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Superior Court Clarifies Pennsylvania Law on Non-Compete Agreements

On May 13, 2014, the Superior Court of Pennsylvania, in Socko v. Mid-Atlantic Systems, clarified the requirement of new consideration when an employer and employee enter into an employment agreement containing a non-competition restrictive covenant after commencement of employment. As an appellate decision, this new clarification leaves a lasting and binding effect on the trial courts.

When Mid-Atlantic hired Socko as a salesman in March 2007, Socko signed an employment agreement with a two-year covenant not to compete.  He resigned in February 2009, but was rehired in June 2009 and signed a new employment agreement with a similar two-year covenant not to compete.  Subsequently, he signed a third employment agreement on December 28, 2010 containing a two year non-compete covering eight named states, including Pennsylvania, and anywhere else that Mid-Atlantic did business.   In January 2012, Socko resigned and took a position with a competitor basement waterproofing company located in Camp Hill, Pennsylvania.  Mid-Atlantic wrote the new employer enclosing the third employment letter and threatening litigation.  The new employer terminated Socko, who sued for declaratory judgment seeking a determination that the non-compete provision of the employment agreement was unenforceable for lack of sufficient consideration.

Mid-Atlantic argued that the employment agreement satisfied the requirement of adequate consideration by containing language stating the parties “intending to be legally bound” and therefore under Pennsylvania’s Uniform Written Obligations Act, 33 P.S. § 6 (“UWOA”), the contract could not be avoided for lack of consideration.  The trial court granted partial summary judgment to Socko, and Mid-Atlantic appealed contending the court erred in failing to give effect to UWOA as satisfying the requirement of consideration sufficient to support the employment agreement and its restrictive covenant.

UWOA states, “[a] written release or promise, hereafter made and signed by the person releasing or promising, shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound.”  Essentially, UWOA acts as a “consideration substitute” in forming a valid contract – i.e., so long as the written agreement contains the language the signer “intends to be legally bound” by the agreement, the agreement is valid even without any other consideration (like money or other property).  As of now, Pennsylvania appears to be the only state in the country with this law.

The Superior Court forcefully rejected Mid-Atlantic’s argument and stressed that since the Pennsylvania Supreme Court’s decision in Kistler v. O’Brien, 347 A. 2d 311 (Pa 1975), decisions of the Superior Court have “consistently and without exception” held that when an employee signs an employment agreement containing a covenant not to compete subsequent to initial employment, the restrictive covenant “ ‘must be supported by new consideration . . .in the form of a corresponding benefit to the employee or a beneficial change in his employment status’”(cited case omitted).  Adequate new consideration is required because “restrictive covenants are disfavored in Pennsylvania because they are in restraint of trade and may work significant hardships on employees.”  Viewed in this context, the Pennsylvania Supreme Court has held that continued at-will employment, contracts under seal and other nominal consideration do not satisfy the requirement of valuable new consideration.  The Superior Court explained that while a contract under seal and the UWOA both import consideration into a contract, thereby eliminating the need for proof of the existence of consideration, neither constitutes adequate consideration to support a covenant not to compete.  At the inception of employment, the job itself is sufficient to satisfy this requirement, but when a restrictive covenant is added to an existing employment relationship, “the employee must receive a corresponding benefit or a change in job status.”

This Superior Court decision is a clear reminder to employers that new restrictive covenants obtained from employees during the course of their employment, need to be based upon some form of clearly stated valuable consideration described with specificity in the agreement containing the restrictive covenant.  Promoting an employee to a more senior position with substantial additional compensation, making the employee eligible for a new bonus or incentive compensation plan, or the payment of a one-time meaningful bonus, are examples of the types of valuable consideration that may satisfy the requirement of new consideration.

Kang Haggerty & Fetbroyt represents employers and employees in disputes involving non-competes and other restrictive covenants.

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