Part III of “The Restricting Covenant” Series: Recipes and Restaurants

By Lawrence J. Del Rossi

This is the third article in a continuing series, “The Restricting Covenant.” In restrictive covenant cases, a company’s trade secrets are sometimes referred to as its “secret sauce” or “secret recipe.”  The “secret formula” of Coca-Cola soda is an analogy used to help explain the uniqueness of a company’s protectable interest and the need to prevent unauthorized disclosure, misappropriation or unlawful competition.  This talk about secret sauces and recipes not only made me hungry, but it also relates to the subject of this article – restrictive covenants, trade secrets and the food and restaurant industry.

What’s in Your Secret Sauce?

Food recipes can constitute trade secrets.  In Tavern Restaurant v. Brandow, for example, the Supreme Court of Iowa held that a restaurant had successfully demonstrated at trial that its former manager and his new employer (a competing restaurant) had misappropriated “secret recipes” for pizza sauce, pizza crust and grinder sandwiches.  To win at trial, the plaintiff had to show that its recipes derived independent economic value and that it took reasonable steps to maintain their secrecy.

As to the independent economic value requirement, the plaintiff’s owner testified that he had purchased the restaurant (including its recipes) for almost half a million dollars, and that his restaurant had won several “highly-prized local food awards.”  In addition, the plaintiff presented an expert from the Culinary Institute of America, who concluded that he could not determine the exact amount of specific ingredients found in the recipes “without access to prohibitively expensive chemical analysis machinery.”  Even the defendants’ expert conceded that he could not determine the underlying process by which the pizza and grinders were assembled.  The court explained that, “[w]hile the core ingredients were determinable with the resort to a rare and expensive machine, the exact assembly and baking processes used could not be determined.”

With respect to secrecy requirement, the plaintiff-restaurant presented evidence that its recipes were not generally known or ascertainable in the public domain.  The owner told its employees that the recipes were confidential.  All recipes, including the crust recipe, were locked in a safe deposit box.  Even though the kitchen employees who prepared the dough knew the crust recipe, the court found that the restaurant’s secrecy procedures were “reasonable under the circumstances.”

Based on this evidence, the Iowa Supreme Court upheld the jury’s award of money damages, as well as the restaurant’s request for a permanent injunction that prevented the defendants from “using, divulging, and communicating to anyone else any of the trade secrets or confidential information which includes all or any part of the plaintiff’s recipes for pizza sauce, pizza dough or grinders or any substantially similar recipes thereto.”

That’s the Way the Cookie Crumbles?

Courts will enjoin a competitor from using a food recipe if it is a trade secret and the holder of the secret has taken steps to protect it from the public.  The opening two sentences of the Massachusetts appeal court’s opinion in Peggy Lawton Kitchens, Inc. v. Hogan is priceless.  The court begins:  “Nothing is sacred.  We have before us a case of theft of a recipe for baking chocolate chip cookies.”

The owner of Peggy Lawton Kitchens (“Kitchens”) had mixed the chaff from walnuts, which he called “chaff, nut meal, nut dust, and nut crunch” in his chocolate chip cookie batter.  This produced “a unique and distinctive flavor.”  The appeals court found that while the basic ingredients of flour, sugar, shortening, chocolate chips, eggs, and salt, would be common in any chocolate chip cookie, and therefore not a trade secret, “the insertion of the nut dust served to add that modicum of originality which separates a process from the every day and so characterizes a trade secret.”  This cookie recipe led to immediate commercial success for Kitchens, and according to its creator, “did to the cookies what butter does to popcorn or salt to a pretzel.  It really made the flavor sing.”

The owner had carefully guarded the cookie recipe by locking the only copies in an office safe and in his desk drawer.  The baking process for the cookies was divided into three separate components and was written on three separate cards.  Access to the cards was limited to long-time trusted employees, including the defendant, Terence Hogan.  The appeals court found that Kitchens had taken “reasonable steps to maintain its mystery and to narrow the circle of those privy to its essentials.”  The court also concluded that the “absence of admonitions about secrecy or the failure to emphasize secrecy in employment contracts (if there were any in this relatively small business)” was not fatal to the plaintiff.

