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Are Non-Competes Enforceable in PA Independent Contractor Agreements?

Short Answer: Yes, but as with all non-compete provisions, proceed with caution and draft wisely.

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Like many states, Pennsylvania has long viewed restrictive covenants such as covenants not to compete with disfavor. Despite its preference against them, non-compete agreements are still frequently used and upheld when narrowly drafted.

In Pennsylvania, in order to be enforceable, a restrictive covenant must satisfy three general requirements:

(1) the covenant must relate to either a contract for the sale of goodwill or other subject property or to a contract for employment;

(2) the covenant must be supported by adequate consideration; and

(3) the application of the covenant must be reasonably limited in both time and territory.

Piercing Pagoda, Inc. v. Hoffner, 351 A.2d 207, 210 (Pa. 1976).

Non-compete provisions within independent contractor agreements are often challenged as unenforceable under the first prong of the above analysis on the argument that these agreements are not contracts for employment. However, courts have long upheld restrictive covenants beyond traditional employer-employee relationships, including independent contractor agreements, "if the rationale behind the covenant can be analogized to that which exists in the employer/employee relationship." Fitness Essentials, L.L.C. v. Nill, 122 A.3d 1121 (Pa. Super. 2015) (quoting Quaker City Engine Rebuilders, Inc. v. Toscano, 535 A.2d 1083 (Pa. Super. 1987)).

In traditional employer-employee relationships, a non-compete will be upheld where 1) it is incident to an employment relationship between the parties to the covenant, 2) the restrictions are reasonably necessary for the protection of the employer, and 3.) the restrictions are reasonably limited in duration and geographic extent. Quaker City Engine Rebuilders, Inc. v. Toscano, 535 A.2d 1083 (Pa. Super. 1987) (internal citations omitted) (emphasis added).

Thus, like non-competes in traditional employment agreements, courts will examine the scope as well as the purpose of the restrictive covenant in the independent contractor agreement in order to ensure that it is reasonably necessary for the protection of the employer. Of course, every business has different interests to protect, so determining what is reasonably necessary for the particular business in question is a largely fact driven analysis.

For example, in Fitness Essentials the non-compete and non-solicitation provisions of an independent contractor were upheld against a former fitness trainer who worked at one of Fitness Essentials' facilities. 122 A.3d at 1122. The trainer, Nill, signed an independent contractor agreement with the following language:

5. Non-Competition. Fitness Essentials acknowledges and agrees that Trainer may provide personal training or other fitness related services on its own behalf or to other persons or organizations and does not object to Trainer's affiliations with other persons or organizations. However, in order to adequately protect the interests of Fitness Essentials, it is necessary for Trainer to undertake limited obligations of non-competition. Therefore, during the terms of this Agreement and for a period of two years immediately following the termination of this agreement for any reason, Trainer will not, without Fitness Essentials' written consent, directly or indirectly engage or employ any person who is engaged by Fitness Essentials as a personal trainer during the times this Agreement is in effect or in any manner seek to induce any person to leave his or her engagement with Fitness Essentials, or any client to stop engaging the services of Fitness Essentials, or solicit any corporate client or customer of Fitness Essentials to engage Trainer or a fitness business affiliated with Trainer in place of Fitness Essentials, or otherwise interfere with ay contractual relationship of Fitness Essentials.

Id. Nill challenged the provision, arguing among other things, that non-compete agreements are per se unenforceable in independent contractor agreements. The Superior Court disagreed under the above analysis and found instead that the independent contractor agreement at issue was sufficiently analogous to an employment relationship, given that the purpose of this particular non-compete provision was to prevent exploitation of Fitness Essentials' facilities and clients.

However, the Eighth Circuit recently rejected a non-compete provision in an independent contractor agreement as unenforceable. Ag Spectrum Co. v. Elder, 865 F.3d 1088 (8th Cir. August 2, 2017) (applying IA law). In that case, Ag Spectrum contracted with Elder to work as an independent contractor to sell Ag Spectrum's products. Elder was given the title of "Area Manager" and sold Ag Spectrum's products essentially as an independent dealer, buying Ag Spectrum's products and selling them at a markup. As part of the agreement, Elder agreed that he would not compete with Ag Spectrum by "marketing to, selling to, or consulting with its customers about similar products for three years after terminating the Agreement." After the relationship ended, Elder challenged the agreement as unenforceable per se under Iowa law.

The Eighth Circuit found that the particular noncompete at issue was unenforceable; however, it declined to hold that noncompete provisions with independent contractors are unenforceable per se. Rather, like Pennsylvania, the Court engaged in a fact-intensive inquiry to determine if the noncompete was unreasonable. The Court found this provision to be uneforceable because the noncompete was unnecessary to protect Ag Spectrum's business, noting that Elder did not have an "advantage" over Ag Spectrum as a result of confidential information or training provided by Ag Spectrum that would allow him "to unfairly compete against Ag Spectrum," nor did Elder benefit from Ag Spectrum's goodwill and customer base because he developed the customers, not Ag Spectrum.

Both cases above highlight the importance of the fact-driven analysis that takes place when court's review non-compete agreements. Regardless of the classification of the employment relationship, covenants not to compete continue to be disfavored in Pennsylvania. These provisions should be carefully crafted and regularly reviewed in order to ensure that the provisions remain consistent with PA law. Best practice is to always consult an attorney before drafting or entering into a non-compete agreement.

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