• Employee Non-Compete Agreements are not Assignable
  • October 23, 2003 | Author: Beth A. Slagle
  • Law Firm: Meyer, Unkovic + Scott llp - Pittsburgh Office
  • Non-competition agreements, non-solicitation agreements and confidentiality provisions: all are agreements, commonly called restrictive covenants, which are used by employers to restrain terminated employees from competing, raiding clients or employees or disclosing confidential information. In their quest to bind employees to these agreements, too often, employers use a "form" restrictive covenant for all employees regardless of the position in which the individual is employed or other circumstances surrounding their employment. Because the courts look at the circumstances of each case prior to determining whether the restrictive covenant is enforceable, an employer which uses a form covenant for all employees may find that the covenant is enforceable in some situations but not in others. Additionally, courts generally do not look upon restrictive covenants with favor. Consequently, they are strictly construed against the employer and may prove to be not binding at all despite the employee's signature on the dotted line.

    A recent issue which proved fatal to one employer's attempts to bind an employee could have easily been fixed by the inclusion in the restrictive covenant of what is called an "assignability" provision, e.g. a provision stating that the restrictive covenant may be assigned by the employer to another entity. In Hess v. Gebhard & Company, Inc., Pennsylvania's highest court said that when an employer attempts to assign an employee's restrictive covenant to another entity, then that assignment is not valid unless the employee specifically consents to be bound by the restrictive covenant with that other entity. The facts of Hess deserve some explanation.

    Hess was an insurance agent employed by Hoaster Company, a real estate and insurance agency. At the time he commenced employment with Hoaster, Hess signed a restrictive covenant restraining him from competing with Hoaster for a period of 5 years within a specific geographic territory if Hess' employment with Hoaster was terminated. Significantly, the restrictive covenant did not contain an assignability provision. Gebhard Company then purchased the insurance business of Hoaster, with Hoaster continuing to operate the remaining real estate business. As part of the purchase of insurance assets was an assignment by Hoaster to Gebhard of Hess' restrictive covenant. After being employed by Gebhard for some time, Hess left his employment with Gebhard and began soliciting business on behalf of a competitor, much to the chagrin of his prior employers. The dispute over whether Hess could compete against Gebhard finally ended up in court, making its way all the way to the Pennsylvania Supreme Court.

    The Court decided that Hess was entitled to compete and that the restrictive covenant was not enforceable. The Court's reasoning was simple: The fact that an individual may believe in one employer and, therefore, agree to be bound by a restrictive covenant for that employer does not mean that the employee would automatically be willing to suffer a restraint on his employment for the benefit of a company that the employee was not familiar with and that was not a party to the original agreement. Consequently, where a restrictive covenant which is contained in an employment agreement does not also contain an assignability provision, then that covenant is not assignable where the covenant is included in a sale of business assets.

    What employers learn from this decision is rather simple. Not only in the context of an assignability provision, but in all aspects of drafting a restrictive covenant, dot the i's and cross the t's. The key factors to drafting an enforceable restrictive covenant is in looking at the circumstances surrounding each person's employment as well as attempting to anticipate potential future scenarios that the employer might encounter. Not including provisions which are critical to ensuring that the covenant is enforceable clearly defeats what the employer was attempting to accomplish in the first place.