On November 18, 2015, the Pennsylvania Supreme Court reaffirmed the long-standing common law rule that covenants not to compete entered into after the commencement of employment must be accompanied by new and valuable consideration. (Socko v. Mid-Atlantic Systems of CPA, Inc., No. 142 MAP 2014.) In doing so, the Court determined that the state’s Uniform Written Obligations Act does not permit employers to enforce a noncompete given to an employee while already employed without providing consideration.
David Socko was a salesman for Mid-Atlantic Systems of CPA, Inc. When he was hired by the waterproofing company in March 2007, he executed a two-year employment contract containing a noncompete agreement. Approximately two years later, Mr. Socko resigned from Mid-Atlantic Systems, before rejoining the Company several months later. At the time he was rehired, he signed a new employment agreement, which also included a two-year covenant not to compete. On December 28, 2010, while still employed by the Company, Mr. Socko signed a third noncompete agreement. This agreement, by its terms, superseded all prior agreements. Mr. Socko did not receive any additional compensation, or any other benefit or other change in his existing employment status, when signing this new agreement.
On January 16, 2012, Mr. Socko again resigned from Mid-Atlantic Systems. A few weeks later, he accepted a position with a competitor located within the same region covered by the December 2010 noncompete agreement. When Mid-Atlantic Systems threatened Mr. Socko’s new employer with a lawsuit, he was terminated. Mr. Socko then sued Mid-Atlantic Systems, seeking a ruling that the December 2010 noncompete was unenforceable because it was not supported with adequate consideration. The trial court and the Pennsylvania Superior Court agreed with him, finding that continued employment, by itself, is not sufficient consideration to support a noncompete agreement. Mid-Atlantic Systems then appealed to the Pennsylvania Supreme Court.
Pennsylvania Supreme Court’s Ruling
Historically, Pennsylvania law requires that a noncompetition agreement may be enforced if the employee receives “consideration,” or “some corresponding benefit or . . . favorable change in employment status” in exchange for agreeing to the noncompete. As such, when an employee signs a noncompete agreement at the beginning of his/her employment, the new employment itself fulfills the consideration requirement. In contrast, for current employees, Pennsylvania courts have required additional consideration (such as a bonus or promotion) to make a noncompete enforceable.
Mid-Atlantic Systems argued that Mr. Socko’s December 2010 noncompete agreement was enforceable (despite the lack of additional consideration) because the agreement was enforeceable under the Uniform Written Obligations Act (“UWOA”). The UWOA states that a written promise “shall not be invalid or unenforceable for lack of consideration” if it contains “an additional express statement that the signer intends to be legally bound.” 33 P.S. § 6.
The Socko court acknowledged that the language of the UWOA gave the impression that noncompetes entered into after the commencement of employment may be enforceable, despite the lack of consideration, where agreement contained language that the employee “intends to be legally bound.” Despite this fact, the Court held that it would be “unreasonable” to allow employers to use the UWOA to enforce noncompetes without providing consideration. The Court reached this conclusion while relying on Pennsylvania’s “long, and virtually uniform, history of strongly disfavoring covenants in restraint of trade,” particularly focusing on “the unique and heavy burden placed upon an employee in attempting to earn a living when subjected to a restrictive covenant.” Ultimately, the Court held:
In sum, while at common law, covenants in restraint of trade have long been disfavored by Pennsylvania courts, an agreement containing a non-compete clause will be upheld, if, among other considerations, it is supported by adequate consideration. In the context of requiring an employee to agree to a restrictive covenant mid-employment, however, such a restraint on trade will be enforceable only if new and valuable consideration, beyond mere continued employment, is provided and is sufficient to support the restrictive clause.
It is important for Pennsylvania employers to understand that the Pennsylvania Supreme Court has not determined that all noncompetes are unenforceable. Indeed, a properly-written non-compete agreement can protect your business from an employee who wants to join a competitor or provide proprietary or confidential information to a competitor. This can effectively preserve your client base and protect your business, provided it is enforceable. Pennsylvania law typically enforces non-compete agreements that meet the following criteria:
- Protects a legitimate business interest
- Does not deprive an employee of a right to make a living
- Does not impose an unreasonable geographical limitation on an employee
- Does not remain in effect for an unreasonable amount of time
The Supreme Court’s decision, however, clearly establishes that any noncompete agreement must provide sufficient consideration to the employee. For a new employee, this may be employment with the company. However, for established employees, some sort of employment benefit must be conveyed in order to make the agreement enforceable. Examples of a “benefit or a favorable change in employment status” include: a promotion; a change from part-time to full-time status; a salary increase; a bonus that the employee is not otherwise entitled to; or a change in other aspects of the compensation package (e.g., stock options, etc). Pennsylvania employers should review all noncompete agreements currently held with their employees to ensure they do not run afoul of the Socko decision. To the extent any agreement relies on the employees intent “to be legally bound,” new agreements with adequate consideration should be executed.