Bilec v. Auburn & Associates, Inc. Pension Trust

A.2d 538 Brevko, Conlon, Hugh BILEC, William A. Coul- Robert Albert Jacobson, Jr., ter, Drexler, Hertneky, Joseph Ralph Andrew J. Mack, Jr., Kriscunas, Lange, Albert J. Charles F. Edward Onderick, Perry, Miller, George A. Howard Albert H. William Schneider, Reid, Robinson, P. Robert Edward J. E. Donald W. Sylvia Simcic, Audrey and A. J. M. Brednick Elmer Wess Sunanin, Appellants, Representatives, Personal

v. TRUST, ASSOCIATES, INC. Robert & PENSION AUBURN Deicas, Avondo, Wesley Life Provident Mutual Co., Inc., Fuhrer’s, Insurance Anthony J. MOSSO. Pennsylvania. Superior Court of Argued March 1990. 22, 1991. March Filed Appeal Petition for Allowance Sept. 1991. Denied Maurizi, Pittsburgh, appellants. for M. Joseph Mut., Jr., for Provident Braham, Pittsburgh, W. Walter appellee. CERCONE, TAMILIA, JJ. KELLY and

Before KELLY, Judge: whether the to determine upon are called

In this case we non-compe- of a the enforcement upheld properly trial court placed by had been clause which forfeiture tition Associates, Inc., a into & Auburn appellee-employer, the Provident appellee-insurer, it entered into contract employ- of its Co., for the administration Mutual Insurance all former were appellants who plan against ee pension failed that, has We find employees. for the our Courts criteria set forth meet any enforcement of non-competition against a ap- covenant Therefore, pellants. we reverse.

The relevant procedural history facts are case as follows. The a appellee-employer was company drafting performed and engineering services for various manufacturing industrial concerns in Pennsylvania. The appellants were appel- all draftsmen who were hired lee-employer All years between 1961. drafting non-managerial worked related until capacities the time of their appellee- termination. The employer company-run, established in-house administered employee pension plan In August 1953. appellee-employer entered into a with contract the appellee- insurer to turn over administration the pension plan appellee-insurer. to the This contract was entitled the Deposit “Group (GDAP) Policy”. Administrative Pursuant contract, to this the appellee-insurer agreed pay the retirement annuities of all of the eligi- appellee-employer’s ble vested employees. The contract subsequently was amended in a entitled “Immediate policy Participation Guar- (IPG) antee”. clause which called the forfeiture of appellants’ pension no- upon benefits tice of termination the appellee-employer and subse- quent employment competing with a firm was included in clause, policies. both essentially which was same policies, both read:

Anything foregoing to the contrary notwithstand- be entitled to no ing, a shall hereun- participant benefits der Policyholder gives Company Insurance if written notice that the participant has his terminated employment participant’s dishonesty due the or through any willful act the course his to the the injury of or Employer participant’s the fellow employees, or enter the services firm with competes the The determination the employer. by the Policyholder participant that has employ- terminated under ment such circumstances shall be conclusive for the in the policy.” (Emphasis supplied opin- of this purposes below.) ion of the court citing GDAP, 2, of the Opinion

Trial Court at Section VIII Employment;” and Section XII the titled “Termination or Em- Employment “Termination of Status as IPG titled ployee.” appellee- the of the appellants

All of the left service 1969 and 1974 to for years the work employer between for appellant The to work the drafting other concerns. last Brednick, his terminated em- appellee-employer, Howard complying 31, exception 1974. With July on ployment in the contract non-competition clause contained all appellee-insurer, and the appellee-employer between the one, requirements estab- of the save met appellants, for by participation lished pension plan.1 1975, appellee-employer ceased August

