Articles

PENNSYLVANIA BAR INSTITUTE
SEVENTH ANNUAL EMPLOYMENT LAW INSTITUTE

APRIL 2000

RESTRICTIVE COVENANTS, TRADE SECRETS, AND FIDUCIARY DUTY CLAIMS: PROTECTING BUSINESS INTERESTS WHEN AN EMPLOYEE LEAVES

Thomas D. Rees, Esquire
High Swartz LLP
40 East Airy Street
Norristown, PA 19404
610-275-0700

I. CONTRACTUAL PROTECTIONS: RESTRICTIVE COVENANTS

A. Introduction

Restrictive covenants are an employer's most important tool in preventing or deterring an ex-employee from damaging the employer's business interests through competitive activity. Properly drafted restrictive covenants are material to an employer's ability to protect customer goodwill and trade secrets. Compare Seligman and Latz of Pittsburgh, Inc. v. Vernillo, 382 Pa. 161, 114 A.2d 672 (1955) (beauty salon's restrictive covenant enforced against ex-employees who memorized customers' names, and formed new salon) with Renee Beauty Salons, Inc. v. Blose-Venable, 438 Pa. Super. 601, 652 A.2d 1345 (1995) (salon without restrictive covenant unable to enjoin competition by ex-employees who memorized customer names).

Without a restrictive covenant, an at-will employee is free to leave employment at any time, and to compete with a former employer, so long as the employee does not misuse trade secrets or confidential information, engage in fraud, solicit customers while still employed, or otherwise engage in conduct directly damaging the employer during the period of employment. The employee may even take steps to prepare to compete before leaving, e.g., by incorporating, obtaining bank financing, signing leases, or scheduling appointments with (but not actually soliciting) customers. See United Aircraft Corporation v. Boreen, 284 F. Supp. 428 (E.D. Pa. 1968), affirmed, 413 F.2d 694 (3d Cir. 1969); Spring Steels, Inc. v. Molloy, 400 Pa. 354, 162 A.2d 370 (1960); The New L&N Sales and Marketing, Inc. v. Menaged, 1998 WL 575270, *7 (E.D. Pa. 1998).

B. Types of Restrictive Covenants

1. Non-competition covenants, or "non-competes", typically prohibit an ex-employee from the following activity after employment:

a. employment or affiliation with an entity that is similar to or competitive with the employer.

b. engaging in business with a customer of the employer.

NOTE: These covenants are separate and distinct from each other. The covenant prohibiting competition per se is a general non-compete, and the prohibition against competition for customers is a specific non-compete. Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618, 136 A.2d 838 (1957). The covenant against engaging in business with customers is also separate and distinct from the non-solicitation covenant (discussed at I, B, 2 below)

In Advanced Fox Antenna, Inc. v. Csaszar, 1999 WL 54567 (E.D. Pa. 1999), the covenant restricted both affiliation with a competitor and calling on or endeavoring to sell to customers. The Court treated the two restrictions separately, enjoining the customer contact but allowing the ex-employee's new employment. See also Thermo-Guard, Inc. v. Cochran, 408 Pa. Super. 54, 596 A.2d 188 (1991).

A non-compete protecting an employee against an employer's competition is unusual; but in Matthews v. Unisource Worldwide, Inc., 748 A.2d 219 (Pa. Super. 2000), an employee sued for breach of a restrictive covenant prohibiting the ex-employer from doing business with the employee's customer accounts after the employment ended.

NOTE: Employment contracts may also prohibit the employee from competing with the employer during employment. This prohibition is a deterrent but is not essential; the employee has a common-law fiduciary duty not to compete with the employer during employment. See, e.g., SHV Coal, Inc. v. Continental Grain Co., 376 Pa. Super. 241, 545 A.2d 917 (1988), reversed in part on other grounds, 526 Pa. 489, 587 A.2d 702 (1991).

