In Socko v. Mid-Atlantic Systems of CPA, Inc., the Pennsylvania Supreme Court held that the Uniform Written Obligations Act (“UWOA”) could not render a restrictive covenant not supported by adequate consideration enforceable nonetheless.  In so doing, the Court emphasized that such restrictive covenants – agreements that restrict an employee’s ability to compete against an employer after termination - are disfavored restraints on trade.  As the dissent noted, the opinion does appear contrary to the plain language of the UWOA, but this dissonance highlights the disfavored nature of restrictive covenants. 

As part of his employment with Mid-Atlantic, Socko signed three restrictive covenants:  one upon the beginning of his employment, a second upon return to Mid-Atlantic after terminating his employment, and a third, more restrictive, agreement signed during his employment.  Along with the third restrictive covenant, Socko did not receive a bonus, promotion or other consideration.  The document recited the magic words of the UWOA that “the parties intended to be legally bound.”  Socko resigned from Mid-Atlantic and went to work for a competitor, and Mid-Atlantic filed suit for breach of the restrictive covenant. 

Pennsylvania law requires that restrictive covenants must be accompanied by adequate consideration.  To meet this requirement, the employee must sign the agreement at the commencement of employment, or the employer must supply new consideration for restrictive covenants signed after the commencement of employment.  “New consideration” includes a benefit to the employee or a beneficial change to the employee’s status.  Socko did not receive any new consideration for the new restrictive covenant that Mid-Atlantic sought to enforce.  Importantly, the new restrictive covenant also included language superseding all previous restrictive covenants, thus rendering the second restrictive covenant, which was supported by sufficient consideration, ineffective. 

To address this problem, Mid-Atlantic argued that Socko was barred from challenging the restrictive covenant on the basis that it was not supported by new consideration because it contained the UWOA language.  Mid-Atlantic asserted that the “magic words” foreclosed the usual analysis of consideration for restrictive covenants signed after the commencement of employment.  The Supreme Court, affirming the Superior Court’s holding, held that the UWOA language does not foreclose such an analysis as it relates to restrictive covenants.  In so doing, the Supreme Court rejected Mid-Atlantic’s framing of the issue.  The issue was not, as Mid-Atlantic asserted, that the UWOA foreclosed Socko from challenging the validity of the agreement based on a lack of consideration.  Instead, the Supreme Court stated that the issue was whether the UWOA acted as a substitute for consideration.  

The Supreme Court relied on principles of statutory construction and the body of case law holding that restrictive covenants are disfavored restraints of trade to find that the UWOA language would not act as a substitute for consideration to support a restrictive covenant.  The Supreme Court noted that the unique treatment of restrictive covenants in the law, including rigorous judicial scrutiny, required this outcome. 

While this holding will not shock employment lawyers, as it is consistent with the court’s jaundiced approach to restrictive covenants, it does highlight important considerations for the use of such documents.  Employers strive to foster their entry level employees into valuable positions, and such a practice benefits employer and employee.  Employers must consider when and whether to require those employees to execute restrictive covenants, the consideration they will provide for new restrictions, and whether there are other, more productive, ways to retain a valuable employee and protect the business.  The Supreme Court’s decision does not change the analysis, but it does clarify that no mere technicality will encourage a court to set aside the rigorous scrutiny of restrictive covenants required by the case law. 

In Roman v. McGuire Memorial, the Pennsylvania Superior Court announced a new basis for challenging terminations of at-will employees.  While Pennsylvania law has always recognized a “public policy” exception to at-will employment, the case law has limited that exception.  Roman expands the exception to include terminations of health-care workers who refuse to work mandatory overtime.
 
Roman worked as a direct care worker, subject to McGuire Memorial’s mandatory overtime requirement.  She was an at-will employee.  The mandatory overtime policy allowed for termination of employees who refused to work mandatory overtime on four occasions. McGuire terminated Roman’s employment after her (disputed) fourth refusal, and Roman sued for wrongful termination in violation of public policy.  After a nonjury trial, the trial court found in Roman’s favor, awarded her $121,869.93 in back pay and lost benefits, and ordered reinstatement to her former position.
 
Relevant to the dispute is Pennsylvania’s Prohibition of Excessive Overtime Act (43 P.S. § 932.1 et seq.).  The Act prohibits a health care facility from requiring employees to work in excess of an “agreed to or previously determined and regularly scheduled daily work shift.”  43 P.S. § 932.3(a)(1).  Further, the Act prohibits retaliation against an employee who refuses to accept work in excess of those limitations.  43 P.S. § 932.3(b).  The Act does not provide for a remedy for employees terminated in violation of its requirements.  It does contemplate a regulatory scheme to address complaints by employees, but those regulations are not yet final.
 
