ARE EMPLOYEES IN PENNSYLVANIA BOUND BY THEIR CONTRACTUAL COMMITMENTS?
With an ever mobile workforce utilizing electronic devices, non-compete/non-solicitation agreements are more common than ever before. More employees at lower levels of organizations are being asked to sign such agreements which restrict their subsequent employment. Pennsylvania courts, like those in many other states, look with disfavor on such agreements – viewing them as historic restraints of trade which inhibit an individual’s ability to earn a living.
To be enforceable, such agreements must:
- Relate to a contract for the sale of goodwill or sale of property or a contract for employment;
- Be supported by adequate consideration; and,
- Be reasonably limited in both time and territory.
Initial employment is sufficient consideration for such an agreement. If not entered into at or about the commencement of employment, then, to be enforceable, such an agreement must be supplemented by additional consideration – i.e., a monetary payment or benefit, change in job status, or conversion of an at-will relationship into a contract of employment for a specific period of time. All of these items are possible points of contention by a former employee seeking to avoid his commitment and to engage in competitive activity.
The Uniform Written Obligations Act (UWOA), however, provides that a signed, written promise is not unenforceable for lack of consideration if the writing contains an expressed statement in any form of language that the signer “intends to be legally bound.” Insertion of such language into a covenant not to compete thus raises the issue of whether an employer can prevent a former employee from trying to avoid his contractual obligation by claiming that his commitment was not supported by consideration (or additional consideration for such agreements made after the commencement of employment).
Pennsylvania courts generally will not review the adequacy of consideration in determining the enforceability of a contract. Courts, however, regularly do make such an inquiry when a covenant not to compete is at issue. Only new, valuable consideration will support the enforcement of such an obligation – not continued at-will employment, a contract under seal, or nominal consideration.
Thus, there is tension between the UWOA and the inherent reluctance of Pennsylvania courts to review the adequacy of consideration on one hand, and these courts’ inclination to ensure that the employee receives something of value in exchange for his post-employment commitment not to compete on the other hand. When called upon to resolve this conflict, both a Pennsylvania trial court and the Superior Court sided with the employee and held that the mere insertion of “intending to be legally bound” language from the UWOA into a covenant not to compete did not prevent the court from considering whether the agreement was supported by adequate consideration. Since the agreement at issue in that case was entered into after the commencement of employment without any additional consideration, both courts refused to hold the employee to his commitment.
These decisions clearly are inconsistent with the terms of the UWOA. The Supreme Court of Pennsylvania, therefore, has agreed to review the underlying case and determine whether the inherent dislike of covenants not to compete by courts will trump the literal language of the UWOA. If the Pennsylvania Supreme Court reverses the decision of the two lower courts, then all employers with a nexus to Pennsylvania will be well-advised to insert such “magic language” in all present and future covenants not to compete, thereby taking any question of consideration off the table.