“Mere Continued Employment” is Insufficient Consideration for Non-Compete Agreement in Pennsylvania
Last week, in Socko v. Mid-Atlantic Systems of CPA, Inc., the Supreme Court of Pennsylvania decided that restrictive covenants not to compete are unenforceable if made during a worker’s term of employment unless supported by “new and valuable consideration, beyond mere continued employment.” That is so, according to the Court, even if the agreement contains language that would otherwise obviate the requirement of consideration pursuant to the Uniform Written Obligations Act (“UWOA”), 33 P.S. § 6. That statute provides that “[a] written release or promise . . . 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.”
The employee in the case, David Socko, worked as a salesman for Mid-Atlantic Systems of CPA, Inc., a provider of basement waterproofing services. While working for Mid-Atlantic in December 2010, and with approximately six months remaining in a two-year employment contract, Mr. Socko signed a superseding agreement with Mid-Atlantic that restricted him from competing with Mid-Atlantic in any jurisdiction for two years following the termination of the employment relationship. The agreement provided for the application of Pennsylvania law, and it stated that the parties intended to be “legally bound.”
Shortly after signing the agreement, Mr. Socko resigned and accepted a position with a competitor. Mid-Atlantic informed the competitor of its agreement with Mr. Socko, and the competitor terminated him. Mr. Socko responded by filing a complaint and action for declaratory judgment in the York County Court of Common Pleas, and a subsequent motion for partial summary judgment, arguing that the non-competition clause of his agreement with Mid-Atlantic was unenforceable for want of sufficient consideration. Mid-Atlantic argued that, because of the Uniform Written Obligations Act, the agreement’s “legally bound” language rendered consideration unnecessary.
The Court of Common Pleas granted Mr. Socko’s motion, and a unanimous panel of the Superior Court affirmed, holding that “[l]anguage in an employment contract that the parties intend to be legally bound does not constitute valuable consideration in th[e] [restrictive covenant] context.” Socko v. Mid-Atlantic Sys. of CPA, Inc., 99 A.3d 928, 935 (Pa. Super. 2014). On appeal to the Supreme Court, Mid-Atlantic pursued what the Court called an “estoppel line of advocacy,” arguing “that the UWOA is not a substitute for consideration, but, rather, prohibits a party to a written agreement in which the party expresses an intention to be ‘legally bound’ from later challenging the contract based on a lack of consideration.”
The court rejected this argument, finding that “[t]he UWOA does not speak of extinguishing a cause of action or barring a challenge,” and that, based on its plain language, it appears that, despite the lack of consideration, the Agreement would be enforceable against Socko.” However, “[u]pon consideration of the historic background regarding covenants not to compete, their relative positive and negative impact upon the employer-employee relationship, and their unique treatment in the law, including more rigorous scrutiny by [Pennsylvania’s] courts,” the Court “conclude[d] that a construction of the UWOA which would vitiate the need for new and valuable consideration when entering into an agreement containing a restrictive covenant after the initiation of employment would be unreasonable.”
In light of the Court’s decision, Pennsylvania employers should be careful not to rely on contractual language to make their restrictive covenants enforceable. Rather, they should take heed of the Court’s examples of “[s]ufficient new and valuable consideration[,]” which include “inter alia, a promotion, a change from part-time to full-time employment, or even a change to a compensation package of bonuses, insurance benefits, and severance benefits.”
For answers to any questions regarding this blog or with regard to restrictive covenant issues generally, please feel free to contact an attorney in the Gibbons Employment & Labor Law Department.