2. Customer non-solicitation covenants typically prohibit the ex-employee from soliciting (i.e., initiating any contact with) customers of the employer (see, e.g., Bell Fuel Corp. v. Cattolico, 375 Pa. Super. 238, 544 A.2d 450 (1988), appeal denied, 520 Pa. 612, 554 A.2d 505 (1989); Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Napolitano, 85 F. Supp.2d 491 (E.D. Pa. 2000)).

a. Non-solicitation covenants are limited by the reasonableness requirements that govern non-competes (Bell Fuel Corp. v. Cattolico, supra, 544 A.2d at 458). Therefore, courts may limit these covenants (e.g., to prohibit contact with only those customers with whom ex-employee did business at former employer). See Robert Half of PA, Inc. v. Feight, 48 Pa. D. & C.4^th 129 (C.C.P. Philadelphia Co. 2000).

b. A covenant that an ex-employee may not "solicit, divert, or take away" customers allows an ex-employee to accept customers who seek out the ex-employee. Harry Blackwood, Inc. v. Caputo, 290 Pa. Super. 140, 434 A.2d 169 (1981).

3. Employee non-solicitation covenants or "anti-piracy" covenants prohibit employees from soliciting other employees to leave and join a new organization. See Starr and Lippner, "Employee Piracy", National Law Journal, Nov. 8, 1999. Although no Pennsylvania cases appear to address the reasonableness of anti-piracy agreements, Pennsylvania courts have strained not to find violations of such agreements. See, e.g., Diversey Lever, Inc. v. Hammond, 1997 WL 28711, *23 (E.D. Pa. 1997), aff'd, 116 F.3d 467 (3d Cir. 1997).

4. Confidentiality/non-disclosure agreements prohibit the employee from disclosing or using confidential, customer, or trade secret information or records or property that belong to the employer, other than for the employer's benefit. These covenants may also require the employee to return all property to the employer upon termination. These covenants often contain a broad definition of proprietary information.

a. The common law of trade secrets, unfair competition, or agency subjects the employee to these restrictions, even in the absence of a confidentiality agreement. The agreement provides evidence of the confidentiality of the information covered in the agreement. See Bell Fuel Corp. v. Cattolico, supra, 544 A.2d 450, 458; Morgan's Home Equipment Corp. v. Martucci, 390 Pa. 618, 136 A.2d 838 (1957).

b. Confidentiality agreements are not limited by the reasonableness requirements that govern non-competes or non-solicitation agreements. See Bell Fuel Corp. v. Cattolico, supra.

c. Confidentiality agreements are enforceable even where an accompanying non-compete covenant is not enforceable . See, e.g., Morgan's Home Equipment Corp. v. Martucci, supra; Insulation Corp. of America v. Brobston, 446 Pa. Super. 520, 667 A.2d 729 (1995).

5. Assignments of property rights may include the following:

a. Assignments of intellectual property rights, in which the employee assigns to the employer all rights to own, patent, trademark, or copyright any items developed by the employee during (and sometimes after) employment.

(1) Such an assignment is necessary to transfer patent rights to an employer, except where the employee is hired to invent an item or to solve a particular problem. See University Patents, Inc. v. Kligman, 762 F. Supp. 1212, 1219 (E.D. Pa. 1991). In Brosso v. Devices for Vascular Intervention, Inc., 879 F. Supp. 473 (E.D. Pa. 1995) aff'd, 74 F.3d 1225 (3d Cir. 1995), the Court held that an employee could not bring an action for wrongful discharge after being fired for refusal to assign ownership of an invention to an employer.

(2) For copyrightable material, an assignment clause is advisable, although the employer will have the right to copyright materials developed by the employee during employment under the "work made for hire" doctrine. Community for Creative Non-violence v. Reid, 490 U.S. 730, 109 S.Ct. 2166 (1989).

b. Assignment of the right to "own" (i.e., to restrict the employee's contact with) the employee's customer contacts brought from a prior employer. See, e.g., Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Napolitano, 85 F. Supp.2d 491 (E.D. Pa. 2000).

C. Relationship of Restrictive Covenants to Employment Tenure

1. Employment at will rule

a. The signature of a restrictive covenant at the outset of employment does not, by itself, provide consideration to override the employment at will presumption. See Shriver v. Cichelli, 1992 WL 350226 (E.D. Pa. 1992)

b. An at-will employee discharged for refusing to sign a non-compete or non-solicitation agreement would presumably have no claim for wrongful discharge under Pennsylvania law. See Brosso v. Devices for Vascular Intervention, Inc., supra.

c. An employee forced to sign a restrictive covenant or lose a job may defend against enforcement of the restrictive covenant on the basis of lack of consideration or duress. See In re Verdi, 244 B.R. 314, 321 (Bankr. E.D. Pa. 2000).