The defendant Hogan, who had no prior experience in volume baking before working at Kitchens, left Kitchens and established a competing bakery business under the trade name “Hogie Bear.”  Hogie Bear’s first product was chocolate chip cookies, which included the “miraculous nut dust” and looked “similar in appearance, color, cell construction, texture, flavor and taste.”  At that time, about 40 brands of chocolate chip cookies were sold in New England.  Except those made by Kitchens and Hogie Bear, no two of them were alike.  The record established that Hogan had “employed a ruse to examine the ingredients cards and may have helped himself to a look at the formula tucked away in Kitchens’ safe or [its owner’s] desk.”  The trial court did not award Kitchens damages because the evidence was “too vague and speculative.”  However, Hogan was enjoined permanently from “making, baking, and selling chocolate chip cookies which use the plaintiff’s formula.”

Inevitable Disclosure of the Secret Formula?

The Third Circuit’s decision in Bimbo Bakeries USA, Inc. v. Botticella is another interesting case discussing the intersection between food recipes, trade secrets, restrictive covenants, and injunctive relief.

Bimbo Bakeries is one of the largest baking companies in the United States, producing and distributing baked goods under popular brand names including Thomas’ and Entenmann’s.  The defendant, Chris Botticella, was responsible for five of Bimbo’s production facilities and oversaw a variety of areas including product quality and cost, labor issues, and new product development.  As one of Bimbo’s senior executives, Botticella had access to and acquired a broad range of confidential information about Bimbo, its products, and its business strategy.  For example, he was one of only seven people who possessed all of the knowledge necessary to replicate independently Bimbo’s popular line of Thomas’ English Muffins, including the secret behind the muffins’ unique “nooks and crannies” texture.  He signed a “Confidentiality, Non-Solicitation and Inventions Assignment Agreement,” in which he agreed not to compete directly with Bimbo during his employment, not to use or disclose any of Bimbo’s confidential or proprietary information during or after his employment, and to return every document he received from Bimbo after his employment.  The agreement, however, did not include a covenant restricting where Botticella could work after he left Bimbo.

Botticella accepted a job at one of Bimbo’s primary competitors in the baking industry – Hostess Brands, Inc.  However, he did not disclose his plans to work for Hostess for several months, continued to engage fully in his work at Bimbo, and had access to Bimbo’s confidential, proprietary and trade secret information after he accepted the job with Hostess.  After Botticella’s departure, a computer forensics expert concluded that the person logging in as Botticella had accessed confidential documents during the final weeks and days of his employment at Bimbo, including 12 documents in 13 seconds on his last day within just minutes after Botticella had disclosed to Bimbo his plans to work for Hostess.

Bimbo brought a lawsuit in Pennsylvania federal court against Botticella seeking to protect its trade secrets and to enjoin him from working for Hostess.  Even though Botticella did not have a post-employment non-compete in his employment agreement with Bimbo, the District Court granted Bimbo’s motion and preliminarily enjoined Botticella from working with Hostess and from divulging to Hostess any confidential or proprietary information belonging to Bimbo.  The court found there was “substantial likelihood, if not an inevitability, that [Botticella] will disclose or use Bimbo’s trade secrets in the course of his employment with Hostess.”

On appeal, the Court of Appeals for the Third Circuit affirmed the District Court’s rulings.  After discussing the contours of the “inevitable disclosure” doctrine under Pennsylvania law, the court concluded that “(1) a determination of whether to grant injunctive relief in a trade secrets case and, if so, the proper scope of the relief, depends on a highly fact-specific inquiry into the situation in the case the court is considering[,] and (2) a court conducting this inquiry has discretion to enjoin a defendant from beginning new employment if the facts of the case demonstrate a substantial threat of trade secret misappropriation.”  Proof of actual misappropriation was not required.  Note that many states do not recognize or have rejected the inevitable disclosure doctrine.

