A Pennsylvania No-Compete Primer

In Pharmethod, Inc. v. Caserta, __ F.3d __ (3d Cir. 2010), the Third Circuit vacated and remanded the district court’s entry of a preliminary injunction enforcing a no-compete based on the trial judge’s failure to fully explain his factual and legal conclusions. The case is noteworthy because the Third Circuit provided what amounts to a primer on Pennsylvania non-compete law to help guide the district court on remand. Here is a summary of the Third Circuit’s guidance:

• Restrictive covenants are not favored in Pennsylvania and, due to the inherently unequal bargaining positions of employer and employee, such agreements are closely scrutinized. The court is required to balance the employer’s protectable business interest against the employee’s interest in earning a living in his or her chosen profession, and then balance the result against the public interest.

• In balancing such equities, some Pennsylvania courts are reluctant to enforce restrictive covenants against an employee who was involuntarily terminated.

• In Pennsylvania, post-employment restrictive covenants are enforceable if: (i) they are incident to an employment relationship between the parties; (ii) the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and (iii) the restrictions imposed are reasonably limited in duration and geographic extent.

• Legitimate business interests that may be protected by a restrictive covenant include protecting trade secrets, confidential information, good will or unique/extraordinary skills. Eliminating competition or gaining an economic advantage do not constitute legitimate business interests.

• Geographic restrictions must also be reasonable. Courts will uphold restrictive covenants with broad geographic limits only where the employee’s duties and customers were equally broad.

• Pennsylvania courts may “blue pencil” restrictive covenants by granting enforcement that is limited to those portions which are reasonably necessary for the protection of the employer. However, Pennsylvania case law favors non-enforcement of gratuitously overbroad restrictive covenants.