Recession intensifies non-compete enforcement

The recession is deepening employers' interest in non-compete agreements, which curb employees from bolting to a rival company or starting their own, according to local attorneys.

The agreements have become increasingly common over the last few years, even as Pennsylvania courts have made them tougher to enforce, attorneys said.

The motives for enforcing them are, in part, economic, said Robert Kelly, a partner in the Harrisburg law firm of Kelly Parker & Cohen.

Companies that face a stagnant or declining market want to do what they can to preserve sales, Kelly said. A non-compete agreement restricts former employees from poaching customers or eating into market share based on their inside knowledge and training.

"It does appear that employers with non-competes are paying more attention to them in the last year, year and a half, than they might have in the past," Kelly said.

Statistics are hard to come by. But using online case reports from LexisNexis, a Boston attorney found that decisions in non-compete cases have been rising nationwide.

Courts rendered about 675 decisions in 2008, according to Jay Shepherd, an attorney with Shepherd Law Group. That's down slightly from 750 in 2007, but up from roughly 500 in 2004.

"Here in Boston we're not finding that cases are down," Shepherd said. "We're getting more non-compete cases not fewer, but ... that's anecdotal."

A non-compete agreement generally prevents a former employee from working in the same industry or geographic area for a set period of time, typically one or two years. The agreement also can cover issues such as intellectual property and trade secrets.

High-level executives, sales people and professionals often are asked to sign non-compete clauses, lawyers said. But they can also crop up at other levels.

To stick, agreements need to guard the business, not punish the employee, said Joseph P. Hofmann, an attorney in the Lancaster office of Stevens & Lee. He concentrates on labor and employment law. (Read more about labor law in this week's Inside Business section.)

"You really have to think hard about what you really need protection from rather than how much pain can I inflict on this person, because that's not going to play," said Hofmann. He said he has not seen stronger interest in pursuing non-compete cases.

Because the agreements limit a person's ability to work, courts have generally been careful about enforcing them, attorneys said.

In Pennsylvania, decisions over the last 10 or 15 years have narrowed the scope of what's enforceable, said Catherine Walters, a partner in the labor, employment and employee benefits group of law firm Saul Ewing. She is based in Harrisburg.

"We're seeing more flexibility in favor of employees," Walters said.

A neighborhood diner, for example, could prevent its head cook from jumping to the diner next door, she said. But it might not be able to keep the same cook from taking a job at a fast-food chain down the street.

As a result, employers are drafting non-compete covenants more tightly around what really matters to them, Walters said.

Companies also have to be consistent in enforcing agreements, she said. They can't expect to prevail if they let some employees go and then try to restrict others who leave at a later date.

One way to draw a clear line is through nonsolicitation agreements, which simply bar former employees from calling on the employer's customers, attorneys said.

Karen Young has been recommending nonsolicitation agreements to her clients. Young, president of HR Resolutions in Lower Paxton Township, Dauphin County, acts as the human-resource officer for small businesses.

"I find the nonsolicitations easier for the everyday man or woman to understand, because what you're saying is, ‘If you leave me, you just can't go after the people that you met while you were working for me,'" Young said.

Nonsolicitation agreements also are more likely to hold up in court, said Alan Boynton, an attorney with the Harrisburg law firm of McNees Wallace & Nurick.

One issue that remains undecided by Pennsylvania courts is whether a non-compete applies in cases where an employee is laid off involuntarily, Boynton said.

In those cases, a court likely would sympathize with the employee, he said.

"Courts aren't particularly anxious to stop somebody from working, especially in this economy, where it's so difficult to get a job," he said.

Companies are equally disinterested in spending scarce dollars in an attempt to prove otherwise, he added. "This isn't the economy for that to happen."