While many employers continue to include restrictive covenants in their employment contracts, courts in Pennsylvania and those applying Pennsylvania law continue to be reluctant to enforce such covenants without a clear showing that the precise terms of the contract have been breached and without a clear showing of harm to the employer. This was most recently applied by the U.S. District Court for the Eastern District of Pennsylvania in its May 31 opinion in Colorcon v. Lewis .
NonCompetition Signed at Beginning of Employment
According to the opinion, Aminah-Iman Lewis worked from 2003 to July 2010 for Colorcon, which makes colorants and coatings for the food and pharmaceutical industries. During this time, Lewis worked exclusively in the food side of Colorcon’s business in a variety of technical and sales positions. She was terminated for poor performance after rising to a managerial position in sales to the food industry.
At the time Lewis was initially hired full time, she signed a restrictive covenant agreeing, in part, that for two years after her employment ended, for any reason, she would not “engage directly or indirectly in any work or activity in the same technical areas in which [she] worked or to which [she] was exposed during [her employment].” She further agreed not to attempt to sell products competitive to Colorcon’s to any customer with whom she had contact in the three years prior to her termination.
Lewis reaffirmed her agreement to abide by these terms at the time of her termination, when she also agreed to a release of all claims.
Work for Competitor
The opinion said that roughly six months after her termination, Lewis accepted employment with Sensient Technologies, a direct competitor of Colorcon’s. Critically, however, Lewis’ position with Sensient required her to work exclusively with the company’s pharmaceutical technologies. Lewis advised Sensient of her restrictive covenant and Sensient issued a directive that no one working on the food colorant side of the business should contact her. She also worked carefully to avoid contacting any customers on behalf of Sensient with whom she had worked at Colorcon.
A few months after Lewis began at Sensient, Colorcon brought suit against her and Sensient, claiming breach of contract against Lewis and tortious interference with contractual relations, unjust enrichment and violation of the Pennsylvania Uniform Trade Secrets Act (PUTSA) against Sensient. The case was removed from state court to federal and the action proceeded quickly to a preliminary injunction hearing.
In considering Colorcon’s request for a preliminary injunction, the court addressed the four key factors for awarding such relief: (1) likelihood of success on the merits; (2) whether there was a showing of irreparable harm; (3) the balance of the equities; and (4) whether granting the injunction would serve the public’s interest.
Unlikely to Succeed on the Merits
The most extensive discussion involved the court’s finding that Colorcon was unlikely to succeed on the merits of its claims. Initially, the court focused on the contract’s language, drafted by Colorcon, restricting Lewis from taking new employment working in the same “technical areas” as she had in her prior employment. Recognizing that noncompetition agreements are disfavored in Pennsylvania and are, therefore, “strictly construed against the employer” and that ambiguous language in a contract will be construed against the drafting party, the court found that Lewis’ work for Sensient’s pharmaceutical business was not in the same “technical area” as the food colorant work that she had done for Colorcon.
The court further found that Lewis’ sales work was not encompassed within the restriction on her working in the same “technical areas” as she had with Colorcon. Notably, the court found that Colorcon “could have chosen a more specific phrase than ‘technical areas’” but that the ambiguity of the language would be held against the company.
The court went on to find that the restrictive covenant, as a whole, was unenforceable under the balancing test between the employer’s “protectable business interests” and the employee’s “interest in earning a living in his or her chosen profession.” In making this finding, the court focused on the fact that Colorcon had terminated Lewis’ employment for poor performance which, under Pennsylvania law, made it “unreasonable … to permit the employer to retain unfettered control over that which it has effectively discarded as worthless to its legitimate business interests,” (citing the 1995 Pennsylvania Superior Court opinion Insulation Corp. of America v. Brobston ). The court found that Brobston stands generally for the proposition that “enforcement of a noncompetition agreement against an employee terminated for poor performance is generally disfavored.”
While Brobston also requires consideration of other equitable factors, the court found that the balance of factors weighed against enforcement of the covenant.
The court quickly dispatched with the common-law claims against Sensient and then considered whether Colorcon was likely to succeed on its PUTSA claim. The PUTSA allows a court to enjoin “actual or threatened misappropriation of trade secrets.” However, in this case, Lewis’ knowledge of Colorcon’s business was in relation to its food products, not the pharmaceutical business that she was performing for Sensient. Moreover, Lewis stated that she did not recall Colorcon’s precise formulas. Finally, Sensient had taken steps to ensure that it would not be in a position to learn confidential Colorcon information from Lewis. As such, Colorcon was found to be unlikely to succeed on its claim that Sensient had violated the PUTSA.
In considering the other factors necessary to establish the need for injunctive relief, the court found that even if Colorcon had established a breach of an enforceable restrictive covenant, this alone would not “demonstrate the sort of imminent irreparable harm that would justify a preliminary injunction.” The court finally found that the equities of the situation, including the currently high unemployment rate in the country, made enforcement of the agreement contrary to the public interest.
Clear Language Required
For employers and their counsel, the lesson of Colorcon is clear: A restrictive covenant must be carefully drafted. In almost every circumstance, the employer has unilaterally drafted the employment agreement and the old adage of “say what you mean and mean what you say” is critically important, as ambiguity will be construed strictly against the employer.
Employees can take away from Colorcon that courts will favor those who use their best efforts to comply with any restrictions. In this case, the court acknowledged Lewis’ efforts to comply with her agreement, which helped to balance the equities of the matter in her favor.
Sid Steinberg is a partner in Post & Schell’s business law and litigation department. He concentrates his national litigation and consulting practice in the field of employment and employee relations law. Steinberg has lectured extensively on all
aspects of employment law, including Title VII, the FMLA and the ADA.