Drafting and Litigating Restrictive Covenants in the Lehigh Valley October 3, 2016 Presented by Loren L. Speziale, Esq. Kimberly A. Spotts-Kimmel, Esq. Zachary R. Fowler, Esq. w w w. G r o s s M c G i n l e y. c o m

The Non-Compete Agreement • Pennsylvania Courts will enforce, but generally disfavor, non-compete restrictions. – Limits an individual’s ability to earn a living and change jobs.

The Non-Compete Agreement Standard under Pennsylvania law: A non-competition provision is enforceable if: 1. The non-compete is related to the employment relationship between the parties and 2. The restrictions are (a) reasonably necessary for the protection of the employer and (b) reasonably limited in duration and geographic scope.

Employer’s Legitimate Business Interest • Define the employer • What are the legitimate business interests of the employer? – Trade secrets – Confidential and proprietary information – Customer good will – Employee’s special training and skills – Employee’s unique or extraordinary skills

Adequate Consideration • What is Consideration? – Money – Benefits – New Position

• New employment = adequate legal consideration • After the start of employment = requires additional consideration

Prohibited Activity • Provide reasonably detailed description of the business • Identify the post-employment activities to be restricted. – – – – – –

Entering into relationship with a competitor Soliciting customers Interfering with vendors Hiring employees Social media restrictions Prohibit disparagement

Geographic Scope or Business Parameters • Geographic limitation should correlate with the legitimate business needs of the employer and be reasonable in scope. • Where is the employer located? Where does (or did) the employee work for the employer? • E-commerce versus brick and mortar location

Duration Restriction • When does the restriction begin and when will it end? • How long does it take the employer to develop a client relationship? How long is the confidential or proprietary information of the employer valuable? • Regularly uphold one to three-year restrictions

Basis for Termination • Voluntary versus Involuntary

Changing Trends • The law on restrictive covenants is state specific. • Non-competition agreements are prohibited or limited by statute in some states. • White House recently released a report on non-compete provisions. • New York Attorney General is targeting noncompete agreements impacting rank-and file workers.

Intellectual Property and Publicity Concerns in Employment Law

Top 4 Intellectual Property Concerns for Employers 1. Ensuring the employer owns employeecreated IP 2. Protecting the employer’s IP 3. Avoiding misappropriation of third party IP 4. Avoiding misappropriation claims by employees for use of their name, image, and likeness

Ensuring Ownership of Employee-Created IP • Inventory IP rights and decide which to protect – Copyrights – Patents – Trade Secrets – Trademarks and Service Marks – Ideas

Ensuring IP Ownership COPYRIGHTS • Presumed the author/creator owns the copyright to the work except under a few limited exceptions • “Work for Hire” automatically grants employer–not the employee–copyright ownership for works created by employees during the course and scope of employment

Ensuring IP Ownership • Work for Hire does NOT apply to contractors • To own works created by contractors: – Work falls in 1 of 9 categories AND there is a written work for hire agreement, OR – Contractor executes a copyright assignment

• While a Work for Hire Agreement is not necessary for employees, in many circumstances that may be the best practice for the employer

Ensuring IP Ownership PATENTS • Presumed that the individual inventor NOT the employer owns the invention – To secure ownership, employee must execute an Invention Assignment Agreement that includes: • Disclosure language • Power of Attorney • Holdover Clause

Ensuring IP Ownership TRADE SECRETS AND IDEAS • Defend Trade Secrets Act (DTSA) signed into law in May of 2016 – Creates federal private right of action for the first time for trade secrets related to a product or service used in or intended for use in “interstate commerce” – No preemption by state law – Allows ex parte seizure authorization under certain circumstances – Greater protections for trade secrets in litigation – Addresses digital issues and trade secret protections – Allows employer to recover attorneys’ fees and obtain exemplary damages – Increased criminal penalties

• Protection against employees exists even without a non-compete; however, to recover attorneys’ fees and seek exemplary damages, employer must provide employees with a whistleblower exemption notice in any agreement

Ensuring IP Ownership TRADE SECRETS AND IDEAS • Employer’s rights subject to state law • Best for employer to modify varying rights under state law with a contract – Non-Disclosure and Confidentiality Agreement – Assignment of Inventions and Works/Work for Hire Agreement

Preventing Misappropriation & Infringement of Employer’s IP • • • • •

IP educational programs Written agreements with specific IP covenants Employee manuals and policies Exit interview Develop specific strategies for trade secrets

Preventing Misappropriation & Infringement of 3rd Party Works • Discuss risks of hiring a competitor’s employee • Avoid infringement and theft – Educate – Monitor works to confirm they are original or, if using 3rd party works, analyze whether or not permission for use is required under applicable IP law