The Superior Court held that the Act established a public policy that healthcare facilities should not require its direct care workers to work overtime hours, and, as such, Roman’s termination for refusing to work overtime hours amounted to wrongful termination in violation of public policy.  Further, the Court distinguished cases in which it had refused to recognize a public policy exception to the at-will doctrine because a statute had already created a remedial scheme to address violations of the particular policy identified in that statute, such as the Pennsylvania Human Relations Act.  In the case of the Prohibition of Excessive Overtime in Health Care Act, there existed no remedial scheme to address the wrong.
 
The Superior Court has thus used The Act to identify a new public policy exception to the at-will doctrine.  Health care entities should be mindful of this exception in creating and enforcing overtime policies for direct care workers. 

Reprinted with permission from the September 28, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.

In a precedential opinion, the U.S. Court of Appeals for the Third Circuit affirmed an award of punitive damages awarded by a jury in a dispute between two businesses. Brand Marketing Group LLC v. Intertek Testing Services, No. 14-3010 (Sept. 10, 2015), addressed two issues of first or limited impression relating to punitive damages. First, the Third Circuit held that juries may award punitive damages in negligent misrepresentation claims. Second, the Third Circuit considered whether courts may consider harm to the public, rather than harm to the plaintiff only, in awarding punitive damages. As the dissent in Brand Marketing noted, the Third Circuit's decision creates some interesting risks and strategies for commercial disputes.

Brand Marketing Group LLC developed vent-free heaters known as Thermablasters. Brand contracted with a manufacturing company to manufacture the heaters, and a testing company, Intertek Testing Services N.A. Inc., to perform testing for the Thermablasters pursuant to American National Standards Institute (ANSI) standards. Brand entered into a contract with Ace Hardware Corp. to buy 3,980 Thermablasters for $467,000. Intertek then performed the testing on the heaters and found that they met the applicable ANSI standard. The heaters were delivered to Ace Hardware. Ace halted sales after discovering that the heaters, in fact, failed to meet the applicable ANSI standard. Ace sued Brand and obtained a judgment for $611,060. Brand then filed a claim against Intertek.

Brand prevailed on its negligent misrepresentation claim after a three-day trial. The jury awarded $725,000 in past compensatory damages, $320,000 in future compensatory damages, and $5 million in punitive damages. The jury found that Intertek negligently misrepresented it had the necessary expertise to test the heaters. Relevant to the issue of punitive damages, the jury found, after instruction by the court, that Intertek acted with reckless disregard for the safety of others.

The Third Circuit affirmed the trial court's denial of Intertek's post-trial motions, and thus the jury award of $5 million in punitive damages. In so doing, the Third Circuit predicted that the Pennsylvania Supreme Court would allow an award of punitive damages for negligent misrepresentation claims, noting there existed no precedent for treating negligent misrepresentation claims differently from general negligence claims for purposes of awarding punitive damages.

However, this holding is not the most interesting part of the case. The Third Circuit next examined whether courts could consider harm to the public in general in awarding punitive damages, or whether the court must limit its analysis to damage to the plaintiff. In this case, Brand experienced financial harm only (Intertek did assert, without success, that the economic loss doctrine barred Brand's claim). No consumer experienced an accident or injury as a result of the testing failure. Intertek argued that an award of punitive damages violated the due process clause under these facts because the jury should not consider potential harm to consumers, and must only consider harm to Brand, in awarding punitive damages. The court found that this issue was "not settled by precedent." The Third Circuit analyzed the case law to conclude that courts may only consider instances of misconduct by the defendant in evaluating a punitive damages award where the conduct is of the same sort as the conduct that injured the plaintiff. The court rejected Intertek's argument that applicable law prohibited consideration of potential public harm in reviewing an award of punitive damages, and found that, in this case, potential public harm was "directly tied" to the harm to the plaintiff. The Third Circuit likewise found that the fact that no one was physically injured by the Thermablasters did not matter, stating that Intertek "should not be rewarded" for the fact the risk did not come to fruition. Thus, Brand stands for the proposition that a court may consider potential harm to the public in reviewing an award of punitive damages as long as the potential harm is directly tied to the injury to the plaintiff.