On all of salaried employees. and terminated doing business later, 15, 1977, pension plan on Two November years any appellants and the were awarded was terminated The instituted this law appellants credits. pension annuity pension entitled to benefits. claiming they were suit of the non-competi the enforcement upheld trial court appeal clause. An this Court was pension tion forfeiture sponte quashed sua to file appellants’ failure due to of appellants’ After Court’s denial motions. post-trial reconsideration, filed a motion for motion pro nunc tunc. file exceptions trial court leave to 15, 1974, non-competition an August clause was removed 1. On statutory agreement prohibitions to the IPG view amendment Congress pension against enacted United States forfeitures (ERISA), Security Act 29 U.S.C. Employee Income Retirement however, seq.; as the removal of the 1002 et § already appellants had occurred after the forfeiture clause service, no bear- appellee-employer’s the clause's removal has left litgation. ing on instant ERISA, Moreover, January effective on which became while post- prohibits forfeiture for preempts law and alL state application activity, employment competitive it has no retroactive pertinent at bar. is not case thus trial granted court the motion. The appellees’ subsequent motion for reconsideration granting of the order appellants’ motion for leave to file exceptions pro nunc tunc was denied as was the appellants’ motion for post-trial relief. This appeal followed. appellees then filed a motion to dismiss the appeal with this Court which was denied.2

On appeal, the appellants have raised two issues for our consideration.

1. Whether the noncompete clause in the Immediate

Participation (IPG) Guarantee Insurance Pension Plan Contract, which results in a forfeiture of pen- vested benefits, sion contrary public policy Commonwealth and therefore unenforceable. 2. Assuming, arguendo, the noncompete forfeiture valid,

clause is whether the employment appellants by existing companies employ draftsmen and design engineers results conduct which is inimical to the economic interests of their former employer. (Appellants’ iii). Brief at

The appellants’ first contention is that the trial court erred in its determination that the instant non-competition pension forfeiture clause was not violative of the public policy this Commonwealth. The appellants argue that as they were forced by the actions of the appellee-employer towards them to seek other employment, the appellee-em- ployer should not permitted to profit action by declaring pensions forfeit. assert that it was inequitable to permit the retain proceeds pensions of their in light of the fact it was the appellee-employer’s own decision to withdraw from competi- tion and eventually close the business that forced the appel- lants to leave its employ.

2. When a trial court untimely exceptions elects to post-trial hear or merits, alleged motions and addresses the error on the we are bound Kurtas, to review the merits. Kurtas v. 555 A.2d 804 (1989); Donegal Farm, Mutual Pa.Super. Insurance Co. v. State agreement appellants’ we not in blan-

While are forfeiture clauses are pre-ERISA ket contention all Commonwealth, of this we do public policy violative public that forfeiture clause violates particular find this in to the enforcement of policy Pennsylvania regards of reasoning reaching to Our this compete. covenants not conclusion is as follows. pension employee

The established an appellee-employer 1962, All 1953, in was self-administered. plan which until of the appellants appellee-employ- of the became fringe of of during er this time the benefits period. One their eventual package the was appellants' compensation pension trust. participation in administered company careers, there was no appellants began At the time the contingent on their pension rights that their were record non-competition a clause. adherence to 1962, a contract appellee-employer In entered into pension to trust with the administer appellee-insurer employees. One of and retirement annuities provide parties clauses in this insurance contract between ineligible and participant that a could be deemed provided employee if terminat- plan no under the receive benefits firm which enter into the service a employment ed his pro- The clause also appellee-employer. competed a appellee-employer’s par- that the determination vided clause ineligible non-competition was under the was ticipant The purposes policy. policy was conclusive for that the was provide appellee-employer amended a written of participant’s notice give appellee-insurer policy. rights forfeiture of under the existence of two contracts. we find Accordingly, contract between employment first contract was an appellants. provision all of the and appellee-employer included all of the contract age upon requisite their attainment plan being length subject service without appropriate and the for their services. exchange non-competition to a between the The second contract was appellee-insurer for the pay administration and out to all pensions eligible retirement This participants. second contract contained the restrictive covenant. implementation application Its appellants, to the hired by the before appellee-employer, its effective date of Au- gust 15, 1962, presented change conditions of appellants’ employment.