The Third Circuit found that the trial court had not abused its discretion in concluding, at the preliminary stage of the case, that Bimbo would suffer irreparable harm absent injunctive relief because the disclosure of its trade secrets to Hostess would put Bimbo at a competitive disadvantage that a legal remedy could not redress.  Additionally, the private and public interests in preventing the misappropriation of Bimbo’s trade secrets outweighed the temporary restrictions on Botticella’s choice of employment with Hostess.

Caught with Your Hand in the Cookie Jar?

Although trade secret and non-compete laws are state-by-state specific, there are some common ingredients that are baked into most state laws.  The three cases discussed above highlight some recurring themes and common ingredients found in food recipe restrictive covenant cases (and many non-foodie non-compete cases).  First, unique and distinctive recipes that derive independent value can constitute trade secrets and are protectable secrets from unauthorized use and disclosure.  Second, the holder of the recipe is expected to take reasonable steps to keep it secret and out of the public domain.  And third, bad actors get punished when their hand is caught in the proverbial cookie jar (sorry, that one was too easy).

No One Size Fits All

Finally, on a somewhat foodie-related/restrictive covenant note, there has been a recent uptick in enforcement efforts by certain states related to non-competes, particularly for low-wage workers in the fast food industry.  The trend is based on the ability of non-executive and non-supervisory employees’ ability to earn a living as long as they do not steal and use trade secrets.  For example, in June 2016, the Illinois Attorney General’s Office filed a lawsuit against Jimmy John’s franchises “for imposing highly restrictive non-compete agreements on its employees, including low-wage sandwich shop employees and delivery drivers whose primary job tasks are to take food orders and make and deliver sandwiches.”  The agreements barred departing employees from taking jobs with competitors for two years and from working within two miles of a Jimmy John’s store.  In December 2016, Jimmy John’s reached a settlement, agreeing to pay $100,000 and to remove non-compete clauses from its new-hire agreements.  This deal was reached after Jimmy John’s had settled with the New York Attorney General’s Office and agreed not to use non-compete agreements for most of its workers in New York.

The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants and a particular occupation or industry.  It is not intended to provide and should not be construed as providing legal advice.  Each situation is different, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.  Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for other occupations and industries, including computer engineers, carpenters, car salespersons, and more.

Click here to view all posts in “The Restricting Covenant” series.

Part II of “The Restricting Covenant” Series: Barbers and Beauty Shops

By Lawrence J. Del Rossi

This is the second article in a continuing series, “The Restricting Covenant.” In this article, I discuss a topic that is near and dear to me – my hair and my long-time relationship with my barber.  I have used the same barber to cut my hair since high school, even after moving many miles away.  I sit in his chair, he cuts my hair with expert precision, and I am a satisfied customer.  This got me to think about one of the most basic reasons why employers want to impose non-compete and non-solicitation obligations on their employees – the value and strength of a long-term customer relationship.  Courts have long recognized that protecting customer relationships is a legitimate protectable business interest that can support the enforcement of a restrictive covenant if it satisfies standards of “reasonableness.”  So if my barber was to leave his current location, could his employer enforce a post-employment covenant that would prohibit him from cutting my hair?  Yikes!

The Art of Barbering

The barber’s trade has a long history, dating back to Ancient Egypt.  Many states require a barber to have a license in order to practice barbering professionally.  There are quite a few cases throughout the country that discuss the enforceability of restrictive covenants in the context of barbers, barbershops, hair stylists, hair, nail and beauty salons, and beauty shops.  Many of these decisions involve the sale of an entire business, not just the transition of one employee to a competitor.  Courts generally tend to be more willing to enforce broader restrictions in the sale of a business context.

One interesting case in my home state of New Jersey that involves barbers and non-competes is Dellacorte v. Gentile, 98 N.J. Eq. 194 (1925). The plaintiff-barber Victor Dellacorte obtained a preliminary injunction to stop the defendant-barber Jean Gentile from directly competing against him in Summit, New Jersey.