In his dissent, Judge D. Michael Fisher opined that if an "admission of imperfection" or a "lack of absolute uniformity" allows for an award of punitive damages whenever something goes wrong, "Pennsylvania companies may be in for a rude awakening." Indeed, as Fisher notes, the Brand decision will create new strategies and areas of risk for businesses involved in commercial disputes. Brand represents, at its most basic level, a commercial dispute—a dispute between businesses regarding a failure of one party to do what that entity contractually agreed to do. Interestingly, Brand did not assert that it was entitled to punitive damages as a result of intentional and outrageous conduct of Intertek, but instead proved to the jury that Intertek's "reckless disregard" for a known risk to safety justified punitive damages. Of course, the jury heard evidence that it concluded met the standard, but the application of the standard to a business dispute is an interesting one. Presumably, this standard would have relevance in any business tort case where a failure occurs in, for example, manufacturing or testing products.

Procedurally, Brand allows for the issue of punitive damages to go to the jury, and, arguably, expands the factors a jury may consider in awarding punitive damages in the context of a business tort, but Brand does not mean that a plaintiff will prevail on the issue. It goes without saying that the threat alone may be enough. Brand's strategy in asserting a claim for negligent misrepresentation (and not, for example, breach of contract) created the opportunity to plead and prove punitive damages. Brand was also fortunate to have sufficient facts to overcome the application of the economic loss doctrine. The Third Circuit's opinion in this case supports that strategy by allowing punitive damages in a negligent misrepresentation case and by allowing the consideration of potential (related) harm to the public. In this way, the Third Circuit has created another tool in the commercial litigation arsenal. It will be interesting to see whether courts in the future limit the application of this case to its facts, or if it marks a dramatic change in the available remedies for business torts. •

By Patricia C. Collins, Esquire, Reprinted with permission from the March 23, 2015 issue of The Legal Intelligencer. (c) 2015 ALM Media Properties. Further duplication without permission is prohibited.

Recently, the United States District Court for the Eastern District of Pennsylvania, in Mathis v. Christian Heating and Air Conditioning, Inc., 13-3747 (March 12, 2015), examined the effect of factual findings in unemployment compensation proceedings in Pennsylvania on discrimination claims filed in federal court.  The conclusion?  The discrimination case is a “do over,” and nothing determined by the tribunal (including the Unemployment Compensation Board of Review and the Commonwealth Court) will collaterally estop either party, presumably, from taking a contrary position in the subsequent wrongful termination suit. 

 The facts are these:  Mr. Mathis was employed at Christian Heating and Air Conditioning (“Christian Heating”) for nearly two years.  During that time, Mr. Mathis had placed black tape over part of his identification badge.  The objectionable part of the card professed the company’s mission statement to, inter alia, run the business in a way that was “pleasing to the lord [sic]….”  Mr. Mathis’s supervisor and the owner of the business required him to remove the tape from the back of his badge.  Mr. Mathis refused to do so, and contended that he was terminated as a result. 

Plan B:  Litigating Non-Solicitation Provisions

By Patricia C. Collins, Esquire
Reprinted with permission from December 12, 2013 issue of The Legal Intelligencer. (c)
2013 ALM Media Propeties. Further duplication without permission is prohibited.

Increasingly, employers and their attorneys meet resistance when seeking to enforce covenants not to compete.  States such as Georgia and California continue to refuse to honor those restrictions. Even in states that recognize the validity of such agreements, Courts can restrict the geographic or temporal scope of the agreement, refuse to find sufficient irreparable harm to permit the entry of a temporary or preliminary injunction, or find other equitable grounds to refuse to enforce the covenant not to compete.  Employers do have a back-up plan, however.  Recent cases illustrate that the court will enforce agreements not to solicit customers and clients after termination.  These cases also illustrate that courts will look to the nature of the contacts with clients or employees to determine if there is a breach of a non-solicitation provision.

In Corporate Technologies Inc. v. Harnett, the United States Court of Appeals for the First Circuit affirmed the district court’s grant of a preliminary injunction against a former employee of Corporate Technologies Inc. and his new employer.  The preliminary injunction restricted the employee from doing business with certain customers of Corporate Technologies with whom he worked during his employment, and required the new employer to withdraw bids which the employee prepared during his employment with the new employer.  The First Circuit court noted that the district court was specifically applying the non-solicitation and not the non-compete provisions of the agreement.  Accordingly, both courts engaged in a discussion of the applicable requirements for the entry of a preliminary injunction (which are the same under Massachusetts and Pennsylvania law).  Notably, the First Circuit did not engage in a discussion of the reasonableness of the geographic or temporal scope of the agreement, or whether the employer had a “protectable interest” served by the non-solicitation provision.  The district court found that the employee breached the non-solicitation provisions of the agreement, and the First Circuit affirmed the grant of the preliminary injunction.

