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Involuntary Termination, Non-Compete Agreements, Pennsylvania Non-Compete Agreements

Recent Non-Compete Case Highlights Pennsylvania’s “Worthless Employee” Doctrine

Need a NY or PA Non-Compete Lawyer?  Call 954-332-2395.

A recent case out of the Western District of New York raises a number of interesting non-compete issues, including Pennsylvania’s “worthless employee” doctrine.

In 1983, Phillip Garrod began working as a salesman in the field of “elastometric precision products.”  Let’s just call them EPPs.  After seventeen years in the business, he was hired by a company called Winfield Industries.  Winfield was later acquired by Fenner Precision.  Garrod subsequently signed a non-compete agreement with Fenner.  That agreement provided that Garrod would not (1) work for any competitor for one year after leaving Fenner (2) contact or solicit any past or current Fenner customers or (3) disclose any of Fenner’s confidential information.  In May 2012, Fenner terminated Garrod without providing any reason.  After being fired, Garrod, who was then 58-years old, applied for nearly sixty sales jobs, all of them outside of the EPP industry.  He received only four responses, all of them rejections.  After those efforts failed, Garrod began looking for work in the EPP industry.  He was able to land a job with a company called Mearthane Products, an EPP manufacturer that competes with Fenner.

Upon starting his new job at Mearthane, Garrod began working his old connections in the industry.  He sent out emails to customers and other contacts he had known over the course of his entire career, informing them that he now worked for Mearthane.  Garrod also began making sales calls to his former EPP customers.   In August 2012, some Fenner employees spotted Garrod at a trade show and learned that he was working for Mearthane.   Fenner sued.  Fenner did not object to Garrod’s employment with Mearthane in general.  Instead, Fenner focused its case on Garrod’s solicitation of current and former clients.  Fenner also sought an injunction to prevent Garrod from disclosing any of the company’s confidential information.

Applying Pennsylvania law (pursuant to a choice-of-law provision), the court denied Fenner’s request for a preliminary injunction and found that Garrod was likely to prevail on the merits.  The court’s opinion focused on three key considerations: (1) Confidential information (2) Garrod’s tenure in the industry and (3) Equity.

First, on the issue of confidential information, it was undisputed that Garrod did not take any of Fenner’s confidential materials with him when he left the company.  Beyond that, Garrod was a sales person.  He had no technical knowledge regarding EPPs.   Fenner attempted to argue that, even as a sales person, Garrod was exposed to confidential information in the form of product pricing.   Garrod rebutted this argument by demonstrating that prices were well-known throughout the industry.  EPP customers frequently shopped around, comparing different manufacturers’ prices and negotiating with sales people (like Garrod).  Pricing was in no way confidential.  In the end, the court found that Fenner had failed to make any showing that Garrod was utilizing the company’s confidential information.

Second, the court gave significant weight to Garrod’s long history in the EPP business.  This factor was particularly important on the issue of solicitation.  Garrod had been in the industry for 30 years.  He was an industry veteran long before he arrived at Fenner.  He knew everybody.  He knew all the players, the companies, the customers, the people with buying authority.  In reaching out to his long-established contacts in the industry, Garrod was not poaching customers who had special relationships with Fenner, or unfairly utilizing goodwill built up during his tenure at the company.  Instead, he was calling the same people he had always called.  Fenner’s argument regarding customer relationships was further undercut by the importance of trade shows within the industry.  Customers attend these trade shows, furnish their contact information to all of the other attendees, and invite contact from the EPP manufacturers.   In short, everyone knows everyone else.

Finally, the court addressed a number of equitable considerations.  First, Fenner had demoted Garrod and then fired him, ostensibly, for unsatisfactory performance.  The court found this significant, particularly under Pennsylvania law.  Apparently, Pennsylvania has a “worthless employee” doctrine in non-compete cases.  Pennsylvania courts generally will not enforce a non-compete agreement against an employee fired for poor performance on the theory that the employee is “worthless.”  A Pennsylvania appellate court aptly summarized the doctrine as follows:  “It is unreasonable . . . to permit the employer to retain unfettered control over [an employee] it has effectively discarded as worthless to its legitimate business interests. Insulation Corp. of Am. v. Brobston, 446 Pa. Super. 520, 532, 667 A.2d 729, 735 (1995). (Note that New York has a similar rule, see, e.g. Arakelian v. Omnicare, Inc., 735 F. Supp. 2d 22, 41 (S.D.N.Y. 2010)).   Beyond the worthless employee doctrine, the court also weighed the possible harm to Garrod that could result from enforcing the non-compete agreement.  Garrod was nearly sixty years old.  If he could not work in the EPP industry, in which he had spent his entire career, he might not be able to find work at all.  He had already tried to find a sales job outside of the industry, but those efforts had failed.