In 1922, Gentile sold his barbershop, including “fixtures and goodwill,” to Paula Tally for $2,500.  The bill of sale had the following non-compete:

The party . . . agrees that he will not, directly or indirectly, either as employer or employee, engage in any branch of the barber business within a radius of one mile from No. 13 Maple Street, Summit, New Jersey, for a period of five years from the date hereof.

As discussed below, the key phrase was “any branch of the barber business.” Thereafter, Tally sold the business, including the non-compete, to Dellacorte.

A few years later (during the restricted period), Gentile opened a “beauty parlor” about 250 feet (in the restricted territory) from Dellacorte’s (formerly Gentile’s) barbershop.  Gentile argued that his new shop did not compete with Dellacorte because it “cut and bobbed ladies and children’s hair,” and was “in no sense a branch of the barber business.”  To bolster this argument, Gentile’s attorney cited the Latin root of the word “barber” (“barba,” meaning “beard”), and provided the court with “opinions of the courts in some of the Western states, to the effect that a beauty shop is not a barbershop, and that hair bobbing is not barbering.”  The court was not persuaded.

Barber’s Hair Bobbing Activities Cut it Too Close to His Competitor

After examining several different authorities, including the Standard Dictionary’s definition of “barber,” the judge found that “the bobbing of ladies’ hair is a distinct and important part of the business of a modern barber shop, as much as, or more than, was cupping a branch of that business in ancient times.”  The judge observed that it was “not uncommon today to see members of the female sex occupying chairs in barber shops having their hair bobbed in an effort to keep pace with the ever-changing styles.”  The judge then discussed “Samson and Delilah” and the “Holy Writ,” but I will leave those portions of the court’s opinion for you to read yourself.

The court focused on Gentile’s activities before he sold his business.  Gentile’s barbershop had engaged in the bobbing of women’s hair for several years before he sold his business.  Accordingly, this line of work “must have been in the minds of the parties when the covenant was entered into.”  The court also looked at Gentile’s conduct leading up to the opening of his new competing shop.  Gentile had tried unsuccessfully to purchase a release from the covenant, and therefore it was “quite apparent to [the judge] that this defendant went into the new business with his eyes open, and has no right to now complain if the successor of his vendee insists upon compliance with the covenant solemnly entered into.”  Based on these facts, the court enjoined Gentile from engaging in any branch of the barber business within the restricted territory pending a final hearing.

Courts Will Look Beyond Labels and Examine Actual Job Functions

Fortunately, for me (and my hair), my barber owns his own barbershop and does not have to worry about non-competes.  However, if he were to hire an apprentice, or merge with another barbershop, he would need to consider the pros and cons of having them sign a non-compete or some other form of restrictive covenant.  Not only is the Dellacorte decision an interesting case about the history of barbers and barbering, it highlights the searching view that some courts will undertake to determine whether someone should be enjoined from working based on a non-compete agreement.  Courts will look behind the “labels” and examine the person’s actual job functions to determine whether a business is truly engaged in unlawful competition.  The judge in Dellacorte, for example, did not take Gentile’s representation at face value that “bobbing ladies’ and children’s hair” was not “a branch of the barber business.”  Instead, he reviewed extraneous sources regarding the meaning of “barbers.”  He also relied on his own experience and observations at barbershops.  He looked at the parties’ conduct before and after the sale of the barbershop.  Did Dellacorte get the benefit of the bargain on the non-compete?  The judge did not think so.  Could Gentile earn a living in his trade outside of the restricted territory?  The judge thought he could.  The balancing of the equities, which is an unpredictable and nebulous concept of “fairness,” favored Dellacorte.

The Dellacorte decision also highlights the critical importance of focusing on the language used in the non-compete itself to determine its scope.  For example, if Gentile’s covenant had contained only the words “barber business,” as opposed to “any branch of the barber business,” would the court have stopped him from operating a “beauty parlor”?  Would it have been more helpful if Gentile had defined “the barber business” in the bill of sale?  While the duration of the restriction and the geographic scope are usually straightforward, the description of the prohibited activity can generate much dispute and litigation.  When drafting non-compete agreements, give careful attention to the description of the activity-based restrictions.

