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.
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.
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.
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.
Kate Gold, Mark Terman and Adam Thurston, partners in the firm’s Los Angeles office, recently presented to the Southern California Chapter of the Association of Corporate Counsel a program titled “What Happens at Work Stays at Work – The California Employer’s Approach To A National Program for Restrictive Covenants and Trade Secret Protection”.
The presentation, which was broadcast to in-house counsel viewing in three separate locations spread out around southern California, first looked at the California landscape, giving a refresher and update on non-competition agreements, customer and employee non-solicitation, identifying and pleading trade secrets and misappropriation.
The presentation then looked at considerations for a multi-jurisdictional approach to trade secret protection, including best practices for effective corporate policies and confidentiality and property protection agreements.
The presentation concluded by addressing social media in a trade secret protection program, including Twitter, LinkedIn, and BYOD, and making the most of choice of law and forum selection clauses in restrictive covenants.
A copy of the presentation can be downloaded here.
A recent decision by a Florida appeals court, Gulliver Schools, Inc. v. Snay, stands as a stark reminder of the perils of trying to maintain confidentiality in the age of social media where news can travel faster than the speed of sound and inadvertent dissemination of information that is intended to be “confidential” can be difficult, if not impossible, to prevent.
Patrick Snay sued his former employer, Gulliver Schools, for age discrimination and retaliation under the Florida Civil Rights Act after his contract as the school’s headmaster was not renewed. The parties reached a settlement in the amount of $150,000 ($10,000 in back pay, $80,000 for non-wage damages, and $60,000 in attorney’s fees), and agreed that the “existence or terms” of the agreement were to be kept strictly confidential. The confidentiality provision prohibited Snay from “directly or indirectly” disclosing or discussing the case or the settlement with anyone except “his attorneys or other professional advisors or spouse.” It contained a clawback or liquidated damages provision allowing for the disgorgement of plaintiff’s portion of the settlement payments in the event of a breach.
Only four days after the parties had signed the settlement agreement, the school notified Snay that he had materially breached the agreement based on a Facebook posting of Snay’s college-age daughter, who boasted to approximately 1200 Facebook friends (many of whom were either current or past Gulliver students): “Mama and Papa Snay won the case against Gulliver. Gulliver is now officially paying for my vacation to Europe this summer. SUCK IT.”
Mr. Snay testified that he believed his daughter was retaliated against at Gulliver, that she was “very concerned about” the lawsuit, and that after the settlement was reached he and his wife decided to tell their daughter that the case had settled and that they were happy with the result. They apparently did not tell her that the settlement was confidential or that she should not disclose such information to anyone else. The trial court found that neither Snay’s comments to his daughter nor his daughter’s Facebook comment constituted a breach. The appeals court disagreed and reversed, ruling that Mr. Snay “violated the agreement by doing exactly what he had promised not to do,” and “[h]is daughter then did precisely what the confidentiality agreement was designed to prevent, advertising to the Gulliver community that Snay had been successful in his age discrimination and retaliation case against the school.”
Confidentiality clauses like the one in the Snay/Gulliver settlement agreement are common and should be enforced when they are clear, unambiguous and voluntarily and knowingly agreed to. From a drafting standpoint, if it was important for Mr. Snay to have disclosed certain information about the settlement to his daughter (as he had claimed at his deposition), then the confidentiality provision could have included “immediate family” as permissible recipients of confidential information and have subjected those family members to the same confidentiality obligations as Mr. and Mrs. Snay.
In addition, attorneys should take heed of this opinion in light of their ethical and legal obligations to protect client confidences. The duty to protect privileged and confidential client information extends to current clients (RPC 1.6), former clients (RPC 1.9), and prospective clients (RPC 1.18). Zealous representation and confidentiality are at the foundation of the attorney-client relationship, but if an attorney’s spouse, family member, or co-worker, inadvertently or otherwise posts on social media client or case information that is confidential (e.g., “mom just settled big toxic tort case, off to Mexico for much needed family vacation!”), such disclosure could be disastrous.