Every year, Pennsylvania’s appellate courts seem to issue a handful of decisions addressing the enforceability of non-compete agreements. However, there are relatively few court decisions addressing non-solicitation agreements. A non-solicitation agreement is the less restrictive cousin of the non-compete. Under a non-solicitation agreement, a former employee is permitted to work anywhere, including competitors of his or her former employer. A non-solicitation agreement merely prohibits a former employee from soliciting (or perhaps even contacting) the former employer’s customers, prospective customers and/or employees. In Metalico Pittsburgh, Inc. v. Newman, the Superior Court of Pennsylvania recently addressed some fundamental points regarding enforcement of these less restrictive agreements.
In Metalico, two executives of a scrap metal broker left their employer (“Metalico”) to join a competitor, Allegheny Raw Materials, Inc. (“ARM”). Upon joining Metalico, they had both signed employment agreements which included non-solicitation provisions that prevented them from soliciting any of Metalico’s suppliers for up to two years after their employment ended. Their employment agreements were each for three year terms and, once these terms expired, the agreements were not renewed. Both executives continued to work for Metalico for a period of time as “at will” employees; i.e. their salaries and bonuses were no longer contractually guaranteed.
After leaving Metalico, both executives began soliciting Metalico’s suppliers for their new employer. Metalico sued to enforce the non-solicitation provisions in the expired employment agreements. The trial court ruled for the executives and refused to enforce the non-solicitation restrictions, holding, once the employment agreements expired, they “were replaced with at-will relationships that did not include non-solicitation provisions.”
On appeal, the Superior Court of Pennsylvania reversed the trial court and enforced the non-solicitation restrictions. The Court began with the basic premise that both executives received adequate consideration for their non-solicitation covenant when they signed [their agreements] “as part of their initial employment relationship.” Citing several earlier decisions, the Court then observed that “it is possible for a non-solicitation covenant to survive the end of a term of an employment contract, when the employee stays on as an at-will employee” if the written agreement provides for this. Looking to the terms of each executive’s employment agreement, the Court then noted that the non-solicitation provision was clearly intended to be in effect during three relevant time periods: (a) during the three-year term of the employment agreement; (b) during any period of continued employment after the employment agreement expired; and (c) up to two years after the executives left Metalico’s employment.
Since the non-solicitation restrictions were supported by adequate consideration (i.e. initial employment) and were never mutually disavowed by the parties, the Superior Court held that the restrictions remained enforceable – notwithstanding the expiration of the agreements in which they appeared.
It is not uncommon for employees to continue working for a company after their written employment agreements expire. The Metalico case serves as a good lesson as to how to draft restrictive covenants that will survive the expiration of the agreement in which they appear. Another approach taken by many employers is to have employees sign two separate agreements – an employment agreement with a fixed term, and a separate restrictive covenant agreement that remains in effect for the duration of employment and for a fixed period afterward. Regardless of which approach is taken, the Metalico case demonstrates that careful drafting is the key to ensure enforceability.
