Non-Compete Agreements: When Can They Be Enforced Against Advisors?

Brian J. Sommer

Although departing financial advisors who comply with the Protocol for Broker Recruiting (the "Protocol") are, generally speaking, free to solicit customers that they serviced at their former firms after they join their new firms regardless of any non-compete agreement they may have signed with their former employer, rightly or wrongly they may nevertheless find themselves having to defend a lawsuit alleging that they have breached any such agreement if there is any question regarding the departing advisor soliciting customers to move their accounts before he or she has left their former firm.

Under such circumstances, the departing advisor is left with no real option but to defend the claim because the alternative, whether by choice or by court order, will require the advisor to not contact or service their clients. Fortunately, and aside from any factual arguments over whether or not there is a breach of the Protocol, there are circumstances under which a non-compete can be determined to be unenforceable.

First, a non-compete is unenforceable if it lacks adequate consideration. Consideration is something of value given by both parties to a contract that induces them to enter into the agreement to exchange mutual performances. While generally speaking courts do not examine the adequacy of the consideration when determining the validity of a contract, non-competes are the exceptions to that rule. If the consideration is not adequate then the non-compete will not be enforced. Examples of adequate consideration include a new job, additional benefits, a bonus, a raise, and/or a promotion. Recently, the Pennsylvania Superior Court affirmed this rule and further held a mere recital in a non-compete agreement that the parties intend to be legally bound to the terms is insufficient consideration. Consequently, any non-compete agreement containing such language and nothing more is unenforceable. See Socko v. Mid-Atlantic Systems, 2014 Pa. Super. LEXIS 702 (Pa. Super. 2014). Interestingly, Socko refutes a decision by a Pennsylvania federal court that held the opposite in a case involving a financial advisor and a non-compete with their former employer. See Latuszewski v. Valic Financial Advisors, 2007 WL 4462739 (W.D. Pa. 2007).

Second, and even if the court finds there is adequate consideration, it may nevertheless decline to enforce the non-compete if it finds the burdens placed upon the departing advisor are too great and burdensome. For example, courts have more recently begun to consider the employee's specific circumstances and in particular the negative impact enforcing the non-compete will have on them. Thus, courts may be less inclined to enforce a non-compete on a highly specialized 60 year-old who is unlikely to start anew in another industry, or on employees who are the sole means of income for their family. See Shepherd v. Pittsburgh Glass Works, LLC, 25 A.3d 1233 (Pa. Super. 2011).

While Socko and Shepherd are the law of Pennsylvania, many non-compete agreements have clauses requiring interpretation and enforcement pursuant to another state's laws. While parties are free to choose what law is to be applied, there is nevertheless a question as to whether or not an agreement otherwise unenforceable under Pennsylvania law will still be enforced due to the governing law of the chosen state. Under such circumstances, Pennsylvania courts will enforce a choice of law provision unless (a) the chosen state has no substantial relationship to the parties or transactions and there is no reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of Pennsylvania which has a materially greater interest than the chosen state in the determination of the particular issue and which would be the state of the applicable law in the absence of an effective choice of law by the parties. See Miller v. Allstate Ins., 763 A.2d 401, 403 (Pa. Super. 2000).

Prior to Socko, Pennsylvania courts enforced non-compete agreements that under Pennsylvania law lacked adequate consideration, but did not under the governing law of the chosen state, reasoning that the existence of consideration did not result in an application contrary to a fundamental Pennsylvania policy. cfn. Perma-Liner v. US Sewer & Drain, 630 F.Supp.2d 516, 522-523 (E.D. Pa. 2008). However, Socko's emphasis that, unlike other contracts, the adequacy of consideration is critically important to enforcing a non-compete agreement suggests that adequate consideration for non-compete agreements is indeed a fundamental Pennsylvania policy. Consequently, pre-Socko decisions enforcing non-compete agreements that lacked consideration merely on the basis of another's states laws as chosen by the parties may no longer be good law. Similarly, Shepherd's holding may also rise to the level of fundamental policy thereby requiring the application of Pennsylvania law notwithstanding a choice of law clause involving the application of another state's laws.

For all these reasons it is important for advisors to consult with counsel before changing firms in order to, among other things, prepare for any lawsuit over existing non-compete agreements.

This material is for informational purposes only.  It is not and should not be solely relied on as legal advice in dealing with any specific situation.

Employees Must Receive Compensation For Signing Non-Competes

Beth Slagle's article "Employees Must Receive Compensation For Signing Non-Competes" recently appeared on the front page of the PHRA’s publication Perspectives. You can click here to download it.

