POST-EMPLOYMENT NON-COMPETES REQUIRE ADDITIONAL CONSIDERATION IN PENNSYLVANIA
The Supreme Court of Pennsylvania recently decided that restrictive covenants not to compete are unenforceable if entered into during employment and not supported by “new and valuable” consideration (which does not include continued employment). Socko v. Mid-Atlantic Systems of CPA, Inc. held that a mid-employment non-compete agreement may be challenged for lack of consideration even if the agreement, by its express terms, indicates that the parties “intend to be legally bound” pursuant to the Uniform Written Obligations Act (“UWOA”), 33 P.S. § 6. The UWOA provides that a written 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.” In December 2010, during the course of his employment as a salesman with Mid-Atlantic Systems of CPA, Inc. (“Mid-Atlantic”), a provider of basement waterproofing services, David Socko signed an agreement restricting him from competing with Mid-Atlantic in any jurisdiction in which it did business for two years after termination of his employment. Socko did not receive any benefit or change in his existing employment status in exchange for signing the December 2010 non-compete. The agreement provided for the application of Pennsylvania law and expressly stated that the parties intended to be “legally bound.”
Socko resigned from Mid-Atlantic in January 2012 and accepted a position with Pennsylvania Basement Waterproofing, a competitor of Mid-Atlantic. Mid-Atlantic informed Socko’s new employer of his non-compete obligation, and Pennsylvania Basement Waterproofing terminated him.
Socko filed a Complaint against Mid-Atlantic in the York County Court of Common Pleas, which granted his motion for partial summary judgment because there was a lack of consideration for the non-compete, notwithstanding the parties’ stated intent to be “legally bound” by the agreement. That decision was affirmed by a unanimous panel of the Superior Court, and Mid-Atlantic appealed.
While generally disfavored, Pennsylvania will enforce covenants not to compete if (i) ancillary to an employment relationship between an employee and an employer; (2) supported by adequate consideration; (3) the restrictions are reasonably limited in duration and geographic extent; and, (4) the restrictions are designed to protect the legitimate interests of the employer. The Court stated that, to be enforceable, a mid-employment non-compete must give the employee “new and valuable consideration” beyond continued employment. The Court concluded that “legally bound” language supplies the necessary consideration to support the enforceability of an agreement, but its analysis did not end there.
After noting that, based solely upon the language of the UWOA, the mid-employment non-compete would be enforceable against Socko, the Court looked to the Pennsylvania General Assembly’s canons of statutory construction. It particularly focused on the General Assembly’s guidance that it “does not intend a result that is absurd, impossible of execution, or unreasonable” and that statutes in derogation of the common law enacted before September 1, 1937 (like the UWOA, enacted in 1927) are to be strictly construed.
The court concluded 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” and that its conclusion was “buttressed by the narrow construction which must be given to the UWOA.” The Court affirmed the order of the Superior Court, finding that the non-compete was unenforceable because of a lack of “actual and valuable” consideration to Socko.
Non-compete agreements are tricky to draft and enforce in most jurisdictions. The Socko case is a good example. As a result, it never hurts to have the advice of competent legal counsel when drafting these agreements.