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Third Circuit Upholds “Blue Penciled” Non-Compete Agreement

Published by and on October 16, 2019

United States Court of Appeals for the Third Circuit upholds Pennsylvania District Court’s enforcement of a modified non-compete agreement blocking former employee from competing with former employer.

On September 5, 2019, the United States Court of Appeals for the Third Circuit issued an opinion in Tilden Recreational Vehicles, Inc. v. Belair, concluding that a Pennsylvania district court did not abuse its discretion in granting a preliminary injunction enforcing a modified, less-restrictive version of a non-compete agreement against the plaintiff’s former employee. Case No. 18-2737 (3d. Cir. Sept. 5, 2019) (upholding the District Court’s substantive findings but vacating the preliminary injunction based on the District Court’s failure to consider the bond requirement before issuing the preliminary injunction). Although the matter was remanded with instructions to consider an appropriate bond under federal rules, the Third Circuit’s opinion in Tilden serves as a reminder to employers of the importance of carefully drafting and enforcing non-compete agreements.

Restrictive covenants, such as non-compete and non-solicitation agreements, limit an employee’s ability to compete after ending the employment with an employer. A non-compete agreement prohibits an employee from competing with his or her former employer by providing his or her services to a competing company within a geographic area for an amount of time following termination of employment. Non-compete restrictions are often set out in an employee’s employment agreement, fringe benefits agreement, or separation agreement. Many states disfavor restrictive covenants or non-compete agreements that unreasonably restrain trade or unreasonably burden employees’ legitimate efforts to earn a livelihood. Several states, including California, Massachusetts, and Maine have laws prohibiting or restricting the use of noncompete agreements for certain employees or under certain conditions of employment.

Employers seeking to enforce such non-compete agreements against former employees must show that the restrictions are reasonably necessary to protect the employer’s legitimate interest (e.g., protection of trade secrets, confidential information, and customer goodwill), and that the restrictions imposed are reasonable in duration and geographic scope. The reasonableness and enforceability of any non-compete restriction is governed by state common law or statutory law, and review standards vary from state to state. In some states, like Pennsylvania, courts are permitted to “blue pencil” or modify non-compete restrictions that are unreasonable or overbroad as written to make them reasonable and enforceable against a former employee who is in breach of a non-compete agreement. In other states, like Virginia, non-compete agreements will be held void and unenforceable against an employee if any aspect of a non-compete restriction is found unreasonable and overbroad.

The defendant employee in Tilden signed a non-compete agreement with Tilden Recreational Vehicles, Inc. (“Tilden RV”) when he was hired as a Product Specialist selling RVs and boats in Hamburg, Pennsylvania. In the non-compete agreement, the defendant agreed he would not work in recreational vehicle sales within fifty (50) miles of any Tilden RV location for a year after his employment with Tilden RV ended. Defendant was later recruited and hired by a Tilden RV competitor to sell RVs at a location approximately ten miles from Tilden RV’s Hamburg, Pennsylvania location. After notifying the defendant that it would do so, Tilden RV sued the defendant to enforce the non-compete agreement.

Although the District Court in Tilden concluded that Tilden RV had a protectable interest in restricting the defendant’s employment, the Court “blue penciled” the non-compete agreement by reducing the scope and duration of the restrictions as written to allow the defendant to work for the competing company in a limited, non-competitive capacity. On appeal to the Third Circuit, defendant argued that the non-compete restrictions were nonetheless unreasonable and therefore unenforceable against him.

Luckily for Tilden RV, the Third Circuit agreed that the “blue penciled” non-compete restriction was indeed enforceable against the defendant employee, as it was both reasonable in geographic scope and duration, and was no more restrictive than necessary to protect Tilden RV’s legitimate business interests. Although the Third Circuit’s conclusion in Tilden regarding the enforceability of the modified non-compete was in favor of the employer, under another state’s law, an employee may not have been prohibited from competing with a former employer, no matter that he or she signed and was in breach of a non-compete agreement as written. In such a case, an employer would learn a costly lesson in drafting state compliant non-compete agreements.

Welter Insight

As mentioned above, the reasonableness and enforceability of any non-compete restriction is governed by state law, and review standards vary from state to state. Thus, it is of great importance that employers carefully draft non-compete restrictions to comply with state laws. In Tilden, the employer’s overbroad restrictions were saved by the Pennsylvania District Court’s “blue-penciling,” but not all states permit modification of non-compete restrictions. The same enforcement action in Virginia would have resulted in the invalidation of the non-compete agreement altogether. Under California law, the same non-compete agreement would be held illegal by statute from the start. With varying outcomes for the same non-compete agreement, employers must draft non-compete reviews with specificity and knowledge of state laws.

The number of states passing statutory laws prohibiting or restricting the use of non-compete restrictions is growing. California, North Dakota, and Oklahoma totally ban non-competes for employees, except under very limited circumstances. Other states have passed laws that restrict or prohibit the use of non-competes for low-wage employees or have other statutory requirements for valid non-compete agreements, including Maine, Maryland, New Hampshire, Oregon, Rhode Island, Massachusetts, and Washington State.

Employers in any state should seek counsel when drafting and enforcing non-compete agreements, particularly multi-state employers. Employers who carefully draft non-compete agreements may be able to avoid costly litigation, and better yet, protect their interests in trade secrets, confidential and proprietary information, and customer goodwill.

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