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Competition among companiesinvolved in the Marcellus Shaleindustry has caused some employers

to utilize employment non-competitionagreements as a means to protect theemployers’ confidential business informa-tion and customer relationships. A recentcourt decision suggests that employmentnon-competition agreements are potentiallyenforceable in the industry, but only if theemployer utilizes the agreements for a legit-imate business purpose and only if the employer complies care-fully with all legal requirements in obtaining those agreementsfrom their employees.

In 2007, Texas-based Red Oak Water Transfer, Inc. opened anaffiliate in Western Pennsylvania to provide water transfer servic-es to the Marcellus Shale drilling industry. By 2010, Red Oakwas seeing an increasing amount of competition as other watertransfer companies were opening operations in WesternPennsylvania. Red Oak decided to deter the possible loss of keyemployees to its competitors by requesting that those employeessign non-competition agreements.

Red Oak’s president flew from Texas to present the non-com-petition agreements to eight operations supervisors in eight indi-vidual meetings. The agreements purported to prohibit the super-visors, for a period of 12 months after leaving Red Oak’semployment, from competing with Red Oak or its affiliates inany geographic territory in which Red Oak or its affiliates were

conducting business, or had plans to conduct business, at thetime of the supervisors’ employment termination.

As consideration for the non-competition agreements, RedOak offered the supervisors Red Oak stock options. At the timeof the presentation of the non-competition agreements to thesupervisors, Red Oak presented the employees with a notice ofgrant of stock option, which each supervisor was required to signas a condition of his receipt of stock options. The notice that RedOak required supervisors to sign stated that both a stock optionagreement and the Red Oak Long-Term Incentive Plan wereattached to and incorporated by reference into the notice. RedOak, however, had neglected to attach those documents to thenotice. To be eligible for stock options, a supervisor needed tosign the notice and the non-competition agreement on the daythat Red Oak’s president presented those documents to the super-visor.

The stock options that Red Oak offered to the supervisors inexchange for their signing of non-competition agreements didnot vest immediately, but instead were to vest over a period ofthree years. Supervisors forfeited any stock options that had notvested prior to termination of the supervisors’ employment withRed Oak.

In 2011 two operations supervisors who had signed the RedOak non-competition agreement and notice of grant of stockoption left Red Oak’s employment and subsequently beganemployment with Countrywide Energy Services, LLC.Countrywide is a Pennsylvania-based company that provides var-ious services to the Marcellus Shale drilling industry, includingwater transfer services. Upon learning that two of its formeroperations supervisors were working for Countrywide, Red Oaksued the supervisors and Countrywide, in the Court of CommonPleas of Allegheny County, Pennsylvania, for breach of andinterference with Red Oak’s non-competition agreements. In thatlawsuit, Red Oak requested that the court issue an injunction,prohibiting the two supervisors from working for Countrywideduring their 12-month non-competition periods.

After a three-day trial, the court denied Red Oak’s request foran injunction. The court reasoned, in part, that Red Oak had nolegitimate business reason for obtaining non-competition agree-ments from the supervisors, because the supervisors did notreceive any specialized training from Red Oak, did not haveaccess to Red Oak business information that was truly confiden-tial, and had no significant customer contact. The court held thatthe stock options that Red Oak offered the supervisors inexchange for their signing of the agreements constituted inade-quate consideration, because the options represented only apotential future benefit. In denying Red Oak’s request for aninjunction, the court also noted that there was no “meeting of theminds” on an enforceable non-competition agreement becauseRed Oak had failed to provide the supervisors with certain of thestock option documents that were part of that agreement, andthat the non-competition agreement was unreasonably broadbecause it purported to preclude the supervisors from working inbusinesses other than the water transfer business and in geo-graphic areas in which those supervisors had never worked forRed Oak. The court’s decision is reported as Red Oak WaterTransfer NE, LLC v. Countrywide Energy Services, LLC, KellyBlackburn, and David Lloyd, 160 P.L.J. 466 (Ward, J. 2012).

Enforceability of non-competition agreements in the Marcellus Shale industry

Kurt A. Miller

Author:

January 2013 Page 27

The Red Oak case contains several lessons for MarcellusShale industry employers who may wish to utilize non-competi-tion agreements with their employees. First, an employer shouldseek a non-competition agreement from an employee only if theemployee will receive specialized training, will have access toconfidential business information or will have significant accessto the employer’s customers. Second, the employer should pro-vide the employee with consideration in the form of an actualcurrent benefit, such as a lump-sum payment or a salary increase,as opposed to a potential future benefit. Third, the employershould be fair to the employee when seekingthe employee’s entry into the non-competitionagreement, by giving the employee sufficienttime to consider the agreement and to consultwith an attorney, and by providing theemployee with all documents that are part ofthe agreement. Fourth, the employer shouldmake sure that the agreement does not con-tain geographic, temporal or scope-of-activi-ties restrictions that are broader than thosenecessary to protect the employer’s legitimatebusiness interests.

The Red Oak case suggests that MarcellusShale industry employers should not neces-sarily be deterred from hiring employees whohave non-competition agreements with com-petitors. Non-competition agreements are notfavored under the law, and any misstep by anemployer in drafting, implementing, orenforcing an agreement may render the agree-

ment unenforceable. As the Red Oak case shows, depending onthe circumstances, an employer may be able to hire a keyemployee from a competitor, despite the fact that the employeehas a non-competition agreement with the competitor. ❐

Kurt A. Miller is a partner in, and is Chair of the Labor andEmployment Law Section of, Thorp Reed & Armstrong, LLP.Thorp Reed and Mr. Miller represented the defendant-supervi-sors in Red Oak Water Transfer NE, LLC v. Countrywide EnergyServices, LLC, Kelly Blackburn, and David Lloyd.