Employment Contract Restrictive Covenant is Upheld and Enforced
In the employment contract, business litigation case of USI Mid Atlantic Inc. v. Wilson, PICS Case No. 14-1634 (C.P. Philadelphia, Sept. 26, 2014) alleging breach of a restrictive covenant, the Honorable Patricia Mclnerney found that defendant had breached the non-compete provision in his employment agreement and that the order, which returned the parties to the status quo, should be affirmed.
USI Mid Atlantic was a licensed insurance producer and consulting firm specializing in providing property and casualty commercial insurance and employee benefits products. Howard G. Wilson joined USI as a producer as part of an acquisition. He executed an employment agreement that included a non-solicitation and confidentiality provision. The agreement provided him with substantial financial consideration.
While employed by USI, Wilson was hired by Lyons Insurance Co., a direct competitor of USI. Prior to submitting his resignation, Wilson notified his long-time clients that he would be leaving USI. On the day Wilson tendered his resignation, USI received broker of record letters from three of Wilson’s major, long-time clients, transferring their accounts to Lyons. Four more USI clients were later lost to Lyons.
USI sent Wilson and Lyons letters demanding that they cease their unlawful conduct. USI then filed a complaint and petition for special injunction. The court granted the petition. Its order provided that Wilson had to contact every client of USI he had contacted and advise each that as a result of litigation, neither her nor Lyons could accept their business and that they could return to USI or engage any other broker of their choice, other than Lyons, until the issue was resolved. Wilson and Lyons appealed the order. The court held that its order should be affirmed.
The court noted that in Pennsylvania, restrictive covenants are enforceable if they are incident to an employment relationship between the parties, are reasonably necessary for the employer’s protection and are reasonably limited in duration and geographic extent. However, they historically have been viewed as a trade restraint that prevents a former employee from earning a living. Thus, the presence of a legitimate protectable business interest of the employer is a threshold requirement for their enforcement.
The court found that the non-solicitation and non-interference provision at issue prohibited Wilson from soliciting and interfering with clients that had been with USI for two years prior to his departure and for two years after he left. However, it did not prohibit Wilson from competing with USI and therefore did not constitute a restraint of trade.
As to whether equitable enforcement of the provision was necessary to protect USI from wrongful appropriation of its customers, the court noted that Wilson had access to a great deal of confidential and proprietary information. His client contact and acceptance of the broker of record letters was a clear breach of the non-solicitation and non-interference provision. Wilson was viewed as a leader in the industry and USI had a legitimate business interest in ensuring that he did not transfer that good will to Lyons.
The court rejected Wilson’s and Lyons’ claim that equitable relief was not necessary since USI could sue for damages. It said that while an injunction was an extraordinary remedy that should not issue if damages can adequately compensate a party, the injury caused by Wilson and Lyons was difficulty to quantify and they suffered irreparable harm. Also, USI was likely to prevail on the merits and greater harm would result to USI if the requested relief was denied than harm to Wilson and Lyons. Further, Wilson was not prohibited from earning a living.
Finally, the court rejected defendant’s argument that the clients who had transferred should be permitted to stay and held that its order directing them to return to USI or choose a different broker restored the status quo.
Reference: Digest of Recent Opinions, Pennsylvania Law Weekly, 37PLW1012 (October 21, 2014)
Filed Under: Employment Contracts; Restrictive Covenants; Injunctive Relief
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