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Non-Competes Must Be Supported By Consideration in Pennsylvania: No Exception Based On Employee’s Agreement To Be Legally Bound

November 20, 2015

By Anne E. Kane

The Pennsylvania Supreme Court has ruled that a non-compete entered after the onset of employment without additional consideration is not enforceable even if the employee expressly agreed “to be legally bound.” See Socko v Mid-Atlantic Systems of CPA, Inc. This decision, although not entirely unexpected, reinforces Pennsylvania’s long-standing jurisprudence disfavoring restrictive covenants.

Writing for the majority, Justice Todd held that a non-compete agreement could not be enforced against an at-will salesman who signed a new employment agreement after several years of employment. The new employment agreement included a non-compete clause barring the salesman from working for competing firms for two years following his departure from Mid-Atlantic. After his resignation, the salesman accepted a job from a competing firm in the restricted area. Mid-Atlantic promptly sent a letter to the salesman’s new employer, enclosing the non-compete provision and threatening to sue. The competitor fired the salesman a few days later.

The salesman then filed a declaratory judgment action against Mid-Atlantic, requesting an order declaring the non-compete unenforceable for lack of consideration. Citing Pennsylvania’s Uniform Written Obligations Act (“UWOA”), Mid-Atlantic pointed to a provision in the employment agreement in which the salesman agreed “to be legally bound.” The UWOA, a law which is unique to Pennsylvania, permits the parties to a contract to use this “magic language” to make the contract binding without consideration.

Both the trial court and the Superior Court rejected Mid-Atlantic’s arguments under the UWOA, and the Supreme Court agreed to take up the issue as a question of first impression. Prior to the Superior Court’s ruling in Socko, Pennsylvania courts had been split on this issue.

In affirming the Superior Court’s decision, Justice Todd reiterated that restrictive covenants are disfavored in Pennsylvania because they both restrain trade and impose hardships on the employees they cover, and held that these policy considerations trump the “magic language” of the UWOA. In a lone dissent, Justice Eakin disagreed, opining that the salesman had forfeited his right to challenge the non-compete. He further urged the Court to reconsider Pennsylvania’s longstanding rule that an at-will employee’s continued employment is not sufficient consideration for a restrictive covenant.

From a practical perspective, the Court’s ruling has not changed the legal landscape and it is unlikely that many Pennsylvania employers will need to revise their non-compete agreements. Most employers who adopted the “intending to be legally bound” language did so as a fallback in the event the intended consideration failed. The Socko decision makes it clear, however, that Pennsylvania will continue to be in the minority of jurisdictions that require additional consideration for restrictive covenants entered into after the onset of employment.

For more information regarding this or other labor and employment issues, please contact Anne Kane, Co-Chair of Schnader’s Labor and Employment Practices Group. 

 The materials posted on Schnader.com and SchnaderWorks.com are prepared for informational purposes only and should not be considered as providing legal advice or creating an attorney-client relationship. Please see our disclaimer page for a full explanation.

 

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