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Is PA Going to Join States Banning Non-Competes?


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5/14/2018
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Towards the end of last year, Pennsylvania's legislature took up arms against non-competes - and did so aggressively - with the introduction of House Bill 1938, which they have coined the "Freedom to Work Act," but is also more appropriately called by its official title, "An Act Prohibiting enforcement of covenants not to compete in employment agreements."

What Proposed House Bill 1938 Seeks to Do With Regard to Non-Competes

Here are the most relevant provisions of the proposed law:

Section 4. Prohibition. Except as provided in section 5, a covenant not to compete is illegal, unenforceable and void as a matter of law. No court may rewrite a covenant not to compete. 

Section 5. Exceptions. A covenant not to compete that satisfies any of the following shall not be subject to section 4: (1) A covenant not to compete that is reasonable and involves an owner of a business that sells the business or sells the goodwill in the business and that is reasonable. (2) A covenant not to compete that involves a dissolution or disassociation of a partnership or a limited liability company. (3) A covenant not to compete that is reasonable, in effect prior to the effective date of this section and may not be renewed. 
 
Section 6. Attorney fees and damages. An employee shall: (1) Receive an award of attorney fees after prevailing in a suit against an employer related to the enforcement of a covenant not to compete. (2) Be entitled to damages, including punitive damages, after prevailing in a suit against an employer related to the enforcement of a covenant not to compete. 
 
Section 7. Venue, personal jurisdiction and governing law. A dispute arising out of or related to a covenant not to compete involving a resident of this Commonwealth shall be: (1) Exclusively decided by a State court within this Commonwealth. (2) Governed by the laws of this Commonwealth.

Where the PA Legislature is Right - and Where it Goes Too Far

Without passing judgment on the wisdom of an outright ban on non-competes (there are reasoned arguments on both sides of this issue, and that is well beyond the scope of this blog post), I think that Pennsylvania's legislature got three (3) things right, and a few things wrong, in its proposed legislation.

First, Section 4's disallowance for "blue-penciling," or re-writing, a non-compete is a smart step towards accomplishing its goal of banning non-competes.

Second, and likewise, allowing carve-out to allow non-competes to protect the sellers of a business is a well-reasoned exception to the rule, because such a move fosters the sale of businesses, and encourages employees to be more entrepeneurial and advance their careers, while at the same time, does nothing to hamper employee mobility in the garden-variety employment context. 

Third, Section 7's provision prevents employers from simply contracting around Pennsylvania's policy determinations, as reflected in this proposed law, by dictating that all such agreements with Pennsylvania residents will be governed by Pennsylvania law and decided in Pennsylvania courts - regardless of what the employers try to put in their agreements.

On the other hand, this proposed bill does, at least in my view, get a few important things wrong, chief among them having one-sided penalties - including attorneys' fees and punitive damages - for employers that lose in litigation over these agreements. While I certainly understand the need for a strong disincentive for employers to violate the proposed statute, it still suffers from the problem that the term "prevailing party" could  be open to interpretation, in which case it would only invite more, rather than inhibit, litigation - which seems diametrically opposed to the legislature's intention.



Category: Non-Compete & Employment Agreements

Jonathan Cooper
Non-Compete, Trade Secret and School Negligence Lawyer

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