The Pennsylvania Supreme Court recently re-affirmed the principle that in order to have an enforceable non-compete agreement in Pennsylvania, the agreement must be supported by adequate consideration and that a statement merely agreeing to be “legally bound” doesn’t meet that requirement. The Court ruled against a waterproofing company hoping to enforce a non-compete agreement against one of its former salesmen. The employer did not provide consideration but unsuccessfully based its argument on language from a 1927 state law called the Uniform Written Obligations Act (“UWOA”). The full opinion, Socko v. Mid-Atlantic Systems of CPA Inc., can be read here.
In the Socko case, after the start of his employment, a salesman (Socko) signed a non-compete agreement. The salesman was not given any additional consideration (such as a raise or access to new, confidential information) but the agreement did state that the parties intended to be “legally bound.” In seeking to enforce the non-compete, the employer attempted to rely on the UWOA which 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.” The “magic” statutory language seems pretty clear, so the employer should easily win, right? Several employers had won on this issue in prior Pennsylvania federal court decisions, so they felt optimistic about their chances. However, the issue is ultimately controlled by state law, and that is interpreted by the Pennsylvania Supreme Court.
The Supreme Court rejected the employer’s approach. It noted that, while courts typically do not inquire into the adequacy of consideration, “the area of restrictive covenants in employment contracts is an exception to the general rule” and a non-compete agreement is unenforceable in Pennsylvania unless the employee receives an actual benefit in consideration for his/her agreement. Recognizing that non-competes have historically been disfavored by courts as a restraint on trade that prevent a former employee from earning a livelihood, the Court concluded that the salesman’s agreement lacked actual, valuable consideration and struck down the agreement as unenforceable.
What does this all mean? Well, without the availability of the UWOA’s “magic” language, for a non-competition agreement to be enforceable in Pennsylvania, non-compete agreements must be entered into either at the commencement of employment or, if entered during employment, supported by new and valuable consideration. In addition to the required consideration, the non-compete must also be reasonably necessary for the protection of an employer’s legitimate business interests and reasonably limited in scope, duration, and geographic coverage. In plain English, to be enforceable in court, the Agreement needs to be reasonable and either a) signed at the start of employment or b) supported by other adequate consideration (such as a monetary payment or a promotion).
Because reliance on the UWOA had been an iffy proposition for years, employers not wishing to test the parameters of the law had been following the consideration rules for years despite the potential beneficial language of the UWOA. The proposition that non-competes are generally disfavored by Pennsylvania courts and valuable consideration is needed to enforce them is not news to them. However, If you wish to review your current non-compete agreements or explore entering into non-competition agreements or other restrictive covenants for your employees (or if your business is considering hiring somebody subject to a non-competition agreement), contact any of the attorneys in the McNees Labor & Employment Group for guidance. If a competitor is trying to enforce a non-competition agreement on you or you are seeking to enforce a non-competition agreement against a current or former employee, legal action could be necessary within a matter of days, if not hours. If you find yourself in a situation where you need to prevent or stop the release of trade secrets or other confidential business information, contact the McNees Injunction team for immediate assistance.