Is It Worth The Paper? (Covenants not to compete)

James L. Goldsmith, Esquire

Employment mobility is here to stay. Few people work for a single company throughout their careers anymore. Not surprisingly, competition between brokers for productive real estate agents makes agent mobility a fact of life in our industry.

Some brokers are fed up with competitors who are unabashed in their efforts to pluck the brokers' better agents. One tool used to prevent agents from not only leaving a broker's office but becoming a member of a competitor's company is a covenant "not-to- compete" between broker and agent.

Here's the story on covenants not-to-compete: sometimes they work and sometimes they don't. The law frowns on agreements that restrict one's ability to work and move freely in the marketplace, however, if properly drafted, with appropriate geographic and time limitations, such covenants will be enforced.

A court will not forecast what it considers to be a reasonable time/place restriction and will only decide these issues when an actual case in controversy is presented to it. Factors such as population density and level of competition will be considered. A court that finds the restriction too lengthy in time or too broad in its geographic range will make no attempt to redraft the covenant to make it fair but will deny its enforceability altogether.

The level of office-hopping that goes on in this industry and the fact that brokers consider their sales affiliates to be independent contractors both speak to a likelihood that only limited covenants will succeed.

These same factors, when applied to key personnel such as managers and trainers, may suggest that lengthier time limitations and geographic restrictions can be applied lawfully. REALTORS® who care about the enforceability of a specific covenant are wise to consult legal counsel who can investigate local decisions on the subject and better assess the standards that apply.

In addition to carefully setting the limitations of a covenant, assuring that it is "paid for" is essential. Every contract must be supported by consideration in order to have binding effect. Consideration is nothing more than the value that is exchanged for the promise. A covenant brings value to the broker by making it more difficult for competitors to take sales affiliates. What is the value exchanged for this benefit? The promise of continued affiliation has been determined to be insufficient to bring enforceability to a covenant not-to-compete. In other words, requiring a salesperson to sign a covenant not-to-compete if he wants to remain with the broker is not a fair exchange of value, according to Pennsylvania common law. When a covenant not-to-compete is made part of the original broker/salesperson contract, the covenant is enforceable because it was given by the salesperson in exchange for the broker's agreement to hire the salesperson, pay a commission split, etc. When an existing salesperson is promised a higher commission split, then the covenant is traded for something of value and would be enforceable.

In any case, REALTORS® should consult legal counsel when considering the benefits of a covenant not-to-compete.