It pensions is well settled that Pennsylvania are viewed Lowe rights gratuities. as contractual rather than Morrison, Jones, Kline v. (1964); Pa. 200 A.2d 880 Levitt v. Billy Penn (1945); 44 A.2d 267 3 Corp., 219 Pa.Super. “A wage- something earner’s is not miraculously falls himto the sky. manna from It is the fruit of the tree which he has planted, he has nurtured with his continuous service and the loyal watered with sweat of his Jones, dedicated work.” Lowe v. supra, years 414 Pa. at 469. not the to Employers right deprive do have former of their justification. benefits without Levitt Corp, v. Billy supra. Penn

Instantly, sought the has to appellee-employer deprive the appellants of to right participate pension plan the through non-competition the use of a restrictive covenant. This by appellee-employer clause was inserted the into a contract it into with appellee-insurer entered the for the of the trust then applied administration all appellants. clause to validity The which the of a standard restrictive in covenant an contact is judged Pennsylva v. Piercing Pagoda, Hoffner, Inc. nia is set forth in 465 Pa. (1976). requirements (1) These three are: (2) to a employment; the covenant must relate contract for supported consideration; covenant by adequate the must be (8) application the of the covenant must be reasonably territory. Piercing Inc. Pagoda, limited both time and Hoffner, supra, 465 Pa. 351 at 210. A.2d 184 apply

In order these facts requirements the non-competi first instantly, we must examine whether employment. to a for tion clause relates contract When began appellee-employer, their careers with the administered pension plan appellee-employer was appellants’ eligibility is no record that and there subject non-competi was to a participate pension plan clause makes its first non-competition tion clause. appellee-employer contracted appearance 1962 when turn the administration of the appellee-insurer with the appellee-insurer. over to the restrictive pension trust appel of the contract between the part covenant was not rather, part of the it was appellee-employer; lants and appellee-insurer. contract with the appellee-employer’s requirement met Thus, has not appellee-employer a covenant must be related to contract that the restrictive for employment. non-

However, insert a employer may validly an into contract competition pre-existing employment a following meets if the amendment standard. Where covenant is executed after commencement restrictive the employee it enforced unless employment, will re competing employer from restricting himself change in status. corresponding ceived a benefit Gottus, Inc. v. Specialities Maintenance Schmolk, Service v. Travel (1974); Wainright’s A.2d 279 199, 500 A.2d Pa.Super. inserted the When the appellee-insurer, agreement clause into change employ- presented actions appellee-employer’s hired before the of the ment contracts into effect. appellee-insurer went agreement trust However, appellee- does not reflect that the record any additional considera- granted employer exchange imposition for tion did Thus, find that we clause. pre-existing to amend a requirements meet the non-competition clause. See Mainte- to include a contract

185 nance Specialities Gottus, v. supra; Wainright’s Travel Schmolk, Service v. supra.

Next, we will examine the requirement final for the enforcement of a restrictive covenant which holds that a covenant not to compete must be reasonably limited in both time and territory. Piercing Pagoda Inc. v. Hoffner, su- In pra. order to determine whether the appellee-employer has met requirement, it must be determined whether the non-competition imposes covenant restrictions broader than necessary protect the employer. Sidco Paper Co. v. Aaron, 586, 594-95, 465 250, Pa. 351 (1976); A.2d 254 Quaker Toscano, City Eng. Rebuilders v. 369 Pa.Super. 573, 579, (1987). 535 A.2d 1089 We are mindful that our Supreme Court has held that a non-competition agree- ment which bound an not to employee compete with the in a employer general business without limitation as to time area, or was void on its being face as an unreasonable restraint of trade and therefore was unenforceable either in whole or part. Reading Bertolet, Aviation Service v. Pa. 311 A.2d 628

The instant non-competition clause did not include any restrictions, time or geographical nor provide did it any kind of restrictions on the kinds of employment its former em- seek; ployees rather, would it was a prohibition blanket against former any employee from working any capacity for any company deemed appellee-employer to be a competitor. The record does not reflect the appellee- that employer compelling had any imposing reason such a stringent non-competition requirement upon the appellants other than the retention employees. of its The appellee- employer alleged has not any of the appellants pos- sessed trade secrets or confidential customer information which could competitors be used to the appellee- employer’s detriment. Morgan See Home Equipment Martucci, Corp. Pa. (1957)(a non- competition covenant will upheld for a reasonable amount of if time the former employee possessor secrets); trade Cattolico, see also Bell Fuel Corp. v. 186 in 238, (1988) (A 450 an em-

