A non-competition covenant prohibited employees of Adhesives Research (AR), a company based in Pennsylvania, from performing services for a competitor of AR anywhere in the world for two years after termination. Newsom, AR’s western U.S. manager of medical products, worked out of her home in California. When she quit and joined another adhesives manufacturer, AR sued and moved for entry of a preliminary injunction. The court denied the motion.
Status of the case. The covenant contained a Pennsylvania choice of law provision and mandated that litigation be filed in that state. Responding to the motion, Newsom argued that Pennsylvania law was inapplicable and asserted that California law applied. It is less friendly to employers. The court concluded that the worldwide geographic scope was overbroad under both states’ legal principles, that blue penciling was impermissible because of AR’s unclean hands in attempting to enforce an oppressive covenant, and that in any event the new employer did not compete with AR. Adhesives Research, Inc. v. Newsom, Civ. No. 1:15-CV-0326 (M.D. Pa., Apr. 13, 2015) (Caldwell, J.).
The parties. AR makes adhesives used in medical, pharmaceutical, electronics, and other industries. Its headquarters are in Glen Rock, PA, but it sells adhesives all over the world. They are purchased as raw materials and used by customers in making their final products. Except for a few days each year spent at corporate headquarters for meetings and training, Newsom worked from home but communicated frequently with AR in Glen Rock.
The non-compete. In 2012, AR required all of its employees, including Newsom, to sign a non-compete agreement. It prohibited performance of:
“any services similar to the services performed by [the employee] during his employment with [AR], for . . . any business . . . that develops, manufactures or sells any products that compete in kind with . . . any products manufactured, sold or under development by [AR] . . . in any area of the world in which such products are sold by [AR].”
The agreement, which contained a Pennsylvania choice of law provision, included a consent to litigation exclusively in a federal or state court in Pennsylvania and a waiver of a claim or defense that the forum was inconvenient.
Newsom’s resignation from AR, and her new employment. Newsom resigned from AR and went to work for Scapa Tapes, a manufacturer of bonding and adhesive products, as a sales executive for the western United States. Unlike AR, Scapa does not sell raw adhesives. Rather, it uses the adhesives in making the other products it sells. Unenforceability under California and Pennsylvania law. Newsom maintained that California law controls the non-compete covenant as against her even though it specifies application of Pennsylvania law. Without deciding, Judge Caldwell concluded that the covenant is unenforceable under either state’s laws.
California. A California statute provides that, with exceptions not applicable here, contractual employee non-compete clauses are void.
Pennsylvania. Courts in Pennsylvania require that restrictions in an employment agreement’s non-competition clause must be “roughly consonant” with the employee’s duties and must not be unduly burdensome. According to Judge Caldwell, a worldwide ban on Newsom’s employment by an AR competitor “is not limited to an area reasonably necessary to protect” AR. He also held that the ban results in a severe hardship to her. Moreover, he concluded that AR had engaged in oppressive overreaching by applying an unlimited geographic scope to an employee whose territory only included one-half of this country, and he ruled that AR had unclean hands. Although Pennsylvania permits blue penciling of unreasonably broad contractual restrictions in some circumstances, the judge stated that AR’s unclean hands here preclude the exercise of such judicial discretion in its favor.
The non-competition clause. Judge Caldwell held that AR and Scapia are not competitors. AR manufactures adhesive rolls which it sells to customers for use in their products. By contrast, Scapia does not sell adhesive rolls but, rather, makes and sells goods which contain adhesives. He ruled that the restraint against working for a company that manufactures or sells “any products that compete in kind” with AR’s products is overbroad because no prudent prospective employer engaged in a business even remotely similar to AR’s would take a chance on hiring a former AR employee.
Takeaways. Employers with workers in more than a single state, who are required to sign a one-size-fits-all non-compete, non-solicitation and/or confidentiality template, run a significant risk that it will not be enforceable in at least some jurisdictions. In addition, inclusion of provisions more protective than necessary jeopardize enforceability. For help in drafting enforceable restrictive employment covenants, consult an experienced trade secrets attorney.