The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants and a particular occupation or industry.  It is not intended to provide and should not be construed as providing legal advice.  Each situation is different, and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.  Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for other occupations and industries, including brokers, bankers, broadcasters, and more.

Click here to view all of the posts in “The Restricting Covenant” series.

Part I of “The Restricting Covenant” Series: Psychologists and Psychiatrists

By Lawrence J. Del Rossi

Restrictive covenants are private agreements that restrict an individual’s business activities within a specific geographic area for a period of time, in return for wages, access to information, or some other type of tangible benefit. Like the spots of a leopard, they come in all shapes and sizes.  Their enforceability varies from state to state, from occupation to occupation, and from industry to industry.  Many states have quirky or arcane rules or regulations tailored to specific occupations.  Some industries have specific rules and practices that dictate the parties’ course of dealing and determine the “reasonableness” of the restrictions.  Some employers prefer non-competes, while others prefer non-solicitations or non-disclosures, or some combination of each.  In any event, before agreeing to be restricted, or before asking someone to be restricted, this legal landscape should be explored and understood because litigation in this area of the law can be financially and emotionally draining.  This article discusses restrictive covenants and psychologists and psychiatrists.[1]

An Offer You Can’t Refuse  

As anyone who has watched the HBO series The Sopranos observed, Dr. Jennifer Melfi, a psychiatrist, occupied a unique position of trust and confidence with her patient, Tony Soprano.  Dr. Melfi was a sole practitioner with no other partners, so she probably did not have to worry about non-competes.  But what if she had just graduated from medical school, found a dream job with a well-established psychiatry practice in her home state of New Jersey, and was asked to sign an employment agreement that contained “non-compete” and “non-solicitation” provisions that restricted her from engaging in psychiatry, or from having any contact with patients, within twenty miles of her office, for two years after she left that practice?  What are Dr. Melfi’s options?  Should she accept, reject or negotiate a new deal?  What would be the financial and ethical impact to her and the patients?

New Jersey Regulations Prohibit Non-Competes for Licensed Psychologists

There is good news for Dr. Melfi, at least if she decides to stay in New Jersey.  She does not have to walk away from the deal.  Her post-employment restrictions most likely would not be enforceable because of New Jersey Administrative Code Section 13:42–10.16, a provision of the rules adopted by the State Board of Psychological Examiners, which reads:  “A licensee shall not enter into any business agreement that interferes with or restricts the ability of a client to see or continue to see his or her therapist of choice.”

In 2005, a New Jersey Appellate Court, in Comprehensive Psychology System, P.C. v. Prince, held that the State Board of Psychological Examiners adopted a regulation that restricted licensed psychologists from entering into non-competes.  In addition to this regulation, the court found that “the nature of the practice of psychology” and “the uniquely personal patient-psychologist relationship forbid any restrictions which might interfere with an ongoing course of treatment.”  The court did not elaborate on the particulars of this “unique personal relationship”, or compare or contrast it to a patient’s relationship with other types of doctors, social workers or therapists.  And interestingly, if the State Board of Psychological Examiners had not adopted this specific regulation, New Jersey courts, following the Supreme Court’s decisions in Community Hosp. Grp., Inc. v. Moore (2005), and Pierson v. Medical Health Ctrs., PA (2005), might have enforced some or all (New Jersey is a “blue-pencil” state) of Dr. Prince’s restrictions if they were otherwise found reasonable to protect a legitimate business interest of her employer (e.g., training, customer relationships, confidential information), not injurious to the public, and did not impose an undue hardship on her.  Future articles in this Series will address restrictive covenants and health care providers in other fields of medicine.

One issue that frequently arises when doctors leave a practice is whether they can contact patients to notify them of their departure and new whereabouts. Often times, the employment agreement will not address this issue directly.  The court in Comprehensive Psychology System, P.C. explained that, “a psychologist who changes his office location, voluntarily or involuntarily, has a duty to inform patients of the change and the new location and phone number.”  Otherwise, in the court’s view, the psychologist would “abandon” his obligations to the patient.  The plaintiff argued that it could have informed “its” patients of Dr. Prince’s departure, and the geographic restrictions were reasonable because Dr. Prince could have treated his patients outside of the restricted area.  However, the court was not persuaded by these arguments and leaned heavily on the “critical patient-psychologist and . . . the right of the patient to continued treatment from that psychologist.”

