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Employee Confidentiality Agreements Can Be Enforced without New Consideration

Federal Court rules:
Clause will be enforced

A federal court in Pennsylvania has held that a confidentiality agreement signed five months after an employee was hired can be enforced after the employee leaves even if the employee received no consideration other than continued employment.

The case is W. Shore Home v. Graeser.

West Shore is a home-remodeling company specializing in windows, doors, and bathroom renovation with about 30 locations in 15 states.

P.J. Fitzpatrick, LLC, is West Shore’s competitor. Both companies do business in Pennsylvania, New Jersey, and Maryland.

West Shore’s confidential information includes details about vendors, materials costs, utilization methods, and procurement strategies. Designated employees may access this information only on a “need to know” basis, using a password. They’re prohibited from downloading this information to a personal device or forwarding it outside the company.

West Shore also requires employees to sign nonsolicitation and nondisclosure agreements to further protect its confidential information and trade secrets.

West Short employees must review and acknowledge the company’s employee handbook, which stresses safeguarding confidential information, every year.

West Shore hired Michael Graeser in 2018. Five months later, he signed an employment agreement with the company that included nonsolicitation and confidentiality provisions.

Graeser worked as West Shore’s procurement manager, a high-ranking position responsible for overseeing the sourcing of materials for the company’s projects.

As the court noted, he had access to

vendor information and capacities, strategies for sourcing materials and supply chain optimization, purchasing trends, pricing information for materials, locations for and stock of company remodeling materials, material utilization rates, market research, and expansion plans and strategies.

Graeser resigned from West Shore in 2021 and became director of procurement and inventory management for Fitzpatrick.

In 2022, West Shore discovered that Graeser had forwarded three emails with the company’s confidential information and trade secrets from his work email address to his personal email accounts a few weeks before he quit. This information included “a strategic Warehouse Distribution Plan” that West Shore had commissioned from a third-party.

A West Shore vendor tried to email Graeser at Fitzpatrick in 2022, but accidentally used his old West Shore email address. In the email chain, Graeser corresponded with the vendor about information West Shore claimed he only could have learned through his work with West Shore.

West Shore sent cease-and-desist letters to Graeser and Fitzpatrick, then filed suit against them.

Under Pennsylvania law, a plaintiff must plead three elements to establish a cause of action for breach of contract or breach of a restrictive covenant in a contract:

  1. existence of a contract or covenant, including its essential terms,
  2. breach, and
  3. resultant damages.

A contract requires:

  1. mutual understanding between the parties,
  2. exchange of consideration, and
  3. delineation of terms with sufficient clarity.

Graeser argued that the second component of a valid contract was lacking. He claimed that the restrictive covenants in his employment agreement were unsupported by adequate consideration when he agreed to them.

Under Pennsylvania law, restrictive covenants are enforceable only if they are:

  1. ancillary to an employment relationship between an employee and an employer;
  2. supported by adequate consideration;
  3. reasonably limited in duration and geographic extent; and
  4. designed to protect the legitimate interests of the employer.

Restrictions imposed after an employee begins working are enforceable only if supported by “new and valuable consideration.”

Normally, noted the court, “mere continuation of the employment relationship” isn’t enough consideration.

However, the court concluded that “continued employment is sufficient consideration” based upon distinctions Pennsylvania courts historically have drawn between discrete nondisclosure agreements and noncompete or nonsolicitation covenants.

The court also found that West Shore took reasonable steps to protect its confidential and trade secret information and had pled a prima facie claim for misappropriation of trade secrets by Fitzpatrick.

Just like the haiku above, we like to keep our posts short and sweet. Hopefully, you found this bite-sized information helpful. If you would like more information, please do not hesitate to contact us here.

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