By Patricia C. Collins, Esquire Reprinted with permission from June 14, 2013 issue of The Legal Intelligencer. (c)

2013 ALM Media Properties. Further duplication without permission is prohibited.

            It is a reality of litigation that the facts of a case can change in significant ways between the filing of the complaint and trial, but litigants do not always amend pleadings to address these changes.   A recent decision by the United States Court of Appeals for the Third Circuit offers incentive to amend in those situations. In West Run Student Housing Associates, LLC v. Huntington National Bank, 7 F.3d 165 (3d Cir. 2013), the Third Circuit held that averments in a complaint that is later amended do not amount to judicial admissions.

The procedural posture of the West Run case is not unique. The plaintiff filed a complaint alleging, inter alia, a breach of contract. The plaintiff claimed that the defendant bank breached its agreement to provide financing for a housing project. The contract required the bank to provide the financing if plaintiff sold the requisite number of housing units. The original complaint included averments regarding the number of units sold, and those numbers were not sufficient to trigger the financing requirement. Defendant moved to dismiss the original complaint, and plaintiff, not unexpectedly, amended. The amended complaint did not contain averments regarding the number of housing units sold.

            Predictably, the defendant again moved to dismiss, alleging that the averments contained in the original complaint were judicial admissions, that is, admissions that cannot later be contradicted by a party, which barred the breach of contract claim. The district court agreed and dismissed the claim.

            The Third Circuit disagreed. The Court found that an amended pleading supersedes an original pleading, and parties are free to correct inaccuracies in pleadings by amendment.   The Court noted that the original pleading is of no effect unless the amended complaint specifically refers to or adopts the original pleading. In this way, the amended pleading results in “withdrawal by amendment” of the judicial admission.

Actually, this blog post is not really about binders full of women – the title is pure, unadulterated pandering.  But it is about the conversation that generated that Tweet-worthy sound bite.  In case your computer, smartphone, television and ears were down this week, let’s recap.  At the October 16, 2012 town hall Presidential Debate, an undecided voter asked how the candidates would address pay inequality for women.  President Obama answered by referencing his support of the Lilly Ledbetter Act.  Governor Romney answered with a story about binders full of women searching for female candidates, and providing flexibility for female employees.  An employment lawyer drooled.  Please note that this is not a political discussion, but a legal one, and the analysis that follows is about whether the law would permit the approaches recommended by the candidates.

 President Obama had the easy path.  The Lilly Ledbetter Act is now the law.  Under the civil rights laws, employees have 180 days from the alleged discriminatory act to file a complaint with state or federal equal employment commissions.  If the employee fails to file the claim in the time required, the employee’s claim is forever barred.  Poor Ms. Ledbetter discovered, too late, that she was paid less than a male employee for the same work.  The court dismissed her claim because she filed it more than 180 days after the first discriminatory paycheck.  The Lilly Ledbetter Act states that the statute of limitations for an equal pay claim resets with each paycheck.  It was the first statute that President Obama signed into law. 

 Governor Romney’s answer invites employment lawyer criticism.  To be clear, this is not political criticism, but legal criticism.  The answer essentially had two parts:  first, his search for female candidates and second, his willingness to provide flexibility to female employers who needed to get home to make dinner.  Let’s start with the search for female candidates.  The civil rights laws prohibit discrimination on the basis of gender.   It was not clear from Governor Romney’s answer whether or not he was referring to an affirmative action program, or whether there was a written diversity plan at issue.  But, certainly, the goal of employing an underrepresented group in the office of the governor is a laudable one. 

 Nevertheless, an employment lawyer worries. Imagine two candidates, both with comparable education and experience, both interviewed well, and, in all respects were both qualified candidates.  One is male, one is female.  Could the governor decide to hire the female candidate solely because she was female?  Put another way, would it be discrimination on the basis of gender for an employer to deny employment to the equally qualified male candidate solely on the basis of his gender?  The legal answer is yes.  An interesting defense to such a claim is that the governor had made a policy decision that his cabinet must reflect the views of qualified women.   Employers should always base their decisions on qualifications for the job.  Where an employer has decided that gender, for example, is part of the qualifications for the job, they must also articulate a legitimate business reason for such a qualification. 

