Often, an employee will sign an employment contract that contains, among other things, a non-compete and a set term. Because the parties fail to renew the employment contract after it expires, the employee continues to work on an “at-will” basis.
Later, the employee resigns, joins a competitor and begins a solicitation campaign in violation of the expired employment contract’s non-compete. The former employer files a court action seeking to enforce the non-compete in the expired employment contract. Is the non-compete enforceable?
The Trial Court Declines to Enforce the Non-Compete in the Expired Contract
This was the question posed to the Pennsylvania Superior Court in Metalico Pittsburgh Inc. v. Douglas Newman, Ray Medred and Allegheny Raw Materials.
Douglas Newman (“Newman”) and Ray Medred (“Medred”) joined Metalico in September 2011 and signed 3-year employment contracts that contained a non-compete prohibiting them from soliciting clients and employees for a period of time after their Metalico employment ended.
In early September 2014, because their employment contracts were set to expire on September 18, Newman and Medred contacted Metalico to find out if their contracts were going to be renewed. Metalico decided not to renew; instead, the company kept them on as at-will employees and made some changes to their compensation and benefits.
One year later, Newman and Medred voluntarily resigned and immediately joined a Metalico competitor. As part of their new employment, Newman and Medred solicited Metalico customers to transfer their business and Metalico employees to resign and join them.
Metalico filed the lawsuit seeking to enforce the non-compete and enjoin Newman and Medred from any further solicitation efforts.
In response, Newman and Medred argued that (a) because the employment contracts expired on September 18, 2014, the non-compete was no longer enforceable and (b) the employment contracts were replaced with at-will employment contracts that did not include the non-compete. The trial court agreed and denied Metalico’s injunction request.
The Appellate Court Disagrees and Reverses the Trial Court’s Decision
The appellate court examined Metalico’s employment contract and initially noted that Pennsylvania law permits a non-compete to survive the end of the term of an employment agreement when the employee remains as an at-will employee. Here, because Newman and Medred received the consideration promised, the appellate court found valid the employment contract’s express provision that the non-compete survives the end of the contract. Thus, the non-compete was enforceable and applied to Newman and Medred after the end of their at-will employment.
Notably, the appellate court disagreed with the trial court’s finding the employment contracts were “replaced” with “at-will” employment contracts because Newman and Medred never disavowed or otherwise sought to have their employment contracts deemed terminated and expired.
Check Your Employment Contracts
Employers should review their employment contracts – especially ones with fixed terms – to make sure that their post-employment restrictions remain viable even after the term expires. A clever employee – like Newman and Medred – will look for ways to avoid those restrictions.
by Michael D. Lee