2. Discrimination claims - Refusal to sign a restrictive covenant constitutes a legitimate, non-discriminatory reason for an employee's discharge. See O'Regan v. Arbitration Forums, Inc., 1999 WL 731775, *4 (N.D. Ill. 1999).

3. Unemployment compensation claims - An employee discharged for refusing to sign a confidentiality agreement was held to have left work voluntarily and to be ineligible for unemployment compensation in Shrum v. Commonwealth, Unemployment Compensation Board of Review, 690 A.2d 796 (Pa. Cmwlth. 1997).

D. Elements of a Typical Restrictive Covenant

1. Description of circumstances of entry - This provision should set forth the relationship between the parties and the consideration for entry into the restrictive covenant (e.g., commencement of a job, increase in compensation, etc.).

2. Description of restrictions - See I, B, above.

3. Duration of restrictions

a. A restrictive covenant will typically prohibit certain competitive activities set forth in II, B, 1-3 for a period of time after the employee leaves the employer.

b. The durational restriction may be tied to activities that took place within a stated period of time before departure (e.g., a one-year restriction on doing business with any customer who transacted business with the employer within six months before the employee's departure). See, e.g., Minnesota Mining and Manufacturing Co. v. Gessner, 78 F. Supp. 390, 391 (E.D. Pa. 1999); Diversey Lever, Inc. v. Hammond, 1997 WL 28711, *5 (E.D. Pa. 1997), aff'd, 116 F.3d 467 (3d Cir. 1997); M. S. Jacobs & Associates, Inc. v. Duffley, 452 Pa. 143, 303 A.2d 921 (1973).

c. The covenant may contain an "elastic" provision extending the covenant's prohibitions in the event of violations by the employee. A typical "elastic" provision will postpone commencement of any restrictions until either the employee ceases all violations or a court enforces the restrictions. See, e.g., Worldwide Auditing Services, Inc. v. Richter, 402 Pa. Super. 584, 587 A.2d 772, 775 (1991); Diversey Lever, Inc. v. Hammond, supra. An "elastic" provision protects the employer against expiration of the covenant during the pendency of litigation, an event that will preclude enforcement of even a valid restrictive covenant. See, e.g., Hayes v. Altman, 438 Pa. 451, 266 A.2d 269 (1970).

d. DRAFTING NOTE: The triggering event for the durational restriction should be the end of employment, not the end of the contract, since the contract may expire before the employee's employment. See., e.g., Boyce v. Smith-Edwards-Dunlap Co., 398 Pa. Super. 345, 580 A.2d 1382 (1990); Geisinger Clinic v. DiCuccio, 414 Pa. Super. 85, 606 A.2d 509 (1992). The covenant should also explicitly survive termination of the contract and the employee's employment.

4. Geographic restrictions typically prevent activities within a specified geographic area (e.g., within a 100-mile radius of Philadelphia, or within a 50-mile radius of any of the employer's offices).

5. "Safety net" provisions

a. Payments to the ex-employee - Certain large corporations' restrictive covenants obligate the employer to pay the employee for part or all of the restrictive period if the covenant precludes the employee from obtaining comparable employment. See, e.g., Minnesota Mining and Manufacturing Co. v. Gessner, 78 F. Supp. 390, 391 (E.D. Pa. 1999); Campbell Soup Co. v. Desatnick, 58 F. Supp.2d 477, 482 (D. N.J. 1999).

b. Exemptions for layoff - In Robert Clifton Associates, Inc. v. O'Connor, 338 Pa. Super. 246, 487 A.2d 947 (1985), the non-compete exempted the employee from the restrictions upon discharge for lack of work.

c. Choice-of-law clause - See, e.g., BABN Technologies Corp. v. Bruno, 1998 WL 720171 (E.D. Pa. 1998), recognizing the effect of a choice-of-law clause on the court's power to modify a restrictive covenant.

d. Forum selection clause - Courts will uphold a clause establishing Pennsylvania as a forum unless it is clearly unjust, or a product of fraud or coercion. See BABN Technologies Corp. v. Bruno, 25 F. Supp.2d 593 (E.D. Pa. 1998); Behavioral Health Industry News, Inc. v. Lutz, 24 F. Supp.2d 401 (M.D. Pa. 1998); compare Dentsply International, Inc. v. Benton, 965 F. Supp. 574 (M.D. Pa. 1997) (invalidating forum selection clause).

