U.S. - Pennsylvania

Fiduciary Duty - Breach of

Official Committee of Unsecured Creditors v. Baldwin (In re Lemington Home for the Aged) (3rd Cir. Sept. 21, 2011): considers fiduciary breach and “deepening insolvency” claims in bankruptcy litigation against former officers and directors of a Pennsylvania nonprofit corporation, and discusses differences between Delaware and Pennsylvania law.

Non-Compete Cases -- see generally Ties that Bind (24-page article with extensive case cites). 

Adequate Consideration Needed.  

The following text is quoted from Figuero v. Precision Surgical (3rd Cir. 4/12/2011): Under Pennsylvania law, a restrictive covenant imposed subsequent to the establishment of an employment or independent contractor relationship "must be supported by new consideration." Gagliardi Bros., Inc. v. Caputo, 538 F. Supp. 525, 528 (E.D. Pa. 1982) (quoting George W. Kistler, Inc. v. O'Brien, 347 A.2d 311, 316 (Pa. 1975)). In Caputo, an employer sought to enforce a covenant not to compete which was contained in a contract executed two years after the employment relationship was formed. Id. at 526. Although the employee was given a raise at about the time of the contract's execution, the raise was found to be a routine salary increase. Id. Accordingly, the court found that there was insufficient consideration to support the restrictive covenants.

 2014.Dec.11  Noncompetes and Employee Agreements: Throw in a Peppercorn
Due to state and local law vagaries regarding what establishes adequate consideration for contractual commitments, employers should be wary of relying exclusively on continued employment and other non-cash benefits. Cash is generally king -- and better than a peppercorn -- when courts face these issues. This advice came to mind from Law360's report that Pennsylvania's Supreme Court will hear an appeal as to whether continued employment is sufficient to support a noncompete. A few months earlier, for example, a Conn. court invalidated an employment agreement in which an employee waived severance, due to the absence of consideration (Thoma v. Oxford Performance Materials, 9/23/14). Oh for these employers to have paid some cash amount such as $100 or $500. Employers should consider making such a payment when they enter into, or amend, employment-related agreements, because paying more than token amount could defuse future claims based on whether or not adequate consideration supports enforcement. 

Enforcement of Non-Competes: courts must balance an employer's protectible business interests against the interest of the employee in earning a living in his or her chosen profession. Hess v. Gebhard & Co, 808 A.2d 912 (Pa. 2002).

Independent Contractor Forfeits Deferred Comp:  based on holding that the contractor's "interest in earning a living, an essential component to the Hess balancing test, is only tangentially implicated by the forfeiture-for-competition provision. The forfeiture-for-competition provision in Fraser's Agreement was more akin to an incentive program than a non-compete clause"). Fraser v. Nationwide Mutual Insurance Co., E.D. Pa, 2009.

Injunctive Relief Standard:  The following text is quoted from Figuero v. Precision Surgical (3rd Cir. 4/12/2011):

We have previously held that even when an action will result in the destruction of a business, a District Court was still justified in refusing to grant a preliminary injunction when the loss was "capable of ascertainment and award at final judgment if [petitioner] prevails." Instant Air Freight Co. v. C. F. Air Freight, Inc., 882 F.2d 797, 801 (3d Cir. 1989). Precision's evidence focused on its projected loss of income and the diversion of its business interests, indicating that any injury was compensable through a monetary damages award. Precision failed to meet the high standard required for the granting of a preliminary injunction to enforce a covenant not to compete. For this reason as well, the District Court did not abuse its discretion when it denied Precision's request for a preliminary injunction.
Preliminary injuction granted against departing executive, in part based on evidence of downloading of computer records on eve of terminating employment -- see Bimbo Bakeries USA Inc. v. Botticella (E.D. Penn. 2/9/2010, aff'd 3rd Cir.).

Misclassification of Worker Status: Employer's treatment of a service provider as an employee rather than as an independent contractor (as contemplated by their independent contractor agreement) resulted in District Court's holding that the employer breached the agreement, with the Third Circuit agreeing and holding that --

"In the context of a motion for a preliminary injunction seeking to enforce a restrictive covenant, an apparent material breach of contract by the employer undermines its claim to such extraordinary relief." Figuero v. Precision Surgical (3rd Cir. 4/12/2011).


Ten Hot Issues in Non-compete Enforcement (March 2009 - broad summary of PA law).