PA Court: Noncompete Only Starts to Run from Injunction
This is HUGE.
In decision issued just last month in Tyco Fire Products v. Fuchs, a Pennsylvania appeals court upheld a trial court's finding that the two-year clock on the defendant's agreement not to compete with Tyco (defendant's former employer) didn't run from the time he left the company; rather, that two-year period would only start to run from the time the court issued an injunction against him - which was almost 11 months later.
In other words, the Court - on its own initiative - tolled, and extended the defendant's non-compete agreement by approximatley 45% - even though Tyco apparently didn't include any such provision in the underlying agreement.
For our purposes, the specific facts in this case aren't particularly critical; it's enough to know that the Court found Fuchs had breached his non-compete by working for a direct competitor of Tyco, and then impermissibly contacting Tyco's customers, in violation of his restrictive covenant.
The Court's Rationale for Extending Fuchs's Non-Compete
Following the trial court's ruling that it would calculate the two years for Fuchs's non-compete beginning from the time of its order (which, as noted above, wasn't issued until nearly 11 months after he left Tyco's employ), Fuchs - understandbly - appealed the order, arguing that by extending his non-compete beyond what was agreed to in his employment contract with Tyco, the trial court had abused its discretion.
The appeals court didn't buy his argument.
Instead, the appellate court reasoned as follows:
"Appellant claims that the trial court abused its discretion by ordering that the periods of restriction imposed by the injunction run from the date of the order, rather than from the date of Appellant’s resignation. Again, we deem Appellant’s claim to be without merit. The trial court’s actions were entirely appropriate, considering Appellant failed to abide by the terms of the non-compete agreements after his resignation from TYCO.
"Although not binding on this Court, we are persuaded by Jackson Hewitt Inc. v. Childress, 2008 WL 834386, at *10-11 (D.N.J. March 27, 2008), in which a former franchisee was enjoined from competing with the former franchisor for a period of twenty-four (24) months, beginning from the date of the former franchisee’s compliance with the non-compete covenant, rather than the date that it abandoned the franchise. The Jackson Hewitt court reasoned that the extension of the restrictive period was justified, as the defendant would otherwise “wrongfully benefit from his refusal to comply with his contractual obligations.”
In other words, since the employer had bargained to receive two years' worth of non-competition in its agreement with its employee, the only way to assure that they would receive that benefit is by having the clock start to run from the date of the injunction.
Why This is, in My View, a Very Bad Decision
One of the fundamental principles of business, litigation and the employment landscape is the ability to accurately assess risk. If courts follow the rationale of the Jackson Hewitt court, employees - and more importantly, prospective employers - will be severely hampered in their ability to build winning teams and enhanced services and products because they will be held hostage to old, otherwise stale restrictive covenants. Indeed, under this holding, if a former employer only "wakes up" five years down the line, there is nothing to prevent him from pursuing a long-departed employee for violating a non-compete years earlier.
As a result, by leaving the length of a non-compete indeterminate, this decision will lead to greater uncertainty, and therefore tend to foster far more litigation.
In short, while at first blush this seems to be a big win for business, in the intermediate and long term, it appears very bad for business.
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