After weighing all of these factors, the court concluded that Fenner had failed to carry its burden and denied their motion for a preliminary injunction.  The case is Fenner Precision, Inc. v. Mearthane Products Corp., 12-CV-6610, 2013 WL 441090 (W.D.N.Y. Feb. 5, 2013)

Jonathan Pollard is a trial lawyer and litigator based in Fort Lauderdale, Florida.  He focuses his practice on cases involving non-compete disputes, antitrust and business torts.  He represents clients in Miami, Fort Lauderdale, Boca Raton, West Palm Beach, Jupiter, Fort Myers, Tampa, and Orlando.  If you have a non-compete question or need a referral to a non-compete lawyer in your area, please contact Jonathan’s Fort Lauderdale office at 954-332-2380.

Discussion

4 thoughts on “Recent Non-Compete Case Highlights Pennsylvania’s “Worthless Employee” Doctrine

  1. Thank the Lord for a federal judge with both brains and compassion who took the time to really listen to and evaluate the facts.

    There is no shortage of lawyers willing make what amount to stupid, unsupported arguments such as “even as a sales person, Garrod was exposed to confidential information in the form of product pricing” when such information is either generally known (or easily obtainable) by the customers! And from your post it appears that was the employer’s best argument!! Of course, I presume Winfield’s lawyers were well paid to come up with this tripe.

    The more I read about these cases, the more I am inclined to agree with California’s stand against employee non-competes.

    Posted by TOM | March 9, 2013, 9:37 am
  2. For more than 30 years I have represented both employers and employees in non-compete cases. There are very valid reasons for employers to have such covenants and there are some cases where the covenants exist and either should not or are overly broad. We have courts to deal with that and I do not agree with the California approach. That being said, Pennsylvania DOES NOT have a “worthless employee” rule, at least to the extent that is understood to mean that if an employer involuntarily terminates the employment of an employee it forfeits the right to enforce a non-compete agreement. The PA Superior Court has explained its holding in Insulation Corp. of America as merely holding that the manner in which employment terminates is just one of many factors to be considered in determining if a non-compete clause is enforceable and the scope of enforcement. See e.g. : All-Pak, Inc. v Johnson, 694 A. 2d 347 (1997) and, more recently, Missett v Hub International PA, LLC, 2010 Pa Superior LEXIS 3240

    Posted by Bob Small | March 11, 2013, 11:18 am
  3. I am a freelancing independent contractor who provides sign language interpreting services to multiple agencies and directly to several businesses. Approximately 25% of my income last year (2012) was with one non-profit agency. One month ago the new executive director of this agency decided to hire staff interpreters to do the bulk of the work. He never told the Independent Contractors the change was coming, didn’t post the positions, and now our work load has been reduced, therefore impacting our income. He has repeatedly said a new contract is being written for the Independent Contractors and has also stressed that he owes us nothing, as we are not employees. Our previous contract had a non-compete clause in it, that said we could not solicit work from businesses we provided services for (through this agency) for a period of 12 months and the entire contract could only be revoked in writing. I agree that it would be unethical to solicit business, while on a job, but I don’t feel it would be unethical for a group of local interpreters who are Independent Contractors to send out a flyer with our contact information to the area businesses that have business with Deaf consumers. I live in Pennsylvania…I would be interested to hear the opinions of others on the issue of non-compete clauses in contracts with Independent Contractor service providers.

    Posted by Cindy | June 28, 2013, 11:40 am
    • I would be careful in relying to heavily on the “worthless employee” doctrine in PA. The Brobston decision has been carved back by later appellate decisions. The reason for termination is only one of several factors courts weigh in the balance. I have represented both employers and employees in covenant not to compete cases for more than 30 years and your situation presents some unique facts. The very first question to be asked is whether the principal in your independent contractor arragement needs a restricitive covenant to prevent UNFAIR competition. PA will not enforce such covenants merely to prevent compettion. Whether you could engage in UNFAIR competition is very fact sensitive. I would need much more information before I could opine as to whether your covenant is enforceable. Off hand, however, I cannot think of a PA case where a court considered such a covenant in the context of an independent contractor relationship. The closest I can think of at the moment is a franchisor-franchisee relationship where a restrictive covenant was upheld, but again it was upheld on the basis of the facts of that case.

      Posted by Bob Small | July 9, 2013, 9:04 am

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