Pa.Super. 544 A.2d covenant a from ployment prohibited employee contract former which in be modified perpetuity may former customers soliciting the former period employer to be a reasonable time when year period). for a two only sought enforcement do However, case not indicate that the facts instant is clause feasible. non-competition a modification sought non-compe- has not use preventing appellants, tition as a means of clause or confidential customer infor- possessors of trade secrets mation, a working competitor from for a reasonable Rather, to use the they sought of time. have amount forfeiture. clause to effectuate a not favored in It is settled that forfeitures are well re construed, In Estate strictly are to law and be Fisher, In re (1971); 421, A.2d 442 Pa. 276 516 Zanfino’s Estate, (1953), in especially 100 A.2d 60 cases 375 Pa. Kennedy, 377 Forrish v. involving employee pensions. See Pennsylvania v. Siegel First (1954); Pa. Co., 664 and Trust F.Supp. Employ Banking for retirement are containing provisions pay ment contracts intention to effectuate declared liberally construed compensation for services additional parties pay Morrison, supra. Kline past. rendered Bank, v. Girard Trust Garner Although, upheld Court non- (1971), Supreme our 275 A.2d forfeiture, for a clause allowed competition distinguishable from the are clearly in that case facts Garner, non-competition clause was In instant case. instantly period, time while year limited to a two basically prohibited no such limitation contained chosen field pursuing employment from their appellants occupation forever. Therefore, non-competition find the instant we pursuing from prohibited clause which appellee-em other than the anyone drafting careers with clause which our analogous ployer Supreme Court held invalid Reading Aviation Service v. Bertolet, supra, prohibited a former from employee pursuing his occupation general chosen field of aviation permanently. eases, In both the employers placed undue hardship on the making without any showing that the restrictions were necessary for the em ployers’ protection. Thus, we find that the instant non- competition clause has failed to meet requirement it must be reasonable as to time and territory. See Moore, Henschke v. 196, (1917); 257 Pa. 101 A. 308 Keeler v. Taylor, 53 Pa. 91 Am.Dec. 221

Moreover, we find that the appellee-employer’s own ac- tions over a period years of such as: the failure to bid on work, new the elimination raises, pay cessation of its traditional policy of paying annual bonuses to the employ- ees, cuts, pay offs, and employee lay were incon- entirely sistent with its stated purpose for imposing the non-compe- tition pension forfeiture clause as a means of retaining its skilled As employees. the appellee-employer’s actions indi- cated to the appellants that their former employer inwas process withdrawing from competition and their prospects of long-term employment with the company were bleak, very they quite naturally sought and obtained other employment.

Accordingly, the invalid non-competition clause had al- ready outlived its usefulness to the appellee-employer at the time the appellants service; thus, left its it was unreason- able and unduly harsh for the appellee-employer to insist upon its strict enforcement as a means of divesting the appellants from pensions and retaining proceeds. See Aaron, Sidco v. Paper Co. supra; Girard Investment Bello, v.Co. 456 Pa. (1974); 318 A.2d 718 v. Bettinger Associates, Inc., Carl Berke

(1974); Quaker City Toscano, Eng. Rebuilders v. supra, (Restrictive employments covenants are valid if only they are reasonably necessary protection for the of the employ- er.) See also Forrish Kennedy, supra; Levitt v. Billy Penn Corp., supra, (The courts can compel the trustees plan exercise their discretion within the bounds Therefore, non- judgment). reasonable instant all has failed to meet of the criteria set

competition clause by forth our Courts for its enforcement and actions of completely contradictory were appellee-employer clause in imposing non-competition stated purpose void on its face and place, the first we find the clause to be therefore, enforcement. subject finding

Due to our that the instant unenforceable, need not address the merits we void However, raised our appellants. of the second issue requires us to determine wheth- first issue disposition er met other valid eligibility all of the have order requirements established pension their entitlement to the of payout ascertain benefits. that appellees specifically