NOTE: The strictures of the federal and state venue requirements warrant inclusion of a forum selection clause in a restrictive covenant. Pa. R.C.P. 1503 is particularly strict, requiring an equity action to be brought in the county where the defendant or a principal defendant may be served, or where property that is the subject matter of the action is located.

e. Consent to (or waiver of objection to) personal jurisdiction - See, e.g., Telamerica Media, Inc. v. AMN Television Marketing, 1999 WL 1244423 (E.D. Pa. 1999); BABN Technologies Corp. v. Bruno, supra, (E.D. Pa. 1998); Behavioral Health Industry News, Inc. v. Lutz, supra.

NOTE: This clause is important for the same reason that the forum selection clause is important. It is advisable to include a consent both to jurisdiction in specified courts and to a specified manner of service of process.

f. Consent to expedited discovery

g. Carve-out from arbitration - Although the Third Circuit and Pennsylvania appellate courts will grant preliminary injunctive relief pending arbitration without contractual authorization (Merrill, Lynch, Pierce, Fenner and Smith, Inc. v. Rodger, 75 F. Supp.2d 375 (M.D. Pa. 1999)), it will expedite enforcement of a restrictive covenant to allow a proceeding for an injunction against an ex-employee as an exception to an employment contract's arbitration clause.

h. Forfeiture / liquidated damages clauses - See Bettinger v. Carl Berke Association, Inc., 455 Pa. 100, 314 A.2d 296 (1974); DeMuth v. Miller, 438 Pa. Super. 437, 652 A.2d 891 (1995); Geisinger Clinic v. DiCuccio, 414 Pa. Super. 85, 606 A.2d 509 (1992).

i. Non-waiver clauses, authorizing the employer to enforce restrictions even if the employer has earlier declined to do so - See Graphic Management Associates, Inc. v. Hatt, 1998 WL 159035, *18 (E.D. Pa. 1998).

j. Assignments have been particularly important since All-Pak, Inc. v. Johnston, 694 A.2d 347 (Pa. Super. 1997), in which the Pennsylvania Superior Court refused to enforce a restrictive covenant that lacked an assignment clause; the party seeking enforcement was the successor by merger to the employer that had entered into the covenant. See also Fonda Group, Inc. v. Erving Industries, Inc., 897 F. Supp. 230 (E. D. Pa. 1995); compare Hess v. Gebhard & Co., 2001 Pa. Super. 65, 2001 WL 204253 (Pa. Super.), in which the assignor of an insurance business enforced a restrictive covenant despite the absence of an assignment clause, because the assignor continued to receive revenue from the assigned insurance business. For complete assignability, the restrictive covenant should explicitly bind and benefit successors and assigns, and any purchase or sale agreement should explicitly mention assignment of the restrictive covenants (see Villanova Health Corp. v. Hawrylak, 1998 WL 961374 (E.D. Pa. 1998)).

E. Requirements for an Enforceable Restrictive Covenant

Because restrictive covenants (particularly non-compete covenants) are partial restraints on the free exercise of trade, courts will strictly construe these covenants, particularly in the context of an employment agreement. See Hayes v. Altman, 438 Pa. 451, 454, 266 A.2d 269 (1970). Courts are understandably reluctant to prevent an individual from earning a living. See Insulation Corp. of America v. Brobston, 446 Pa. Super. 520, 667 A.2d 729, 733 (1995). The following requirements are essential to enforcement:

1. The covenant must be ancillary to employment, sale of a business, or an otherwise enforceable agreement

a. Ancillary to employment

(1) The following non-compete covenants have been held to be ancillary to employment:

