CLIENT ALERT: RECENT COURT RULING REGARDING THE VIOLATION OF A COVENANT NOT TO COMPETE – SOLICITATION OF PAST CUSTOMERS

In a breach of contract case last month (January 2013), a Pennsylvania trial court correctly ruled (in my humble opinion), that a seller did not violate the terms of a covenant not to compete in an asset purchase agreement by providing services to its former clients. The new owners of the company argued for a broad interpretation of the word “solicit” and a holding that the seller had solicited its former business clients. The court disagreed, and in a very clearly worded opinion held the word “solicit” means more than just accepting work from a former client. In this case, the seller did not proactively reach out to any of his former clients, but merely agreed to work for them after the former clients unilaterally approached him.

This unfortunately was a case of a lawyer not paying attention to the details. The main asset in this sale appears to have been the customer list, and the buyer failed to ensure it was properly protected. This problem could have easily been easily avoided by including in the agreement a list of clients the seller could not work with, a mandatory referral clause, or perhaps a broader geographical restriction, just to name a few options. Realize now, every case turns on its own unique set of facts and circumstances and your situation may differ from what the court analyzed here. In the above example, the key fact for this particular court was that the plaintiff was unable to produce any evidence to contradict the seller’s statement that he did not reach out to former clients.

While this case took place in the context of a sale of assets, a restrictive covenant like a non-compete or a non-solicitation of former employees or former clients is regularly hidden in employment agreements, independent contractor agreements, employee handbooks or employment offer letters. The attorneys at Danziger Shapiro have years of experience drafting and litigating these and other common employer employee issues. Please feel free to contact us to discuss this and any other concerns you may have.