The contended two have Mack, Albert do not Edward Kriscunas and appellants, appel- established the eligibility meet the other criteria pension plan. for lee-employer participation not meet the appellant that Kriscunas did argue appellees plan appel- in the and requirements vesting pension for age length of service under required lant Mack did have the participant. vested IPG to an inactive become person provides I the IPG that a can Section of if upon status termination he vested inactive acquire a participant To become under under Section XII. qualifies have, III, under IPG Section XII, employee must Section of credited service and years four and six months completed (The age thirty-five years. of GDAP age reached have months). Al years and six thirty-four was requirement years had ten and nine months Kriscunas though appellant termination, of his he had at the time of credited service seven months thirty-one and age years attained only termination; thus, he to reach the his failed at time of pur vesting either active or inactive for requisite age pen denied him properly poses, appellee-employer and the sion benefits. however, an Mack, appears qualify as

Appellant his began Mack participant. inactive vested 15, 1956 and left its August on appellee-employer on 1960. Mack was for the first time December service August on later reemployed prior months of four and three years 1965 and credited with appellee-employ Mack left the service service. When had on he 15, 1973, February second time er for the six months of unbroken service seven acquired years prior appel months service. and four and three years years Mack to have five argue required lees was agreement order to under the IPG uninterrupted service However, agree under the GDAP participant. abe vested ment, an active after participant an became employee had attained and six months and completion years of four Mack, and six months. who age years thirty-four 2, length had fulfilled both the born on June was agreement before the IPG age requirements service and Thus, already Mack had on 15,1970. took effect November agreement pension plan under GDAP vested find Accordingly, we pension entitled to receive benefits. qualified Kriscunas are appellants except that all of the entitled to trust and are participants inactive lump payment or a sum annuity either a pension receive from the trust. above, judgment we reverse the

For the reasons stated appellants except all of the in the trial court as to entered to the trial court for a Kriscunas and remand this case due to each pension of benefits determination of the amount Kriscunas, judgment the appellant the As to appellants. of is affirmed. relinquished.

Jurisdiction TAMILIA, J., dissenting opinion. concurring files a and TAMILIA, Judge, concurring dissenting: and after the This from the entered appeal judgment is an an in favor court, sitting without a entered Order jury, trial 190 had defendants/appellees, finding appellants forfeited with com- pensions by taking employment competing

their former Auburn and Asso- panies. Appellants, ciates, (Auburn), argue pension are entitled to they Inc. now prior agreements employ- entered with benefits under reached the agree I the final result er. While holding the I dissent majority, respectfully public policy. My in case violates forfeiture clause this instead, and inequitable on the nature analysis, focuses provision applied when harshness of forfeiture in been sum- accurately case. Those facts have facts this repeated. and not be marized will majority appellants propose two Opinion, As in the majority stated (1) the non-competition for our whether issues review: IPG, in the forfeiture vested clause in the results which benefits, Common- policy of this pension public violates unenforceable; (2) assuming is therefore and wealth and valid, clause is noncompete forfeiture wheth- arguendo appellants by existing companies er the in design engineers draftsmen and results employ which economic interests of their conduct inimical which not address the majority former need employers. While having second issue found unenforceable, I disagree with that

case to void and proceed to address both issues. holding accordingly and I v. Roch holdings Corp. believe the Rochester W.L. (4th Cir.1971) and ester, Jr., 450 F.2d 118 Garner Girard (1971), Bank, appel A.2d which Trust Pa. case, from the and attempt distinguish present lants decision, do support court relied to upon which trial enforceability non-competi validity and support plan. I would hold that such pension tion clause eliminated pension plan, in a which have been provisions se Legislation, per are pursuant since 1976 to Federal believe, ERISA, I how- 29 U.S.C.A. 1144.1 invalid. See § however, recognizes change legislation, manner 1. The federal perceive programs government society provides worker withdrawal of vested protection for the from ever, be in To they interpreted cannot a vacuum. do so is unjust fundamentally and creates a windfall and unjust directors, corporate trustees, enrichment either for the or shareholders remnants of employees managed who to business, survive a and persistent slow decline in the if not an actual competition. withdrawal from

