United States: Pennsylvania Opinion Highlights Need To Ensure Appropriate Geographic Scope And To Lay Groundwork For Protecting Interest In Specialized Training In Noncompetes

In Peter Zimmerman Architects, Inc. v. Toates, No. 3022 EDA 2013 (Aug.19, 2014), a firm specializing in custom, residential architecture sought to enforce a noncompetition agreement against a former employee and the new architectural firm he founded. As written, the noncompete would have prevented the former employee from (1) participating in the business of residential architecture for three years within an area extending 25 miles from the company's office and (2) engaging in residential architecture for the renovation or new construction of one-of-a-kind properties for five years. The latter restriction had no geographic limit.

On the company's motion for a preliminary injunction, the trial court modified, and then enforced as modified, the noncompete. The trial court reasoned that, as a former long-term employee and part-owner of the company, the defendant had access to trade secrets (such as marketing materials, client lists, and methods of doing business) and "possessed specialized training and skills." Those considerations meant that the company had a justification to restrict the defendant's ability to earn a living. The court also reasoned, however, that the company's noncompete was geographically unreasonable: because the majority of the company's business was located with 15 miles of its office, the trial court limited the geographic scope of the restriction to 15 miles. The trial court also reduced the duration of the noncompete from three to two years, although the rationale for that modification is unclear. On appeal, the Superior Court concluded that it was not an abuse of discretion for the trial court to enforce the noncompete as modified.

Toates offers two lessons to companies drafting noncompetes, or auditing the noncompetes they currently have.

First, to the extent an employer seeks to protect trade secrets, it should ensure that the geographic scope of the noncompete is proportionate to the information it wishes to protect. In Toates, for example, given that the company's business was largely within a 15-mile radius from its Pennsylvania office, a worldwide prohibition on engaging in certain types of residential architecture probably was not needed to prevent the former employee from using the company's marketing materials, etc. to the company's detriment. Given the apparent incongruity between the geographic scope of the noncompete and the information the company sought to protect, the trial court might have concluded that the noncompete was so geographically overbroad that it should neither have been enforced as written nor blue-penciled.

A geographically broad restriction may, however, have been needed to protect the company's provision of specialized training to the former employee, which leads to the second lesson: an employer wishing to rely on specialized training to support its noncompete should state – in the contract – exactly what training was provided and when. Pennsylvania courts are reluctant to enforce a noncompete to protect specialized training, but Toates shows they will do so when the employer proves that it would be unfair to allow a competitor to reap the benefits of such training without paying the cost. Although the burden of establishing a protectable interest in specialized training is high, the potential payoff is also high: where a noncompete is needed to protect specialized training, a broad geographic restriction may make sense. Regardless of where the competitor is located, an employer is unfairly harmed when it provides specialized training to an employee who then promptly uses that training for the benefit of the competitor.

A puzzling aspect of Toates is that, although the trial court agreed that the company had a protected interest in specialized training, the court did not believe that more than a two-year, 15-mile noncompete was needed to protect that interest. It is difficult to reconcile those two aspects of the opinion: if the company provided the former employee with training from which it would be unfair for a competitor to benefit, then the distance of the competitor should not matter.

In any event, given the paucity of cases in which Pennsylvania courts have found specialized training to be a protected interest, Toates is significant, and suggests that it is worthwhile to prepare the groundwork for protecting specialized training by setting forth, in the contract itself, (1) why it would be unfair to allow competitors to benefit from the employer's specialized training and (2) how long it will take the employer to recoup its training investment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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