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PA Supreme Court ruling clarifies consideration in non competes

Pennsylvania Supreme Court Ruling in Socko v. Mid-Atlantic Systems of CPA, Inc.

By Noah R. Jordan, Esq.

 
 

The Pennsylvania Supreme Court recently affirmed a decision of the Superior Court, holding that an employment agreement that contains a non-compete clause, signed by an employee after commencing his employment, may be challenged for lack of consideration, even if it contains language stating that the parties “intend to be legally bound.”  Such language suggests that the agreement may be exempted from the normal requirement for consideration pursuant to the Uniform Written Obligations Act (UWOA), a Pennsylvania statute describing when written instruments lacking consideration are, nonetheless held to be valid.   This holding provides added protection for employees whose employers and former employers try to restrict future employment without providing new, valuable compensation in exchange for their agreement to be legally bound to a non-compete.

Background on the non-compete agreement at issue

The plaintiff in the case, David Socko, had been hired as a salesperson by Mid-Atlantic Systems CPA, Inc., a basement waterproofing company, in 2007.  At that time, Mr. Socko signed a two-year employment contract which included a non-compete agreement.  After resigning his employment in early 2009, Mr. Socko returned to the company a few months later and signed a new agreement that also contained a non-compete.  While still under contract with the company in 2010, Mr. Socko signed a third agreement containing a non-compete that was even more restrictive than the one under which he had been working at the time.  The new agreement, which superseded his prior ones, prohibited Mr. Socko from competing with the company for two years after the termination of his employment within any jurisdiction in which Mid-Atlantic did business, including all of Pennsylvania.  The agreement stated that the parties intended to be “legally bound.”

Mr. Socko resigned his employment in mid-January 2012 and shortly thereafter accepted a position with Pennsylvania Basement Waterproofing, a competitor of Mid-Atlantic within the Commonwealth.  A month into his new employment, Mid-Atlantic sent a copy of the most recent non-compete agreement to Mr. Socko’s new employer and threatened litigation.  Mr. Socko was terminated ten days later.

Socko initiated suit against Mid-Atlantic, claiming that his most recent non-compete agreement was not enforceable due to a lack of sufficient supporting consideration.  While Mid-Atlantic stipulated that the agreement was signed during Mr. Socko’s employment and that he was not given any benefit in exchange for his agreeing to sign, it claimed that the UWOA did not permit Socko to challenge the agreement based on a lack of consideration since it contained the “intend to be legally bound” language referenced above.  Both the Court of Common Pleas as well as the Superior Court ruled in favor of Socko and Mid-Atlantic appealed to the Supreme Court.

Issue Presented and Arguments Before the Pennsylania Supreme Court

On appeal, the Supreme Court addressed “whether an employment agreement containing a restrictive covenant not to compete, entered into after the commencement of employment, is unenforceable for lack of consideration where the employer provided the employee with no benefit or change in employment status at the time of execution, but where the agreement expressly states that the parties ‘intended to be legally bound’ by its terms.”  Mid-Atlantic argued that while consideration normally must be given to an employee signing a non-compete, that this is not the case under the UWOA when the “legally bound” language is included, as this serves as a bar to challenge the validity of the agreement based on lack of consideration.  Socko responded that this interpretation of the UWOA is contrary to the Commonwealth’s longstanding principle that a non-compete agreement entered into during the employment relationship, without the addition of new consideration, violates public policy.  Furthermore, he pointed out that some form of the “legally bound” language appears in most employment contracts and, as such, Mid-Atlantic’s interpretation of the UWOA would effectively eliminate the requirement of consideration in non-compete agreements.

Court’s Ruling on whether the non-compete agreement was enforceable

At the outset, the Court noted that while Pennsylvania is an “at-will” employment state, in which an employment relationship may be ended for any reason other than a discriminatory one, this is modified by the presence of a restrictive covenant, such as a non-compete.  These agreements will be enforceable only if they meet specific requirements, one of which is the support of adequate consideration.  If a non-compete is entered into after an employee has initiated employment, the employee must be provided with “new and valuable consideration,” such as a promotion, change in status, increased compensation, or additional bonuses.[1]  Thus, the Court’s starting point was that such additional compensation must be provided.

The Court next turned to the language of the UWOA in order to determine whether an exception to the general rule applied to the issue presented.  It noted that the Act states that an agreement “shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement…that the signer intends to be legally bound.”  Thus, based on the plain language of the UWOA, the agreement between Socko and Mid-Atlantic would appear to be enforceable. 

However, the Court was, as it always is when interpreting a statute, required to determine whether such an interpretation of the Act would lead to an absurd or unreasonable result.  The Court once more noted the Commonwealth’s long and consistent history of disfavoring restricted covenants and its requirement that new and valuable consideration for any such covenant entered into after an employee begins his employment to be enforced.  With this in mind, the Court held that interpreting the UWOA in the manner articulated by Mid-Atlantic would, in fact, lead to an unreasonable result.  Therefore the Court affirmed the decision of the Superior Court, finding the agreement to be unenforceable.

What This Means for You

This ruling is significant for employees and employers alike in Pennsylvania.  For employees, if, after you have begun your employment, your employer wants you to sign a restrictive covenant that, for example, limits your ability to accept work with certain employers, within a particular geographic region, and/or for a defined period of time, it must offer you new and valuable consideration in exchange for signing such an agreement.  Any consideration previously given to you, such as when you first were hired, does not count.  Furthermore, merely offering you continued employment, despite the “at-will” nature of employment within the Commonwealth, is insufficient to satisfy this requirement.  This will be the case even if the agreement contains language identical or similar to the “intend to be legally bound” language found in Socko’s non-compete.  Employers must similarly take all of this into consideration when requesting their existing employees to sign non-compete agreements.  It is advisable that employers devote the appropriate time and care when drafting such agreements in order to make sure that after they are executed they will be enforced, rather than rushing to secure an agreement and run the risk of it not being enforced if and when challenged, as happened in the Socko case.

If you find yourself dealing with such an agreement in your current or future employment matters, our attorneys would be happy to assist you.



[1] The Court noted that “the mere continuation of the employment relationship at the time of entering into the restrictive covenant is insufficient to serve as consideration for the new covenant, despite it being an at-will relationship, terminable by either party.”

 

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