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Recent Pennsylvania Holding on Restrictive Covenants

By:  Stuart R. Lundy, Esquire

In a recent Lawrence County, Pennsylvania, case the court heard a case filed by the buyer of the assets of an accounting firm.  The parties had a written  Asset Purchase Agreement (“APA”) that contained a restrictive covenant precluding the seller from using its trade secrets after closing.  In the lawsuit, the buyer claimed that the seller violated the restrictive covenant after the restricted period had expired by using the client list to contact clients to notify them that the seller was returning to the accounting profession.

The court held that a client list is a trade secret; however, the court ruled that the restrictive covenant in the APA did not preclude the seller from contacting clients on the client list because: (a) it was after the restricted period had expired; (b) the clients contacted by the seller were family members, friends, or had been engaged in non-accounting business transactions with the seller after closing on the sale of the assets; (c) the contact with the clients was limited to a letter informing the clients that seller was once again rendering accounting services; and (d) the letter did not disparage the buyer.

As a result of the holding of the court and as a “belt and suspenders approach,” every restrictive covenant should: (a) specifically provide that a client list is a trade secret that may again never be used thereafter by the seller, directly or indirectly, including, but not limited to, after the expiration of the restricted period; and (b) that anyone on the client list including, but not limited to, family, friends, and persons engaging in other types of business with the party may not be contacted at any time in the future, directly or indirectly, for any reason related to the type of business identified in the agreement.