In Socko v. Mid-Atlantic
Systems of CPA, Inc., 2014 WL 1898584 (Pa. Super. May 13, 2014), Pennsylvania's
Superior Court held that neither contractual language satisfying the Uniform
Written Obligations Act, 6 P.S. §33 ("UWOA") - - i.e., a statement that parties “intend to be legally bound” - - nor
an employee's continued employment are sufficient consideration to support a covenant-not-to-compete's
enforcement.
Specifically, the UWOA provides
that “[a] written release or promise, hereafter made and signed by the person
releasing or promising, 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 Superior Court unanimously
upheld a trial court’s ruling that a non-compete agreement was not enforceable
against an at-will employee signing the agreement following a year's employment
as a waterproofing company salesman despite “intend to be legally bound” and
"not to compete for 2 years after employment's termination" language because
employee received no benefit or job status change at the time of entering into
the agreement.
After setting aside conflicting
federal district court decisions, the reasoning of which were found to be unpersuasive,
the Superior Court concluded that it was necessary to review Pennsylvania's
history of restrictive covenant's enforcement "to determine the precise
nature of the consideration required to support them”.
After noting that adequate
consideration could take the form of a corresponding benefit to employee or
beneficial job status change, citing the George W. Kistler, Inc. v. O’Brien,
464 Pa. 475, 347 A.2d 311 (1975) decision, the Superior Court identified 3
forms of consideration inadequate to support a non-compete: continued
employment even if relationship is terminable at will; execution of "under
seal" employment agreement; and "nominal" consideration recital
(e.g., $1).
Rejecting Mid-Atlantic’s "UWOA's
application rectified non-compete's lack of consideration" argument, the
Superior Court explained that, unlike most contracts for which consideration's adequacy
is not examined in determining contract's validity, Pennsylvania courts
consistently inquire into the adequacy of consideration sufficient to support restrictive
covenants. The Superior Court held that
“[l]anguage in an employment contract that the parties intended to be legally
bound does not constitute valuable consideration in this context”.
The Superior Court stated:
“[w]hen the restrictive covenant is contained in the initial contract of
employment, the consideration is the job itself. But when the restrictive covenant is added to
an existing employment relationship, however, to restrict himself the employee
must receive the corresponding benefit or change in job status.”
Although the “legally
intending to be bound” language in Mr. Socko’s contract may have satisfied UWOA
requirements, the Superior Court concluded that it did not provide him with any
actual benefit and could not support the restrictive covenant's enforcement.
What the Socko v.
Mid-Atlantic Systems of CPA, Inc. opinion fails to provide is what consideration will be deemed adequate to
support a restrictive covenant entered into after employment's commencement
presumably a case-specific inquiry requiring a court to weigh factors including
nature of the benefit conveyed to employee and the restrictive covenant's scope
and duration.