 Governor Romney also talked about the need for flexibility for female employees.  Tsk tsk, Governor Romney, tsk tsk.  The law requires that Governor Romney provide the same level of flexibly for all of his employees, regardless of gender.  The law also requires that Governor Romney avoid making employment decisions based on gender stereotypes (i.e., the woman needs to get home to make dinner).  An employment lawyer loses a few hours of sleep. 

 Interestingly, this is the place where the candidates intersect.  The law requires equal pay for equal work, and the Lilly Ledbetter Act keeps that claim alive with each new paycheck. But employees, male and female, do ask for flexible work schedules, and many employers are happy to oblige to keep good candidates. Our advice:  don’t be like Governor Romney!  Make sure flexibility is available to all employees, and that the pay is commensurate with the work provided. 

 The candidates’ discussion does highlight the challenges for employers:  sometimes, an employer’s good intentions, the realities of the workplace, and the requirements of the law seem  at odds with one another.  Even presidential candidates struggle with these competing concerns.  It is our experience that employers can work through these complex issues and strike a balance with good legal and human resources advice. 

In a recent case that may not bode well for the enforcement of noncompete agreements in Pennsylvania and New Jersey, the Virginia Supreme Court reversed twenty years of Virginia precedent relating to noncompetes, agreements pursuant to which an employee agrees not to compete with an employer for a period of time after the termination of employment. Until this recently, Pennsylvania, New Jersey and Virginia had similar laws relating to noncompetes. Historically, courts in all states have not looked favorably on such agreements, and have used various tools to limit or deny enforcement of noncompetes. Prior to the court’s decision in Home Paramount Pest Control v. Shaffer, the law in Virginia was similar to Pennsylvania law: a Court could re-write overbroad noncompete agreements so that the document was consistent with the employer’s protectable interests. In Home Paramount Pest Control, the court stated that it would no longer re-write such provisions, and that it was free to refuse to enforce a noncompete that was overly restrictive.

The former employee in Home Paramount Pest Control signed a noncompete agreement that prohibited him from competing with his former employer’s fumigation business in any manner, in any geographic area where he worked for Home Paramount Pest Control for a period of two years after his termination. Prior to this case, it was well settled that if the court found the restrictions of the noncompete broad, it could rewrite the document and enforce more reasonable provisions. The court generally exercised its re-writing power to limit the geographic or temporal scope of the document, or to find that specific conduct did not violate a noncompete if the employer could not articulate a protectable interest in prohibiting the conduct, even where the clear language of the agreement prohibited the competitive conduct. Generally speaking, “protectable interest” means that the employer has provided something to the employee that it has the right to protect, such as access to trade secrets, or specialized training. If the restriction on future employment did not match a protectable interest, the court would not enforce the restriction.  

In Virginia at least, this is no longer the case. The Virginia Supreme Court noted that it had “incrementally clarified” the law relating to noncompetes so dramatically over the past two decades that it was free to find the noncompete unenforceable in this case. Most interestingly, the court focused on language that lawyers generally believe is good drafting. The agreement in question contained a list of prohibited activities designed to address every conceivable kind of competition, as well as the ubiquitous “in any capacity whatsoever” catch-all for good measure. The court found that the employer could not articulate a protectable interest that would justify such a sweeping prohibition. Specifically, the court was looking for a nexus between the employee’s job duties, and the prohibitions imposed by the noncompete.

In the good old days, the court would simply have revised the agreement to remove whatever restrictions were too broad, such as the “in any capacity whatsoever” language. Or, the court may have found that there was no protectable interest in prohibiting the employee from engaging in his current employment. But the Virginia Supreme Court refused to do so, noting that incremental changes in the law required a different result. I will not bore the reader with the court’s very interesting discussion of how the doctrine of stare decisis applies to the case, except to note that the court recognized its decision as a departure from well-settled law.

While this case does not apply in Pennsylvania or New Jersey, many states have seriously limited the enforceability of noncompetes. We are making sure to discuss these issues with our clients, and draft noncompetes as narrowly as possible.   We are also thinking creatively about other solutions to the problem of competition, trade secrets and specialized training, such as non-solicitation provisions. The Virginia Supreme Court has given us new reasons to draft carefully.