The Broker Protocol is No Release from a Non-Compete Agreement

Brian J. Sommer

Strict adherence to the Broker Protocol is not a complete shield from a lawsuit. This is because signatories to the Broker Protocol retain the right to bring raiding claims. Raiding is not, however, one particular claim. Rather, it is an umbrella term encompassing a number of claims including claims for breaches of non-compete agreements.

Historically, Courts have weighed a number of factors when determining whether or not to enforce a non-compete agreement, one of them being whether or not the non-compete agreement is reasonably necessary to protect the employer's legitimate business interests. In particular, courts assess an employee's access to confidential and proprietary information. Because such information gives a company its competitive advantage, courts will consider how an employee's knowledge of company information, such as corporate strategy, new technologies, or customer lists, may negatively impact the employer's business. 



Other factors historically weighed by Courts include whether there was consideration for the non-compete either in the form of a new job, or for existing employees, some additional payment, such as a bonus or stock options, and/or a promotion, and whether the non-compete agreement is reasonable in terms of length and geography in light of the employee's position as well as the nature of the employer's business. For example, a court might consider an agreement that prohibits a lead product engineer from working for a competitor within a 100 mile radius of the employer's office for two years to be reasonable, but a clause that prevents a receptionist from working for any competitor nationwide for 10 years is likely to be determined to be too restrictive.



In addition to these factors, more recently Courts have begun to consider the employee's specific circumstances and, in particular, the negative impact of enforcement will have on them as part of the deliberations. For example, courts may be less inclined to enforce a non-compete on a highly specialized, sixty (60) year old who is unlikely to be able to start anew in another industry or on employees who are the sole means of income for their family and thus have neither the time nor the money to wait out the agreement. 



Thus, before departing, it is best practice for advisors to review their employment agreements for language settling for any restrictions on where, when, and under what circumstances, they can work for a competitors. If such language is in their agreement, advisors would be wise to consult with a lawyer about enforceability against their event options, if any, the advisor has.



Separately, employers of financial advisors need to be mindful that Courts will consider a departing advisor's circumstances when deciding whether or not to enforce a non-compete agreement.

Compensation For Signing Non-Competes

Beth A. Slagle

Most employers ask some or all of their employees to sign non-compete agreements to prevent them from leveraging the knowledge and connections gained during the course of their employment to get a job with a competitor.

Although many employers may not realize it, Pennsylvania law dictates that employers always must offer employees some type of valuable compensation in exchange for signing a non-compete agreement. Without compensation, the company will be unable to enforce the agreement in Pennsylvania courts.

It's a common misconception that employers can get around the compensation rule by making sure that the non-compete agreement says that both employee and employer "intend to be legally bound" by the document.  The belief comes from Pennsylvania's Uniform Written Obligations Act (UWOA), which states that any contract is valid, even if no payment or other benefits have been exchanged, as long as the contract states that both parties intend to be legally bound by it.

But a recent ruling by the Pennsylvania Superior Court forcefully dispelled that misconception, making it clear that the rule to give employees compensation for signing non-compete agreements trumps the UWOA.

In the case, a company hired a salesman who had worked for it previously.  Upon accepting employment, the company asked him to sign a non-compete agreement that restricted him from working for a competitor for two years after leaving the company.  Later, the company asked the salesman to sign another agreement that further restricted him from working for competitors in several states, including Pennsylvania. The salesman was given no extra compensation or consideration for signing the non-compete agreement.

When the salesmen took a job with a competitor in Pennsylvania, his former employer threatened legal action against the new employer, which fired the salesman. The salesman then sued his former employer, claiming that his non-compete agreement was invalid because the company didn't compensate him for signing it.   The company argued that despite the lack of compensation, the contract was legally binding under the UWOA.

The Pennsylvania Superior Court ruled in favor of the salesman, noting that non-compete agreements "have always been disfavored in Pennsylvania." The UWOA does not relieve employers of their obligation to compensate employees for signing non-compete agreements.  For new employees, the job itself is acceptable compensation.  But for existing employees, employers must offer some other benefit, such as a bonus or promotion.  Courts do not consider "continued employment" to be acceptable compensation.

The ruling serves as a warning to all employers of the difficulty of enforcing non-compete agreements in Pennsylvania.  Employers should review their non-compete agreements and administration policies to make sure that the agreements are enforceable in court.

For more information about non-compete agreements and other matters related to employment law, contact Beth Slagle at bas@muslaw.com or 412-456-2890.

Beth Slagle has practiced law for more than 20 years and focuses her practice on business disputes and employment law. Beth's work has earned her a spot in Best Lawyers in America since 2010, and she is the chair of the firm's Insurance Coverage Litigation Group. She can be reached at bas@muslaw.com or 412.456.2890.