Recent Appellate Decision Draws Attention to Key Steps to Enforcing Restrictive Covenants

The Pennsylvania Superior Court’s recent decision in Metalico Pittsburgh, Inc. v. Douglas Newman, et al., No. 354 WDA 2016, 2017 PA Super. 109 (Apr. 19, 2017), confirms the importance of careful contractual drafting in agreements containing non-compete clauses and other post-employment restrictive covenants.  In circumstances where an employee is hired for a term of employment but later becomes an at-will employee, that contractual language may determine the enforceability of the agreement’s non-compete and non-solicitation provisions.

Metalico entered into employment agreements with two employees in 2011. Each employment agreement had a three‑year term and a non‑solicitation provision prohibiting solicitation of employees and customers to join competitors during their employment and for a finite period thereafter. After the three‑year employment terms ended in 2014, both employees continued to work as at‑will employees for one year. Shortly thereafter, the two employees began working for a business competitor and allegedly began soliciting Metalico customers and employees to move to that competitor. Metalico sued to enforce the agreements’ non-solicitation provisions.

The employees and their new employer moved for and obtained partial summary judgment on the grounds that the non‑solicitation provisions in the employment agreements were unenforceable for lack of consideration because the employees became at-will employees when the agreements’ three-year terms had expired. On appeal, the Pennsylvania Superior Court reversed the trial court and held that specific contractual provisions in the agreements established that consideration was not lacking and that the non-solicitation provisions remained enforceable.

The Superior Court emphasized that the continued enforceability of the restrictive covenants did not depend on whether the terms of employment materially changed. Instead, following its earlier reasoning in Boyce v. Smith-Edwards-Dunlap Co., 580 A.2d 1382 (Pa. Super. 1990), appeal denied, 593 A.2d 413 (Pa. 1991), the Superior Court held that the agreements’ express language determined whether the restrictive covenants remained enforceable. The employment agreements at issue in Boyce referred to the employee’s employment by the employer “whether pursuant to this Agreement or otherwise.” Accordingly, the Superior Court in Boyce held that the restrictive covenants continued to apply during the employee’s subsequent at-will employment. Similarly, in Metalico, the Superior Court held that the employees remained subject to the restrictive covenants during any continued period of employment as at-will employees and during the post-employment period agreed to by the parties. The Superior Court noted (among others) that the post‑employment period was defined in the contracts to run from the “last day of the Executive’s employment by the Employer,” not from the date when the three‑year term of employment ended.

Notably, the Superior Court in Metalico distinguished the facts before it from those of a federal case, Innoviant Pharm. Inc. v. Morganstern, 390 F. Supp. 2d 179 (N.D.N.Y. 2005). The Innoviant Court applied Pennsylvania law and invalidated a restrictive covenant where the employer and employee had signed a written document acknowledging that the employee no longer had an employment contract with the employer. Unlike in Innoviant, the employees in Metalico signed no such document, and the employment agreements’ original language, including the specific reference to the “last day of the Executive’s employment by the Employer,” carried the day.

In light of Metalico, employers should scrutinize carefully their existing employment agreements to ensure that their restrictive covenants will still meet their business needs when an employee changes to at‑will employment. While Metalico reversed the trial court’s order granting summary judgment and remanded to the trial court for further proceedings, its ruling and reasoning make clear that the enforceability of non‑compete and non‑solicitation provisions after a transfer to at‑will status depends on careful attention being paid at the time of drafting to the specific terms of the original agreement and any subsequent amendments to that agreement.

© 2009- Duane Morris LLP. Duane Morris is a registered service mark of Duane Morris LLP.

The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

Proudly powered by WordPress