Much has been written in the legal and business press in the last year on the issue of employment agreements and certain types of restrictions that some employees are subject to in those agreements. Generally speaking, these contractual provisions are known as “restrictive covenants.” The restrictive covenant is a broad category that includes several related, but distinct, restrictions which prevent: 1) competition against the employer; 2) the solicitation of the employer’s clients; and 3) the solicitation of the employer’s customers.
You may also wonder how employment agreements can protect trade secrets, but that is a subject unto itself which will be covered separately. In this post, we will focus on non-competition covenants, known informally as “noncompetes.”
What is a Covenant Not to Compete?
Quite simply, a noncompete is a contractual provision by which an employee agrees not to enter into or start a similar business against the employer for a specified period of time and within a defined geographic area after the employment relationship ends. A well drafted employment agreement will almost always contain both features: 1) a time restriction and 2) a geographic restriction. An example of a typical non-competition covenant follows:
Employee warrants and guarantees that throughout the duration of this Agreement and for a period of two (2) years after the termination of this Agreement, that Employee shall not directly or indirectly engage in any business that would be considered similar in nature to with Employer, its subsidiaries, and any current or former clients and/or customers within a ten (10) mile radius of Hometown, Pennsylvania.
To be enforceable, the scope of the noncompete must be tailored to protect the employer’s legitimate business interests. That is the magic legal concept in these types of cases. Assuming that the market for the employer’s business in the above example is contained within a ten mile radius, it is reasonable to expect that a court would enforce this provision as written.
Consider if the language of the example noncompete covered a territory of a one hundred mile radius, but all of the employer’s customers were located within only ten miles of the employer’s location, that geographic restriction would likely judged overly broad and thus unenforceable as written.
Alternatively, consider a noncompete that would prevent the now former employee from competing with the employer for a period of ten years. With the speed of business these days, a ten year restriction would seem indeed excessive and likely unenforceable.
Judicial Review
In litigation matters involving noncompetes, typically the plaintiff/petitioner is the employer attempting to enforce the agreement against a former employee. On the rare occasion, a former employee will initiate litigation against a former employer for declaratory relief from the court - a judicial order modifying parts of the noncompete based on the facts of the case or declaring it invalid entirely. Sometimes, the best defense is a good offense.
Pennsylvania state court judges do have significant latitude to reform the language of the restrictive covenant to meet the judge’s sense of fairness.
The foundational case is Sidco Paper Co. v. Aaron, 465 Pa. 586, 351 A.2d 250 (Pa. 1976), which established that when a restrictive covenant is broader than necessary to protect the employer, a court may enforce only those portions that are reasonably necessary for the employer’s protection. This principle has been consistently reaffirmed by subsequent Pennsylvania appellate decisions, including All-Pak, Inc. v. Johnston, 694 A.2d 347 (Pa. Super. Ct. 1997), Bell Fuel Corp. v. Cattolico, 544 A.2d 450 (Pa. Super. Ct. 1988), and most recently Prop. Damage Restoration 2 v. KD Disaster Cleanup, LLC (Pa. Super. Ct. May 14, 2025).
The courts’ power to “blue pencil” or reform a covenant is not limited to excising offending language; it extends to supplying new, limiting terms that render the covenant reasonable. For example, a court may reduce the geographic scope of a noncompete to the area where the employer actually does business, shorten the duration to a period necessary to protect the employer’s interests, or limit the scope of prohibited activities to those that would actually harm the employer.
The Federal Trade Commission Goes Wild
In April 2024, the Federal Trade Commission (the “FTC”) approved a Final Rule which effectively banned almost all employment non-competition covenants (the “FTC Rule”). It was a wildly overbroad assertion of federal administrative power over what is generally a state law issue. The FTC Rule purported to regulate not only future non-competition covenants, but also non-competition covenants that were already in existence. In other words, the FTC wanted to invalidate contractual provisions that may have been agreed to years prior.
Unsurprisingly, the legality of the FTC Rule was challenged in court, most notably in Ryan, LLC v. the Federal Trade Commission in the U.S. District Court for the Northern District of Texas at Docket No. 3:24-CV-00986-E. The court’s opinion provided that:
The Court concludes that the FTC lacks statutory authority to promulgate the Non-Compete Rule, and that the Rule is arbitrary and capricious. Thus, the FTC’s promulgation of the Rule is an unlawful agency action. See 5 U.S.C. § 706(2). The Court grants summary judgment as to Plaintiff’s and Plaintiff Intervenors’ corresponding claim(s) under the [Administrative Procedures Act). The Court denies the FTC’s motion for summary judgment. Opinion at p.26.
With the change in the Executive Branch following the 2024 Presidential election, the new administration brought a different approach. The FTC abandoned its appeals of the court’s ruling in Ryan, which allows the nationwide injunction to remain. Stated plainly, the FTC Rule is unenforceable nationwide. It appears that for now, noncompetes are indeed enforceable now and for the foreseeable future. Employers should keep this in mind as they recruit and onboard new employees.
If you have any questions about this material, contact TLO.
Tuk Law Offices provides this information as a service to clients and peers for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers.