Pa. Superior Court: ‘Valuable Consideration’ Required for Employer Enforcement of Non-Compete Agreement

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In a case of first impression, a Pennsylvania appellate court recently held that contractual language satisfying the state’s Uniform Written Obligations Act (UWOA)—that is, a statement that the parties “intend to be legally bound”—is not a sufficient form of employer consideration to support the enforcement of a non-compete agreement. The Superior Court of Pennsylvania’s ruling also serves as a reminder that continued employment will not serve as sufficient consideration for an employee’s agreement not to compete under Pennsylvania law.

In Socko v. Mid-Atlantic Systems of CPA, Inc., the Superior Court unanimously upheld a trial court’s ruling that a non-compete agreement could not be enforced against an at-will employee who signed the agreement after being employed for more than a year as a waterproofing company salesman. Although the agreement stated that the parties “intend to be legally bound” by the contract’s terms, the court found that it was unenforceable because the employee received no benefit or change in job status at the time he entered into the agreement.

The agreement included a covenant for the employee not to compete for two years after the termination of his employment. When the plaintiff resigned and almost immediately accepted a position with another basement waterproofing company, Mid-Atlantic sent a letter to the new employer attaching the non-compete and threatening litigation. The plaintiff was subsequently terminated from his new job and brought an action against Mid-Atlantic seeking a declaratory judgment that the non-compete was unenforceable. The company argued that, based on the “intend to be legally bound” language, the UWOA prevented the avoidance of any written agreement for lack of consideration.

The Superior Court first set aside two conflicting federal district court decisions on the issue in Pennsylvania. The court did not find the reasoning of either decision persuasive, “instead conclud[ing] that it is necessary to review the history of the enforcement of restrictive covenants in Pennsylvania to determine the precise nature of the consideration required to support them.”

Reviewing that history, the Superior Court noted that adequate consideration could take the form of a corresponding benefit to the employee or beneficial change in job status. Citing the Pennsylvania Supreme Court’s 1975 decision in George W. Kistler, Inc. v. O’Brien, the court also identified three forms of consideration inadequate to support a non-compete:

  • Continued employment even if the employment relationship is terminable at will
  • The execution of the employment agreement under seal
  • Recital of nominal consideration (e.g., $1)

The Superior Court rejected Mid-Atlantic’s argument that application of the UWOA rectified the lack of consideration for the plaintiff’s non-compete. Section 6 of 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 court explained that, for most contracts, Pennsylvania courts require consideration as a necessary element of enforcement, but do not inquire into the adequacy of the consideration in determining the validity of a contract. With restrictive covenants, however, Pennsylvania courts consistently inquire into the adequacy of consideration sufficient to support the covenant. 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.”

 

Topics:  Consideration, Employment Contract, Non-Compete Agreements, Restrictive Covenants

Published In: Civil Procedure Updates, General Business Updates, Labor & Employment Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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