(a) a covenant discussed with the employee before any offer of employment, and signed within ten days after starting employment (National Business Services, Inc. v. Wright, 2 F. Supp.2d 701 (E.D. Pa. 1998));

(b) a covenant submitted to the employee as part of a comprehensive employment agreement two days after starting employment (Beneficial Finance Co. of Lebanon v. Becker, 422 Pa. 531, 222 A.2d 873 (1966));

(c) an oral covenant agreed to at the outset of employment, although the written contract was executed later (Records Center, Inc. v. Comprehensive Management, Inc., 363 Pa. Super. 79, 525 A.2d 433 (1987)).

(2) The "ancillary" rule is different for unionized employees; under federal common law, a covenant in a pre-existing collective bargaining agreement is "ancillary" to employment for employees who begin work subsequently (Prudential Insurance Co. of America v. Stella, 994 F. Supp. 308 (E.D. Pa. 1998)).

(3) The following covenants were held not to be ancillary to employment, and therefore required additional consideration for enforceability:

(a) a covenant first disclosed on the first day of work, rather than at the earlier date when the parties agreed to other employment terms (George W. Kistler, Inc. v. O'Brien, 464 Pa. 475, 347 A.2d 311 (1975));

(b) a covenant required after the employee had worked for several weeks (Ruffing v. 84 Lumber Co., 410 Pa. Super. 459, 600 A.2d 545 (1991));

(c) a covenant contained in an employer's contract with a pension administrator (Bilec v. Auburn & Associates, Inc., Pension Trust, 403 Pa. Super. 176, 588 A.2d 538 (1991)).

b. Ancillary to an independent contractor arrangement - Courts will treat a restrictive covenant as ancillary to an independent contractor agreement if the parties' relationship is similar to an employment relationship. See, e.g., Quaker Engine Rebuilders, Inc. v. Toscano, 369 Pa. Super. 573, 535 A.2d 1083, 1087 (1987).

c. Ancillary to a sale of business - See Alabama Binder and Chemical Corp. v. Pennsylvania Industrial Chemical Corp., 410 Pa. 214, 189 A.2d 180 (1963); Scobell, Inc. v. Schade, 455 Pa. Super. 414, 688 A.2d 715 (1997); Worldwide Auditing Services, Inc. v. Richter, 402 Pa. Super. 584, 587 A.2d 772 (1991); Alexander & Alexander, Inc. v. Drayton, 378 F. Supp. 824 (E.D. Pa. 1974), aff'd, 505 F.2d 729 (3d Cir. 1974).

d. Ancillary to a franchisor/franchisee relationship - Piercing Pagoda, Inc. v. Hoffner, 465 Pa. 500, 351 A.2d 207 (1976); Novus Franchising, Inc. v. Taylor, 795 F. Supp. 122 (M.D. Pa. 1992).

e. Ancillary to a distributorship - Vector Security, Inc. v. Stewart, 88 F. Supp.2d 395 (E.D. Pa. 2000).

f. Ancillary to an insurance underwriter/agent relationship - Volunteer Fireman's Insurance Services, Inc. v. Cigna Property and Casualty Insurance Agency, 693 A.2d 1330 (Pa. Super. 1997).

g. Ancillary to a joint venture / development agreement - ProtoComm Corp. v. Fluent, Inc., 1995 WL 3671, *11 (E.D. Pa. 1995).

h. Ancillary to a license agreement - QVC, Inc. v. Tauman, 1998 WL 156982 (E.D. Pa. 1998).

