While non-competition clauses are typically enforced in the context of employment agreements, a recent Pennsylvania Superior Court decision extended enforcement of a non-compete in the context of an independent contractor relationship. In Metro Public Adjusters v. Houck, the defendant signed Metro’s standard independent contractor agreement for new adjusters which contained a non-competition clause. The clause prohibited Houck from competing with Metro in the states in which Metro does business for two years after Houck’s relationship with Metro ended. Even before Houck left Metro, however, he began setting up a competing company with two other Metro adjusters. They created a limited liability company and set up a website. Upon leaving Metro, Houck and his fellow adjusters sought the same business in states in which Metro was licensed until Metro obtained an injunction. Judge Rubinstein of the Bucks County Court of Common Pleas held:
The covenant not to compete within the independent contractor agreement is designed to prevent an independent contractor from hijacking the training and experience garnered while affiliated with Metro [Public Adjustment Inc.] and utilizing it to create their own business to directly compete with Metro. Indeed, this precise situation occurred in this case.
Judge Rubinstein was particularly influenced by the evidence that Houck and his accomplices had no experience in public adjusting prior to their association with Metro and actively began plans to compete while still working for Metro.
On appeal, Judge Anne E. Lazarus of the Superior Court affirmed Judge Rubinstein’s decision and largely adopted his reasoning. The court held that such non-competition agreements protect legitimate business interests and are enforceable. Quoting from Rubinstein’s opinion, “
Metro provided the tools to be successful in the industry, including basic and advanced training, as well as their proprietary information regarding the best way to maximize profits on a claim. All three defendants were very successful no doubt due to the opportunity, training and experience provided by Metro.
A close analysis of the Houck opinion, however, shows the courts did not have to reach that far to extend enforcement of the non-competition clause in this case. Though Metro had the adjusters sign “independent contractor agreements,” the facts showed that Metro’s relationship with its adjusters was closer to employer-employee than true independent contractors. None of the defendants had previous public adjusting experience. They worked exclusively for Metro and followed Metro’s methods and instructions. One wonders if the tables were turned and the adjusters were suing Metro for employee benefits or seeking unemployment compensation whether the courts would find Metro’s “independent contractor agreement” was really a contract of employment?
There is a cautionary tale in this story for both employers and employees. Employers who use “standard independent contractor agreements” in situations that are more akin to traditional employer-employee relationships might find their agreement is a double-edged sword. And employees who seek to get one up on their employer by relying on legal loopholes to avoid agreements they sign might find the courts unwilling to open the loopholes for them.
If you have questions regarding independent contractor versus employee relationships or other legal matters, please call our Yardley office at 215-493-8287 or send us an email HERE. We will be glad to help.