Hess v. Gebhard & Co. - 570 Pa. 148, 808 A.2d 912 (2002)

Rule:

Restrictive covenants, of which non-disclosure and non-competition covenants are the most frequently utilized, are commonly relied upon by employers to shield their protectible business interests. The non-disclosure covenant limits the dissemination of proprietary information by a former employee, while the non-competition covenant precludes the former employee from competing with his prior employer for a specified period of time and within a precise geographic area. In Pennsylvania, restrictive covenants are enforceable if they are incident to an employment relationship between the parties; the restrictions imposed by the covenant are reasonably necessary for the protection of the employer; and the restrictions imposed are reasonably limited in duration and geographic extent. Pennsylvania law permits equitable enforcement of employee covenants not to compete only so far as reasonably necessary for the protection of the employer. However, restrictive covenants are not favored in Pennsylvania and have been historically viewed as a trade restraint that prevents a former employee from earning a living.

Facts:

In April 1974, appellant W. Lawrence Hess commenced employment as an insurance agent with appellee Eugene Hoaster Company, Inc. As part of his employment, appellant executed an employment agreement in which he consented not to disclose proprietary information and covenanted not to compete with appellant within the period of five years after the termination of his employment. The covenant had no assignability provision. In July of 1996, Charles Brooks, Esq. entered into a sales agreement with appellant Gebhard & Co. Inc., to sell all the assets associated with the insurance portion of his business. Pursuant to the contract of sale, Brooks sold only the insurance portion of his business to appellee, while he retained the real estate operation. Appellee informed appellant that it had decided to eliminate his position when it officially assumed ownership. Unbeknownst to appellants, appellee began employment negotiations with a competing agency. When appellees learned about it and was soliciting his former clients, appellees threatened to sue him. Appellant sued appellees alleging intentional interference with prospective contractual relations, seeking to void the contract's covenant not to compete, and requesting damages and injunctive relief. The trial court found the covenant enforceable, but modified its terms, and awarded the employee no damages. The Pennsylvania superior court affirmed. 

Issue:

Did the superior court err in affirming the trial court’s decision finding the restrictive covenant enforceable?

Answer:

Yes.

Conclusion:

The supreme court reversed the order of the superior court. The supreme court held that a covenant not to compete in an employment contract was not assignable, absent an assignability provision in the contract, by an employer to a purchaser of the assets of the employer's business. Nor could the assignor enforce the covenant against the employee, because, as it was no longer in the insurance business, it had no protectible business interest. Moreover, the court found that no trade secrets were at stake, because the identities of potential clients were widely known and easily available.