Thursday, March 28, 2013

The Milkman Principle: Why Solicitation of Former Clients or Customers Will Always Get You in Hot Water if You Have a Non-Compete Agreement

                       WITH NON-COMPETE AGREEMENTS 

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In Pennsylvania, if You Have a Non-Compete Agreement and Solicit Former Clients or Customers, You Are Asking for Trouble

If you have an Employment Agreement that includes Confidentiality, Non-Competition and Non-Solicitation covenants, and nevertheless go to work for a new company that competes with your former employer, you will likely be all right UNLESS you use Confidential Information misappropriated from your former employer prior to your departure and/or you solicit new business from clients you serviced while in your previous job.

Why is that?

Pennsylvania courts generally do not want to enforce non-compete agreements against Joe/Jane Average Employee simply because he/she is working for a competitor of his/her former employer.

Leave Your Employer's Confidential Information Behind
However, if there is proof of wrongdoing by the employee, such as evidence that the employee expropriated his/her soon to be ex-employer's Confidential Information during the days/weeks immediately prior to departing or that the employee solicited business from his/her former customers in violation of a Non-Solicitation covenant, courts will acted decisively and swiftly to enjoin such conduct.

You May Want to Take a Look at Our Video Discussing Pennsylvania Law Regarding Non-Compete Agreements.  

In fact, non-compete agreements are enforced only where doing so is necessary to protect the legitimate business needs of the former employer.

Misappropriation and Solicitation Cast
Dark Shadow on One's Character
Simply stated, the average employee working for a competitor of his/her former employer does not have knowledge of a "Trade Secret", and thus does not pose a true threat to the former employer's legitimate business needs.

Odds are, you do not have such a Trade Secret (customer lists, business forms, marketing materials and the like are not trade secrets under Pennsylvania law).  If you do, however, your non-compete agreement will be enforced even if you never solicit a former client or customer.

Soooo good.  And so Very Secret!
 NOTE:  If you posses knowledge about a true "Trade Secret" maintained by your former employer, then you are NOT Joe/Jane Average.  For example, Thomas's English Muffins closely guards its formula for how to put the nooks and crannies in its muffins.  Only 7 people within the company know the secret.  When one of those 7, Senior VP Chris Botticella, left and joined Hostess, his non-compete agreement was enforced.

Are My Former Employer's Customer Lists, Business Forms and Marketing Materials Trade Secrets Under Pennsylvania Law?

Generally the answer is NO.

In 2015, Pennsylvania's Superior Court issued a decision construing Pennsylvania's Uniform Trade Act, and held that "customer information, contracts and prices were not trade secrets....[because] competitor[s] could obtain the information be legitimate means."

However, you should not take any of your former materials (whether written or in digital format) with you when you leave the job, nor should you use any of them when you start your new job. Such Confidential Information is your employer's property, and misappropriation of same is a prescription for trouble.

That Midnight Download of Your Employer's Customer List
Onto a Thumbdrive Will Not Go Undetected
Remember, every key stroke you take while on the company's network leaves an electronic footprint, and employers routinely examine the computer activity of a departing employee immediately after the door closes on the employee's last day of work.

If you do so and are found out, a court will deem you "untrustworthy" and will enforce your non-compete even if you are not soliciting customers of your former employer.

Indeed, if an ordinary employee has engaged in aggressive, subversive behavior that suggests the employee is intent upon "stealing" business from his/her former employer by any means necessary.

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How Do I Know What State's Laws Apply to My Non-Compete Agreement?

What Law Applies?
This is usually spelled out in the contract.  Click Here to learn more.  Otherwise, the law of the state in which the contract was signed and/or performed will control.  It is important for you to determine what state's laws govern your contract before selecting a lawyer to help you.

Under Pennsylvania Law, Soliciting Clients or Customers of Your Former Employer Does Pose a Threat to Your Former Employer's Legitimate Business Interests

Indirectly = No Straw Parties
However, if you utilize the contacts you made with clients or customers during your previous employment in order to try and take business away from your former employer after you leave, a Pennsylvania court will usually stop you in your tracks.

Why?  Well, the overwhelming majority of non-compete agreements contain non-solicitation clauses that prohibit the solicitation of former customers. And, while merely working for a competitor of your former employer is not going to cause them provable harm (no matter how wonderful you are), taking their customers will cause them provable financial harm and loss of good will. Courts will not countenance that, and your next stop will be a Preliminary Hearing wherein your former employer will seek to obtain a court Order prohibiting you from continuing on in your current business endeavor.

If evidence of misappropriation and use of Confidential Information coupled with solicitation of your former employer's customers surfaces at that Hearing, such an Order will usually follow.

So, my advice is, stay away from those former customers!

Suppose a Customer of My Old Company Contacts Me and Wants to Do Business With My New Company?  Is That a Violation of My Non-Solicitation Agreement?

Yes, it is.  There is simply no way around a non-solicitation agreement.  Even if you can prove that the customer called you first, and said that it was going to stop doing business with your former employer, and wanted you to start handling its business, you will still be held to have violated your non-solicitation agreement.   including the customer's choice.

Moreover, you cannot get around this problem by using a third-party, a straw person if you will, to solicit those former customers on your behalf.  Almost all non-solicit agreements clauses say that you cannot "directly or indirectly" solicit former customers.  Using a straw person is exactly what they mean by "indirectly."

Direct and Indirect Solicitation Prohibited
There are many reasons why non-solicitation agreements are interpreted as described above.  Perhaps the simplest to understand is that, in most cases, it was the company that initially provided the resources necessary to develop the relationship in the first place.

What resources, you ask.  Compensation to employees, development of the product or service sold by the company, providing the sticks, bricks, inventory, equipment and machinery to outfit the company's office(s), marketing the company, paying for expenses associated with overhead, etc.

Frank worked for White Cow Milk For 20 Years; He Knew All of the Ladies in the Neighborhood Very Well.
When Wawa Hired Him Away, Who Do You Think Mrs. Crabtree Wanted  to Deliver Her Milk?
In many cases, the products or services sold by companies are fungible; I mean, really, can you taste the difference between White Cow's milk and Wawa's milk?

Courts understand the fungibility principle, that individuals become the face of their employer and that, in many cases, customers will want to follow the departing employee to wherever he/she goes. Indeed, these very basic human principles led to the creation of non-solicitation agreements in the first place?

Absent a non-compete contract containing a non-solicitation covenant, customers are free to follow an exiting employee to wherever he/she goes.  And, employees with such a loyal following therefore have a great deal of value in the open market.

However, the customer's understandable wishes will be frustrated by a non-solicitation agreement. Courts will almost always enforce a non-compete agreement with a non-solicitation clause if there is any evidence that the former employee has attempted to or is actually doing business with a customer of his/her former employer.

                                         Philadelphia Non-Compete Agreement Lawyer

Representing Pennsylvania’s Workforce Since 1991

John A. Gallagher is an employment attorney who represents employees who need an employment lawyer in the Philadelphia area, including individuals who live or work in Philly or nearby communities such as Chester County, Delaware County, Montgomery County, Bucks County, Berks County and Lancaster County.

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