Other Jurisdictions Might or Might Not Enforce Non-Competes for Psychologists or Psychiatrists  

Dr. Melfi would likely fare the same if her job offer were from a practice in California, Colorado, Delaware, Massachusetts or Tennessee, where either the state legislatures or the courts in those states have prohibited, or significantly curtailed, restrictive covenants in physician employment contracts.  These states find persuasive the American Medical Association Council on Ethical and Judicial Affairs, Op. E-9.02 (1998), which provides: “Covenants-not-to-compete restrict competition, disrupt continuity of care, and potentially deprive the public of medical services.  The Council of Ethical and Judicial Affairs discourages any agreement which restricts the right of a physician to practice medicine for a specified period of time or in a specified area upon termination of an employment, partnership, or corporate agreement.  Restrictive covenants are unethical if they are excessive in geographic scope or duration in the circumstances presented, or if they fail to make reasonable accommodation of patients’ choice of physician.”

However, if Dr. Melfi’s job offer was from a psychiatry practice located just across the Hudson River in “Johnny Sack” territory, her restrictions might be enforced completely or in part.  For example, in Metropolitan Medical Group, P.C. v. Eaton (1989), a corporation that provided medical, psychiatric and psychological treatment for private patients sued Dr. Eaton, a licensed psychologist, for violating a one-year non-compete that prohibited her from rendering clinical or psychological services within 20 miles of Regent Hospital in New York County.  Although the employer did not successfully obtain a preliminary injunction (because it failed to show irreparable harm), the court nevertheless allowed the employer to proceed with the case against Dr. Eaton for monetary damages.  The court appeared to strike a balance between a patient’s right to choose his or her own psychologist and an employer’s right to protect and recoup its legitimate business interests in training Dr. Eaton and providing him with access to patients.

The difference in approach to restrictive covenants between New Jersey and New York highlights that there is no “one size fits all” rule.  Each state’s laws, rules, regulations, and judicial decisions must be consulted to determine applicability and enforceability.

This is the first article in a continuing series entitled, “The Restricting Covenant.”  The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues or special circumstances that might arise in the context of restrictive covenants and a particular occupation or industry.  It is not intended to provide and should not be construed as providing legal advice.  Each situation is different and if legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.  Stay tuned for future articles in this Series, which will discuss the restrictive covenant landscape for other occupations and industries, including accountants, actors, agents, attorneys, and more.  And that’s just the “A’s.”

Click here to view all posts in “The Restricting Covenant” series.


[1] Future articles in this Series will discuss how similar restrictions might or might not apply to other mental health professionals such as social workers and therapists.

Recent Scrutiny of Non-Competes

Larry Del Rossi published an article for Today’s General Counsel titled, “Recent Scrutiny of Non-Competes.” Larry provides an overview of non-compete agreements (also known as restrictive covenants) and discusses a recent uptick in government activity that may regulate or challenge private businesses’ use and enforcement of non-competes.

Larry says “one major challenge for national companies is that enforcement of non-competes varies from state to state, so that there is no uniform standard.” In May 2016 the White House issued “Non-Compete Agreements: Analysis of the Usage, Potential Issues, and State Responses,” a document intended to identify areas where implementation and enforcement of non-competes may present issues, put forward a set of best practices, and serve as a call to action for state reform.

Larry advises companies to consider whether all employees within the company should have non-competes, evaluate the scope and structure of their agreements, and document the business rationale for requiring employees (including at-will employees) to sign any non-compete.

Read “The Recent Scrutiny of Non-Competes.”

Read Larry’s previous post, “What Employers Need to Know about the Government’s Recent Scrutiny of Non-Competes.”