2. The covenant must be supported by consideration, which may include either the extension of an initial offer of employment (even at-will employment) or a beneficial change in the terms and conditions of employment.

a. The following have been found to constitute adequate consideration:

(1) the initial entry into an employment agreement (Records Center, Inc. v. Comprehensive Management, Inc., 363 Pa. Super. 579, 525 A.2d 433 (1987));

(2) the commencement of employment (National Business Services, Inc. v. Wright, 2 F. Supp.2d 701 (E. D. Pa. 1998));

(3) the change of an employee's tenure from at-will to a specific term (In re Quaker Distributors, Inc., 1995 WL 71410 (Bankr. E.D. Pa. 1995));

(4) the conversion from provisional employment to regular employment (Modern Laundry and Dry Cleaning Co. v. Farrer, 370 Pa. Super. 288, 536 A.2d 409 (1988));

(5) an agreement to pay commissions (M. S. Jacobs & Associates, Inc. v. Duffley, 452 Pa. 143, 303 A.2d 921 (1973));

(6) a promotion and eligibility for profit sharing (Jacobson & Co. v. International Environment Corp., 427 Pa. 439, 235 A.2d 612 (1967));

(7) a payment of $5,493 (Graphic Management Associates, Inc. v. Hatt, 1998 WL 159035 (E.D. Pa. 1998));

(8) payment of $100, a promise of two weeks' notice before termination, two weeks' severance pay, and increased benefits and reimbursements (Davis and Warde, Inc. v. Tripodi, 420 Pa. Super. 450, 616 A.2d 1384 (1992));

(9) reduction in scope of a restrictive covenant, provision for pre-discharge notice, and disability benefits (Gordon Wahls, Inc. v. Linde, 306 Pa. Super. 64, 452 A.2d 4 (1982));

(10) issuance of stock or rights to stock (Wainwright's Travel Service, Inc. v. Schmolk, 347 Pa. Super. 199, 500 A.2d 476 (1985); Campbell Soup Co. v. Desatnick, 58 F. Supp.2d 477 (D. N.J. 1999) (New Jersey law); International Paper Co. v. Suwyn, 951 F. Supp. 445 (S.D. N.Y. 1997)(New York law)).

b. The following items have been held not to constitute consideration:

(1) commencement of employment under an earlier agreement, plus one dollar (George W. Kistler, Inc. v. O'Brien, 464 Pa. 475, 347 A.2d 311 (1975));

(2) threat of loss of employment upon refusal to sign a restriction (In re Verdi, 244 B.R. 314 (Bankr. E.D. Pa. 2000));

(3) mere continuation of employment, even at-will employment (National Risk Management, Inc. v. Bramwell, 819 F. Supp. 417 (E.D. Pa. 1993)); compare New York law, which appears to hold that mere continuation of at-will employment with possibility of stock options is adequate consideration (International Paper Co. v. Suwyn, supra);

(4) Conversion from an oral to written employment contract without any change in terms of employment (Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279 (1974); Capital Bakers, Inc. v. Townsend, 426 Pa. 188, 231 A.2d 292 (1967) (enforcing earlier restrictive covenant, which was supported by consideration));

(5) a regular, scheduled salary increase (Gagliardi Brothers, Inc. v. Caputo, 538 F. Supp. 525 (E.D. Pa. 1982));

(6) agreement to provide notice of termination (Okidata, Inc. v. American Trade Services, Inc., 1998 WL 306534 (E.D. Pa. 1998));

(7) the payment of $1,000 (without more) (Kramer v. Robec, Inc., 824 F. Supp. 508 (E.D. Pa. 1992)).

(1) the employer's customer goodwill (Sidco Paper Co. v. Aaron, 465 Pa. 586, 591-593, 351 A.2d 250, 252-253 (1976)); or

(2) the employer's trade secrets or confidential business information (Kramer v. Robec, Inc., 824 F. Supp. 508 (E.D. Pa. 1992); National Business Systems, Inc. v. Wright, 2 F. Supp.2d 701 (E.D. Pa. 1998)); or

(3) the employer's investment in specialized training for the employee.

b. On occasion, Pennsylvania courts will examine the scope of the prohibited activities in considering whether or not a covenant is reasonably necessary to protect the employer's legitimate interests. See e.g., Boldt Machinery & Tools, Inc. v. Wallace, 469 Pa. 504, 512 n. 4, 366 A.2d 902, 906 n. 4 (1976); Thermo-Guard, Inc. v. Cochran, 408 Pa. Super. 54, 596 A.2d 188 (1991); In re Monaghan, 141 B.R. 80, 84 (Bankr. E.D. Pa. 1992); Advanced Fox Antenna, Inc. v. Csaszar, 1999 WL 54567 (E.D. Pa. 1999).

