Third Circuit sets forth the criteria to support the imposition of an injunction related to a non-compete agreement.
Non-competition, confidentiality, and non-solicitation agreements all are examples of restrictive covenants that are used to preclude an employee from taking certain proprietary information or customers and using it (or them) in a way that may adversely affect the individual’s previous employer. When a company determines that a former employee may be prepared to violate such an agreement, it often will ask the court for injunctive relief that can include ordering the individual to refrain from taking certain actions over the period of time during which the validity of the restrictive covenant is determined. The 3d U.S. Circuit Court of Appeals recently vacated a district court’s preliminary injunction, finding that the lower court insufficiently evaluated and supported its decision to enforce a noncompetition agreement. PharMethod Inc. v. Caserta, 3d Cir., No. 10-1388, unpublished opinion, 6/2/10.
In that case, Michael Caserta had entered into restrictive covenants with his employer, Rentacom. He then became employed with that company’s successor, PharMethod. He was terminated by PharMethod in 2009 and became involved in activity viewed by PharMethod as competitive with its services. PharMethod filed a lawsuit, asking the federal court for a preliminary injunction to stop Caserta from competing against it until a full analysis of Caserta’s employment activities could be completed. The court granted the injunction, and Caserta appealed to the Third Circuit.
The Third Circuit reversed and remanded, stating that while the applicable federal rule requires a district court to make specific findings of fact and conclusions of law to assist in “meaningful appellate review,” the lower court here simply stated ultimate facts and conclusions without foundation. The appellate court vacated the preliminary injunction and remanded the lawsuit back to the district court with specific instructions on how to properly evaluate the request for injunctive relief.
First, it said, the lower court should evaluate the relationship between Caserta’s original employer, Rentacom, and its successor, PharMethod, to assure that PharMethod can enforce a restrictive covenant in an agreement made between Caserta and Rentacom. Next, the specific restrictions within that agreement must be reviewed to determine whether they are enforceable. In Pennsylvania, post-employment restrictive covenants are enforceable if: (1) they are incident to an employment relationship between the parties; (2) the restrictions are reasonably necessary for the protection of the employer; and (3) the restrictions are reasonably limited in duration and geographic extent. The Court also pointed out that restrictive covenants are “not favored in Pennsylvania and have been historically viewed as a trade restraint that prevents a former employer from earning a living.”
While a restrictive covenant may legitimately protect certain business-related interests, the Third Circuit specifically held that eliminating competition or gaining an economic advantage is not a legitimate business interest. Further, while the courts have discretion to “blue pencil” an agreement by limiting restrictive covenants to terms that are reasonably necessary for the protection of the employer’s business interest, the Third Circuit also pointed out that over-broad restrictions suggest an “intent to oppress the employee and/or foster a monopoly, either of which is an illegitimate purpose,” and could lead a court to invalidate an entire agreement. The Court also pointed out that because some Pennsylvania courts have shown a reluctance to enforce restrictive covenants against an employee who leaves employment involuntarily, the lower court here should have determined whether enforcement of a restrictive covenant against Caserta is appropriate under the specific circumstances of his termination.
The in-depth inquiry directed by the Third Circuit provides a checklist of elements that employers should incorporate into the drafting of restrictive covenants. A covenant-not-to-compete should be limited to the protection of the legitimate business interest of the employer, and should not be overly-broad in either a temporal or geographic respect; a confidentiality agreement should protect proprietary information, including trade secrets, and should not be extended in an attempt to protect information that is otherwise publically available; and non-solicitation covenants should preclude a former employee’s solicitation only of actual or probable customers, and not speculative ones. Because an appropriate court review should include all of these factors, employers should recognize that restrictive covenants that extend beyond those boundaries may be subject to revision or non-enforcement by the courts.