelihood and the general public interest in unfair restrictions on free and open competition.

Confidential Information Restrictions
Restrictive covenants with confidentiality provisions prevent disclosure or use of the employer’s trade secrets and other confidential, proprietary information. Most states including Pennsylvania, have provided statutory protection to trade secrets by adopting a variation of the Uniform Trade Secrets Act. In Pennsylvania, a trade secret is any information that “[d]erives independent economic value … from not being generally known to … other persons who can obtain economic value from its disclosure or use.” 12 Pa. Cons. Stat. Ann. § 5302 (2005). A trade secret may consist of any formula, pattern, device or compilation of information that is used in one’s business, and gives that person an opportunity to obtain an advantage over competitors who do not know or use it. Felmlee v. Lockett, 466 Pa. 1, 351 A.2d 273, 277 (Pa.1976). On the other hand, information that can be obtained from sources outside of the business or are generally known within the industry are not considered trade secret or protectable as proprietary information of the employer. A customer list is a classic example of business information that may or may not be considered proprietary.

Non-solicitation Restrictions
Non-solicitation provisions prohibit a former employee from soliciting or doing business with customers of the former employer. To be reasonable, the restriction must be limited in duration, geographical scope and no broader than necessary to protect the employer’s legitimate interest. For example, if the employer has invested substantial resources in the development of the employee’s skills and expertise such that the employee has acquired unique talents at the employer’s expense, then limiting that person’s ability to exploit those relationships to the detriment of the former employer has been recognized as reasonable by courts. On the other hand, if the individual established customer relationships before becoming an employee, then the employer cannot legally prevent the former employee from soliciting such customers after his employment ends.

Noncompete provisions
The essence of a noncompete provision is that the employee cannot go to work for a competitor of the employer after ending employment, however again, the limitation must be reasonable in duration, geographical area and scope of activity. If the employer operates globally and the employee had very broad responsibilities, then a global noncompete for a reasonable period of time, such as one or two years may be found to be reasonable. On the other hand, where the employee did not have responsibility beyond a limited geographic area, the noncompete should be similarly limited in scope.

Tips for employees
If you are beginning a new job and required to sign a written agreement containing any type of restrictive covenant, you should take the time to carefully read and understand the restrictions. If they seem reasonable in relation to your new job description, then signing the agreement may very well be appropriate. However, if the provisions of the restrictive covenant seem to be one sided, overbroad or unreasonable in any way, then think twice before signing. You have a right to negotiate the terms of a restrictive covenant just as you would negotiate any other term of your employment. If you have concerns, voice them and see whether the new employer understands your concerns and responds in a way that you believe to be fair under the circumstances. Just because the restrictive covenant is “standard” or “customary,” doesn’t mean you should sign even if they don’t fairly reflect your individual circumstances. If your new employer insists you sign the restrictive covenant without addressing the things you believe are unreasonable, then be sure to make a written record that you raised concerns which the employer rejected. After you sign and begin your employment, ask the personnel office to put a note in your file reflecting that you asked for certain changes in the restrictive covenant which were rejected and that you signed without the changes because it was a condition of your employment. At a minimum prepare a written summary of your oral dealings with the employer about the issue because after employment ends, if a dispute arising about the restrictive covenant, you may be able to demonstrate that the employer’s conduct in insisting on overbroad restrictions was unreasonable.

Tips to Employers
While it is always tempting to have your counsel draft restrictive covenants as broadly as possible to maximize your legal protection, increasingly courts are evaluating the fairness of every aspect of restrictive covenants because of the strong public policies favoring the right of everyone to pursue a livelihood and the strong public policy favoring unfettered competition. To be reasonable and enforceable, restrictions must be no broader than necessary to protect your legitimate business interests.

In practical terms this means that a noncompete should be narrowly drawn to prohibit the employee from working for a direct competitor in a position that is the same or similar to the position held with your company. The restriction also should be limited to a confined geographical area and for a reasonably short period of time. In Pennsylvania, for example, a two year limitation had been judicially approved, but one year is more customary. Confidential information restrictions must also be narrowly focused on categories of information that are truly proprietary such as customer purchase histories, marketing plans, projections, and trade secrets. Whatever you consider to be proprietary information, you should be able to show is not readily known within the industry or available from public sources. If it can be “Googled”, it can’t be confidential and proprietary to you and shouldn’t be included in your restrictive covenant. Nonsolicitation provisions also need to be limited to the relationships that you introduced to your employee and that you expended money to develop and maintain.

Understanding and acknowledging the talents and experience a new employee will bring to your organization means, among other things, being willing to negotiate the scope and specific terms of restrictive covenants. For example, if the new employee has developed client or customer relationships that you know about and hope the new employee will capitalize on for the benefit of your organization, then revise your nonsolicitation provision to exclude relationships developed before becoming your employee. If a post-employment dispute arises over enforcing your restrictive covenant, being able to show you negotiated and revised the restrictions to accommodate concerns voiced by the individual and to reflect the realities will greatly strengthen your prospects of enforcing the terms of the restrictions.

Courts increasingly are not sympathetic to enforcing post employment restrictions that are obviously overbroad and appear to reflect overreaching or dominating conduct by the employer at the beginning of the employment relationship. A quirk of Pennsylvania law is that enforcing a noncompete is much more difficult in the case of employees terminated for cause.

As one federal court explained:

Courts are skeptical when an employer seeks to enforce a non-compete agreement for a terminated employee based only on customer goodwill, as the employer’s termination suggests that the employer does not find the employee to be a competent salesperson, and thus, is not a competitive threat.

InterMetro Indust. Corp. v. Kent, 2007 WL 1140637 at *7 (M.D. Pa. April 17, 2007).

Understanding the pitfalls of overbroad restrictive covenants may help employers craft restrictive covenants that can actually be enforced if the need arises.