A vitality against forfeiture retains as a restriction competition so firm only long competition, as the remains in niceties of distinction made earlier cases between restraint on future contained in competition contracts, opposed against to restraint a joining competi- tor if pension rights preserved, are to notwithstanding. be Garner, See In Corp. Rochester and either in- supra. stance, a purpose retaining restriction for the trained and skilled order to remain persons competitive and to deny such skilled a or persons competitor prevent to competitors from employees becoming to the ultimate harm parent most company. pension plans require Since input financial and other employer from probably viability continued of the company integri- maintain their if ty, vested, even the employee becomes his termination to work for competitor against a could conceivably work best All pension plan. interest of this presupposes company initial to be going concern and the employees provided opportunities the employment compensa- tion for they bargained at the they time entered into plan.

All of the cases upon by relied deal majority limitations competition on direct employer terms time, geographic retaining distance or and solicita- tion of original customers Those employer. cases U.S. -, rights. Very recently, Corp., in PBGCv. LTV 110 S.Ct. (1990), Supreme 110 L.Ed.2d 579 United States Court deter filing corporations may bankruptcy, mined that in arbitrarily pension programs thereby divesting terminate interest in Corporation employees of their requiring Guaranty funds that Pension Benefit responsibility payment. assume for their Pursuant to ERISA, plans private protected permit such sector are retirees and terminated to obtain the benefits for which

they bargained. clause have to limit the influence such a can been construed and, bring upon employee's future livelihood as to bear such, The at strictly rather construed. clause issue are a on might competi here be construed as restriction broadly tion, of ability employee it does not effect to but in in the area direct employment seek and obtain immediate restriction, The competition employer. the former with rather, employee receiving such an from prevent is to employer, the first on by benefits conditioned paid entirely least, or, at in employment engaging not continued with the compete employer. which would employment changed public governmental perspec is the and What has vested, compensation being tive of such as deferred benefits gratuitous an but conditional employer’s to opposed such, majority’s As discussion and reliance on benefit. to on relating competi cases and law restrictive covenants to here. In misplaced is and the issue totally tion irrelevant addition, no Court case that has Supreme I am aware of we, public policy a to and ruled such be violative court, make a may as an not such appellate intermediate Garner, continuing presence in the finding face supra.

Here, strong corporation facts out a case a make decline, in later toward self- gradual years moving and from employee The firm reduced numbers 650 extinction. and froze and reduced years, to 50 ten or fifteen over position in a requiring wages thereby placing employees it elsewhere while was available employment them to seek and restricted facing likely employment or termination in a employees trapped The were total job opportunities. society, economic restructuring of the industrial and base or unanticipated management labor. totally which was which a forfeiture was upon Such conditions were busi- employees join who terminate apply intended to parent actively competition are nesses which compensation held to deferred firm. Pensions have been Jones, time. Lowe v. after a reasonable vest Twp. Margalis, 110 Newport (1964); 880 A.2d Pa.Commw, par- employee and most years from to 19 service ties to this action have or year prior two employment within terminated compe- into direct None entered company’s dissolution. competing all although joined employer, tition with their whose role firms. Most low level were in- no effect on significant had competing companies firm or decline from the other crease competition firm. Their competition by parent or appellee’s decline firm irrelevant to the competing was new edge employer. maintained competitive is inequitable in this case harsh and applied result forfei- asserting refers precisely to which law Fisher, re tures are favored. In Estate of (1971). abiding by The trial while 276 A.2d judge, law, provision recognized case harshness appellate case and need for courts applied this cases, holdings light particularly reconsider earlier restricting scope severity employ- recent cases Blackwood, against competition. ment contract provisions Pa.Super. Caputo, Inc. reasons, I agree majority’s

For these while in the trial court judgment decision to entered reverse and direct that the appellants except as to all Kriseunas against enforced rights of these Kriseunas, as to to affirm pension plan, appellant that the disagree I the determination judgment, Penn- public case policy forfeiture clause violates sylvania.

Case Details

Case Name: Bilec v. Auburn & Associates, Inc. Pension Trust

Court Name: Superior Court of Pennsylvania

Date Published: Mar 22, 1991

Citation: 588 A.2d 538

Docket Number: 1263 Pittsburgh 1989

Court Abbreviation: Pa. Super. Ct.