Publicity Rights & Endorsements • Use of employee’s image and likeness • Privacy rights and potential claims – Public disclosure of private and embarrassing facts – False light – Intrusion of solitude – Misappropriation

• Publicity Release • Employee Endorsements

Commencing Litigation • Complaint and civil cover sheet – All possible claims, including breach of contract, intentional and/or tortious interference with business relationships or contracts, conversion, misappropriation of trade secrets, etc. – Monetary damages as well as equitable relief such as preliminary and permanent injunctions

Commencing Litigation • Petition for Preliminary Injunction - At a minimum, must allege sufficient facts to show: – Petitioner is likely to prevail on the merits of the underlying Complaint; – Relief is necessary to prevent immediate and irreparable harm that cannot be adequately compensated by money damages – Greater injury will occur from refusing to grant the injunction than from granting it; – The injunction will restore the parties to their status quo as it existed before the alleged wrongful conduct; – The injunction is reasonably suited to abate the offending activity; and – The public interest will not be harmed if the injunction is granted.

Commencing Litigation • Rule Returnable – Discuss process of getting an emergency hearing versus non-emergency petition

• Proposed Order • Brief in Support of Petition for Preliminary Injunction depending upon the circumstances and local rules

Breach of Restrictive Covenant Claim • At a minimum, a Complaint must allege and a plaintiff must prove that the restrictive covenant: – Was incident to an employment relationship between the parties and founded upon a sufficient consideration; – The restrictions imposed by the covenant must be reasonably necessary for the protection of the employer; and – The restrictions must be reasonably limited in duration and geographic scope

Breach of Restrictive Covenant Elements 1. Restrictive Covenant Incident to an Employment Relationship Between the Parties and Founded Upon a Sufficient Consideration 2. Restrictions Imposed by the Restrictive Covenant Are Reasonably Necessary for the Protection of the Employer 3. Restrictions Imposed by Restrictive Covenant Are Reasonable in Duration and Geographic Scope

Element One: Sufficient Consideration • Pennsylvania courts have historically held that a restrictive covenant is incident to employment and founded upon sufficient consideration when the restrictive covenant is signed at the beginning of an employment relationship. (Holding that the job itself is consideration for the covenant not to compete when contained in the initial contract of employment.) • Where the restrictive covenant is signed long after the beginning of employment, it may be unenforceable for lack of consideration.

Element One: Sufficient Consideration • Consideration must be more than trivial or mere recital. Trivial consideration or mere recitals are insufficient. • It is not sufficient for a restrictive covenant to merely recite that the parties intend to be legally bound; there has to be real, tangible, and valuable consideration given contemporaneously to the signing of the restrictive covenant.

Element Two: Reasonably Necessary • Pennsylvania courts will only enforce a covenant not to compete if it is “reasonably necessary” for the protection of the employer. • Pennsylvania cases have recognized that trade secrets, customer goodwill and specialized training and skills acquired from the employer are legitimate protectable interests that can support a restrictive covenant.

Element Two: Reasonably Necessary • “In essence, the court must examine and balance the employer's legitimate business interest, the ‘individual's right to work, the public's right to unrestrained competition, and the right to contract ... in determining whether to enforce a restrictive covenant.’” • As a general rule, courts are less inclined to enforce a restrictive covenant where the employer terminates the employee, and the employee is unable to seek meaningful employment because of the restrictive covenant.

Element Three: Reasonable Duration & Geographic Scope • Blanket prohibition against any former employee from working in any capacity for any company will be invalid. • Pennsylvania has consistently held that a 30 mile to 50 mile restriction is reasonable. • Two-year to five-year restrictions also found to be reasonable.

Litigation Challenges • Given emergent nature of preliminary injunction, not enough time to fully develop all facts that meet each necessary element, especially with respect to harm suffered. – At a minimum, you need all contracts upon which you base your petition; – All witnesses that can authenticate the contracts; – All witnesses that can testify as to the employee’s breach of a restrictive covenant; – Any witnesses demonstrating an effort to compete, i.e., soliciting clients, using proprietary and confidential information, etc. – You can request pre-hearing discovery in your Rule Returnable, but that does not obviate concerns in an emergency setting – Another way of obviating this concern is to include language in the restrictive covenant that the employee acknowledges that a breach will cause and be deemed to cause “irreparable harm for which monetary damages will be inadequate and hard to calculate.”

Questions? Loren L. Speziale, Esq. [email protected]

Kimberly A. Spotts-Kimmel, Esq. [email protected]

Gross McGinley, LLP 33 S Seventh Street PO Box 4060 Allentown, PA 18105-4060 P: 610.820.5450

Zachary R. Fowler, Esq. [email protected] w w w. G r o s s M c G i n l e y. c o m