Thou Shalt Follow All Legal Covenants

…or maybe not.

In honor of the Pope’s visit to Philadelphia this weekend let’s discuss a basic commandment of good business practices.  Recently, the Pennsylvania Superior Court wrapped up a case involving the owners of a clothing and shoe store who sued its former employee when the employee left and opened up a shoe store of his own. The former employee had signed a non-disclosure and non-compete agreement, or restrictive covenant, when he started working at the Plaintiff’s clothing and shoe store.  The employee, via restrictive covenant, promised not to steal or reveal Plaintiff’s trade secrets. Restrictive covenants are common in a number of businesses, especially when customer lists, supplier lists or business processes are vital to a business’s financial welfare. Despite signing the covenant the Defendant left his employer, opened up his own store, and used a confidential supplier list to set up his new business.

Seems fairly obvious what should happen next. The Plaintiff sues its former employee for violating the covenant and wins…right?

Not so fast.

The court ruled in favor of the Defendant who violated the covenant. Why? Because the covenant was insufficient to cover what the Plaintiff likely intended.  Specifically, it did not protect this business in this instance. First, the covenant stated the Defendant could not seek or accept employment with another retail company and then reveal Plaintiff’s trade secrets. Defendant avoided this by opening his own store. Pretty slick, right?

The covenant also put the burden on the Plaintiff to prove if its former employee revealed trade secrets such disclosure alone would cause Plaintiff irreparable harm.  Plaintiff also retained the burden to show how the supplier relationships would be adversely affected by the former employee’s exploitation of such information.

Now, don’t panic. Restrictive covenants are very powerful contracts, as long as they are drafted with your specific business needs in mind. In this case, the covenant was not sufficient to stop the former employee from setting up the new business, in direct competition with Plaintiff’s, but there are plenty of ways to protect yourself and your business. Call Bergmann & Good to discuss your business operations and what can be done to protect yourself.

 

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