c. Courts refused to enforce the following covenants as not reasonably necessary to protect an employer's interests:

(1) a covenant with no geographic or time limitation (Reading Aviation Services, Inc. v. Bertolet, 454 Pa. 488, 311 A.2d 628 (1973); Bilec v. Auburn & Associates, Inc. Pension Trust, 403 Pa. Super. 176, 588 A.2d 538 (1991));

(2) a covenant prohibiting an employee from working for any other employer for three years, without geographic limitations (In re Monaghan, 141 B.R. 80, 84 (Bankr. E.D. Pa. 1992));

NOTE: Reasonableness of a covenant is at issue only in an action for injunctive relief to enforce the covenant; reasonableness is not at issue in an action for damages for breach of the covenant. Boyce v. Smith-Edwards-Dunlap Co., 398 Pa. Super. 345, 580 A.2d 1382 (1990).

4. The covenant must be reasonable in duration - In general, courts will enforce a non-compete or non-solicitation covenant for only so long as it is necessary for the employer to hire and train a new person to replace the departing employee, and to restore the employer's customer relations and goodwill. See Robert Clifton Associates, Inc. v. O'Connor, 338 Pa. Super. 246, 487 A.2d 947 (1985). In industries involving frequent client contact, the new employee generally needs less time to demonstrate effectiveness. Boldt Machinery & Tools, Inc. v. Wallace, 469 Pa. 504, 366 A.2d 902, 907 (1976). In most cases, a one-year restriction will be upheld as reasonable under Pennsylvania law. National Business Services, Inc. v. Wright, 2 F. Supp.2d 701 (E.D. Pa. 1988).

a. The following limitations have been held reasonable:

(1) ten years, in the sale of a business (Westec Security Services, Inc. v. Westinghouse Electric Corp., 538 F. Supp. 108 (E.D. Pa. 1982));

(2) five years, in the sale of a business (Alabama Binder & Chemical Corp. v. Pennsylvania Industrial Chemical Corp., 410 Pa. 214, 189 A.2d 180, 181 (1963));

(3) five years, for employees of a modular home manufacturer (Barb-Lee Mobile Frame Co. v. Hoot, 416 Pa. 222, 206 A.2d 59 (1965)); and for a salesman for a machinery manufacturer (Boldt Machinery and Tools, Inc. v. Wallace, 469 Pa. 504, 366 A.2d 902 (1976)).

NOTE: Five years is probably the maximum allowable length for a restrictive covenant in an employment agreement in Pennsylvania.

(4) three years, limited to actual sales territory, for an industrial device salesman (John G. Bryant Co. v. Sling Testing & Repair, Inc., 471 Pa. 1, 369 A.2d 1164 (1977)); and for an insurance agent (Harry Blackwood, Inc. v. Caputo, 290 Pa. Super. 140, 434 A.2d 169 (1981) (reduced from five years)).

(5) two years, in the following circumstances:

(a) reduced from ten years, and limited to the Philadelphia area, for an insurance agent on sale of a business (Alexander & Alexander, Inc. v. Drayton, 378 F. Supp. 824 (E.D. Pa. 1974), aff'd, 505 F.2d 729 (3d Cir. 1974));

(b) reduced from five years, for an insurance salesman (Hess v. Gebhard & Co., Inc., 2001 Pa. Super. 65, 2001 WL 204253 (Pa. Super.));

(c) reduced from three years, for a paper salesman (Sidco Paper Co. v. Aaron, 465 Pa. 586, 351 A.2d 250 (1976));

(d) reduced from three years, for a computer network developer (Kramer v. Robec, Inc., 824 F. Supp. 508 (E.D. Pa. 1992)).

(6) one year for an internet sales manager (National Business Services, Inc. v. Wright, 2 F. Supp.2d 701 (E.D. Pa. 1998)); for printing company salespersons (Davis and Warde, Inc. v. Tripodi, 420 Pa. Super. 450, 616 A.2d 1384 (1992)); and for a chemical salesman, limited to salesman's territory (Plunkett Chemical Co. v. Reeve, 373 Pa. 513, 95 A.2d 925 (1953)).