In the case of W. Short Home, LLC v. Graeser[1], the United States District Court for the Middle District of Pennsylvania reviewed existing cases where continued employment was deemed consideration for confidentiality agreements.
In a time of uncertainty regarding employer’s continued ability to enforce non-competition agreements, KingSpry’s Employment Law Chair, Avery E. Smith, provides insight to employers regarding the protection of confidential information and trade secrets.
Background
Plaintiff, West Shore Home, LLC (“West Shore”) is a privately held home-remodeling company who competes for business directly with Defendant, P.J. Fitzpatrick, LCC (“Fitzpatrick”) who offers similar services. Defendants, Michael Graeser (“Graeser”) and Joshua Penn (“Penn”), once employed by West Shore, were subsequently employed by Fitzpatrick.
As most employers know, the continued employment of an ex-employee by a direct competitor triggers concern for breach of confidentiality. In West Shore, the court examines how confidentiality agreements may be enforced against employees based on continued employment—even where additional consideration is lacking.
Graeser’s Employment with West Shore
Graeser executed an employment agreement with West Shore “in consideration of their mutual promises hereinafter set forth and other good and valuable consideration…”
This agreement contained both nonsolicitation and confidentiality provisions. Meaning, Graeser agreed to not disclose any confidential information nor trade secrets during and after the term of his employment. The agreement further allowed West Shore to seek and obtain relief as a result of breach of the confidentiality provisions.
Graeser undeniably had access to confidential information and trade secrets of West Shore in his position as procurement manager. Therefore, his employment with Fitzpatrick was a concern.
Graeser’s Breach of Employment Contract
Following his resignation, West Shore learned that Graeser had forwarded three emails containing the company’s confidential information and trade secrets from his work email address to personal email accounts.
West Shore averred that Graeser forwarded these emails for Fitzpatrick’s benefit.
Legal Action
Following cease-and-desist letters issued by West Shore, the company brought action against its former employees, Graeser and Penn, and their current employer, Fitzpatrick, for misappropriation of trade secrets in violation of state and federal law, and related state-law claims.
Ultimately, Penn filed a motion to dismiss, suggesting that the court lacked subject matter jurisdiction, which was granted. Graeser and Fitzpatrick, however, were unable to escape litigation through their motions, and the court held that Graser and Fitzpatrick must respond to West Shore’s Complaint.
Alleged Violations
West Shore alleged Graeser violated his employment agreement by:
- Disclosing West Shore’s confidential information and trade secrets; and
- Unlawfully converting West Shore’s confidential information and trade secrets for his own benefit; and
- Breaching his duty of loyalty to West Shore.
The company further alleged that Graeser and Fitzpatrick misappropriated its trade secrets in violation of state and federal law.
Breach of Contract in Pennsylvania
Under Pennsylvania law, a plaintiff must plead the following three elements to establish a cause of action for breach of contract or breach of a restrictive covenant contained in a contract:
- Existence of a contract or covenant, including its essential terms; and
- Breach; and
- Resultant damages.
In his defense, Graeser suggests that a valid contract never existed between West Shore and him, arguing that the restrictive covenants in his employment agreement were unsupported by adequate consideration when he acceded to them.
Not All Restrictive Covenants Are Created Equal
Though the mere continuation of the employment relationship will not suffice as consideration, the Court asserted that “not all restrictive covenants are created equal”.
In review of precedential law, the Court found that “continued employment is sufficient consideration based upon distinctions the Commonwealth’s courts historically have drawn between discrete nondisclosure agreements and noncompete or nonsolicitation covenants”. To further support its decision, the Court noted that it “canvassed the universe of federal decisions” citing relevant rule.
What Does This Mean for Employers?
While West Shore’s remaining claims against Graeser and Fitzpatrick move forward for Defendants’ Answers in accordance with the Federal Rules of Civil Procedure, the Court has upheld the precedent and significance of continued employment as consideration in confidentiality agreements.
Protecting Confidential Information and Trade Secrets
As discussed in our blog regarding non-compete agreements, protecting confidential information and trade secrets is imperative for employers, but options for protecting these assets may dwindle in the near future[2].
The precedent followed by Pennsylvania Courts to uphold continued employment as consideration is one form of protection for employers and sensitive information, should an employee breach their contract or its confidentiality provisions.
If you have questions regarding the enforcement of employment contracts or confidentiality agreements, please contact your legal counsel or an Employment attorney at KingSpry.
[1] W. Short Home, LLC v. Graeser, 2023 U.S. Dist. LEXIS 42951.
[2] It is likely that the Federal Trade Commission’s proposed rule to ban the use of noncompetes will take effect, rendering past and current noncompete provisions unenforceable.
