Protecting Your Business with Noncompetition Agreements

July 3, 2007

The incidents of corporate raiding and mass employee defections to competitors are on the rise as businesses scramble to find and retain high quality employees. Under any business model, it is far easier to recruit away a group of experienced employees with a "book of business" than it is for an employer to start from scratch.   Whether or not these actions are "illegal" or just aggressive competition primarily turns upon the existence of any contracts limiting competitive activities by employees and former employees.

Corporate raiding isn’t just a Wall Street phenomenon. It was recently reported that Resource Bank, a Virginia based subsidiary of Fulton Financial Corporation, was hit with a defection of nearly its entire mortgage company staff to a rival lender. The employees allegedly followed two executives who are now accused of orchestrating an employee raid. The former Resource Bank executives signed employment agreements containing restrictions on soliciting employees on behalf of a rival business. This good business practice will undoubtedly form the primary basis for legal claims by Resource Bank against its competitor.

Noncompetition Agreements are invaluable in protecting legitimate business interests provided they are carefully drafted and properly executed. Such agreement typically contain some or all of the following clauses:

  • Prohibitions on a former employee’s competition by working for or starting a competitive business.
  • Restrictions on soliciting, selling to, or providing services to customers and prospective customers of the former employer.
  • Restrictions on soliciting employees of the former employer.
  • Prohibitions on using or disclosing confidential business information of the former employer.

There are special legal requirements for noncompetition agreements under Pennsylvania law. As restrictions on free trade, these agreements must be:

  • Necessary to protect an employer’s legitimate business interest
  • Entered into at the commencement of the employment relationship or supported by "additional consideration" in the form of a promotion or payment
  • Reasonably limited in duration and geographic scope

On the other hand, prohibitions on disclosure of confidential information need not be supported by consideration or limited in duration. However, it is essential for an employer to define the scope of what is confidential by delineating the specific categories of material and taking steps to keep it from entering the public domain.