Pennsylvania Supreme Court Finally Kills Hope That Magic Words Can Substitute for Valuable Consideration in Exchange for Post-Offer Restrictive Covenants

By Daniel Aiken and Vik Jaitly

To most practitioners, Pennsylvania law governing the consideration required for an employment agreement containing a restrictive covenant (e.g., a non-competition clause or non-solicitation clause) has been simple: (1) if the restrictive covenant is entered at the inception of the employment, the consideration to support the covenant is the award of the position itself; (2) if the restrictive covenant is entered during employment (i.e., post-offer), it is enforceable only if the employee receives new and valuable consideration—that is, some corresponding benefit or a favorable change in employment status. To avoid the need to provide a current employee additional consideration, some employers added magic language to their restrictive covenants, based on a statute from 1927, which arguably made a restrictive covenant enforceable without new consideration.

Specifically, the Uniform Written Obligations Act (“UWOA”) states that a written promise “shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound.” Thus, according to the terms of the statute, using the magic language, “the parties intend to be legally bound” erased any deficiencies in the consideration actually exchanged. Therefore, despite a significant line of authority requiring valuable consideration for post-offer restrictive covenants, an employer looking to enforce a post-offer covenant that lacked additional consideration could hold out hope of nevertheless enforcing the covenant.

Earlier this week, the Pennsylvania Supreme Court extinguished any flicker of hope with its decision in Socko v. Mid-Atlantic Sys. of CPA, Inc., No. 142 MAP 2014 (Pa. Nov. 18, 2015). There, the employer, Mid-Atlantic, was seeking to enforce a restrictive covenant against a former salesperson, David Socko. When Mr. Socko began his second stint of employment with Mid-Atlantic (he had resigned but was rehired four months later), Mr. Socko signed a new employment agreement containing a two-year noncompetition covenant. While still employed, Mr. Socko signed another, more restrictive, covenant not to compete. That agreement also expressly stated that the parties intended to be “legally bound,” but Mr. Socko apparently did not receive anything of value in return for his signature.

When Mid-Atlantic sought to enforce the agreement signed by Mr. Socko during his employment, Mr. Socko argued that the non-competition clause was unenforceable, as it was not supported by consideration. Mid-Atlantic, citing the parties’ pledge in the agreement to be “legally bound,” contended that the UWOA did not allow Mr. Socko to challenge the validity of the terms of the agreement on the basis of a lack of consideration. Ultimately, the Pennsylvania Supreme Court disagreed. The Court concluded that the UWOA does not save a post-offer restrictive covenant that otherwise lacks consideration. In reaching this conclusion, the Court cited Pennsylvania’s historical disfavor of covenants in restraint of trade and the fact that Pennsylvania courts have, for years, mandated strict compliance with the basic contractual requirement of consideration in the context of post-offer restrictive covenants.

For employers, this case serves as a reminder that they must provide new consideration in exchange for a post-offer restrictive covenant. To avoid this situation altogether, employers should consider whether they should insist, at the time of hiring, on having employees (especially those employees who will be in contact with customers or will have access to sensitive information) enter post-employment restrictive covenants. Agreements entered at the time of hiring are rarely subject to challenge for lack of consideration. Otherwise, employers will need to give up something of value in order to create a binding restrictive covenant. Continued at-will employment—which is sufficient consideration under most states’ laws—is not sufficient under Pennsylvania law. Rather, employers will need to offer more, and Pennsylvania courts have found that the following suffice as new consideration in exchange for a post-offer restrictive covenant: a promotion, a change from part-time to full-time employment, or a beneficial change to a compensation package of bonuses, insurance benefits, and severance benefits. Other valuable promises may also suffice depending on the circumstances.

How Safe Are Your Company’s Trade Secrets?

In a world where employee mobility is a business reality, companies should be taking proactive measures to guard trade secrets, retain competitive advantage and be ready for court if it comes to that. Click below to launch a video and hear from Labor & Employment partners Mark Terman and David Woolf on what they, and our other Labor & Employment group lawyers, are doing every day to protect companies.

 

Trade Secrets & Restrictive Covenants