Pennsylvania Supreme Court enforces covenant not-to-compete executed weeks after employee signed offer letter –– despite absence of new consideration

by Saul Ewing Arnstein & Lehr LLP
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Summary

The Pennsylvania Supreme Court recently held that an employee’s covenant not-to-compete, agreed-to nearly a month after the employee returned a signed offer letter, is enforceable without the provision of new consideration. Per the holding in Pulse Technologies, Inc. v. Notaro,1 an offer letter that outlines the terms of employment and references a future document containing more definite terms, merely evidences negotiations and does not establish an employment relationship. Because no employment relationship results from the offer letter, a covenant not-to-compete nested among the terms of a later-issued employment agreement is enforceable without the need for new consideration to bind the parties.

Pulse involved two employers seeking to fill a vacancy for a Swiss Screw engineer –– a highly specialized machinist. Pulse Technologies, Inc. engaged a national search firm that aligned Pulse with a suitable candidate, Peter Notaro. After a series of interviews, Pulse’s president mailed Notaro a two-and-one-half-page letter formally offering him employment. The letter contained a summary of Notaro’s intended position with the company, and included relevant terms such as the description of the position, responsibilities, location, base salary, benefits, effective date and confidentiality. The letter contained the following additional language:

You will also be asked to sign our employment/confidentiality agreement. We will not be able to employ you if you fail to do so . . . . In addition, the first day of employment you will be required to sign an Employment Agreement with definitive terms and conditions outlining the offer terms and conditions contained herein.

The offer letter made no mention of any restrictive covenant. When Notaro arrived for his first day of work, nearly a month after receiving his offer letter, he was asked to sign an employment agreement containing a non-competition restrictive covenant. Notaro voiced no objection at the time.

Nearly five years later, Notaro learned of an available position with Pulse’s competitor –– MK Precision, LLC. Notaro accepted a position in MK Precision’s Swiss Screw business unit, and Pulse immediately sought to enforce the covenant not-to-compete by way of preliminary injunction.

The trial court granted Pulse’s petition for injunctive relief, and the Superior Court thereafter vacated the injunction. The Superior Court reasoned, in pertinent part, that the restrictive covenant was entered after Notaro has commenced employment, and was precluded by the limitation contained in the offer letter indicating that the employment agreement to be signed on the first day of work would only outline the offer terms contained in the offer letter.

Granting allocatur, the Pennsylvania Supreme Court vacated and remanded, contending that the Superior Court mischaracterized the language contained in the offer letter. Specifically, the Court declared that the Superior Court “disregarded the statement [contained in the offer letter] that the employment agreement would contain the ‘definitive terms and conditions’ of the agreement.”

Unlike the Superior Court, which considered the signing of Notaro’s offer letter as the starting point of the employment relationship, the Supreme Court determined that the offer letter was merely “part of the hiring process.” The Supreme Court reasoned that Notaro’s employment did not begin until his first day of work when he signed the employment agreement. In arriving at this conclusion, the Supreme Court referenced the components of the offer letter that contemplated a future, more binding document, and stated that “[t]he clear references to future specific terms show the offer letter is not a contract, but only evidence of negotiation.”

In separate concurring opinions, Justices Todd and Saylor each reasoned, generally, that the offer letter contained the fundamental terms necessary to form a binding employment arrangement; both Justices concluded that Notaro’s employment began when he signed the offer letter.

Notwithstanding the varying views on when exactly a binding employment agreement was created, the Justices unanimously agreed that the covenant was “ancillary” to Notaro’s taking of employment. Pennsylvania case law has historically enforced non-compete agreements when “ancillary,” “incident to” or “auxiliary” to the taking of regular employment. The Court found relevant the fact that the offer letter sufficiently notified Notaro of a nondescript document he would later be required to sign as a condition of his employment. Interestingly, the Court did not assign any significance to the fact that the offer letter omitted any mention of a non-competition covenant. The Court reasoned that since Notaro endorsed the employment agreement, of which the non-competition covenant was a part –– the covenant was ancillary to Notaro’s taking of regular employment, and thus was enforceable.

Pulse is relevant because it seems to signal a slight departure from the existing precedent embodied, e.g., in George W. Kistler, Inc. v. O’Brien,2 where the Court tied the commencement of employment to an oral agreement, akin to the signing of the offer letter, and required new consideration for any covenant entered thereafter. The Court in Pulse accounts for such comparison by noting the factual distinctions separating the present case.

Pulse is valuable to practitioners for the clarity it provides to a common scenario that, at times, creates uncertainty for employers and employees. Employers can better manage their risk exposure given the insight Pulse provides on the timing of the fundamental aspects of engaging a new employee: offer letter, employment agreement, and commencement of work. Employees are now better informed of the enforceability of covenants not-to-compete arising under similar facts. The long-term net effect of the Pulse decision is likely to affect the outcomes of pending and future non-compete enforcement cases across the Commonwealth, and otherwise enhance the precision with which non-compete agreements are administered.

1. _ A.3d _, 2013 WL 2322472, *1 (Pa. May 29, 2013). http://www.pacourts.us/assets/opinions/Supreme/out/J-94-2012mo.pdf?cb=1

2. 347 A.2d 311 (Pa. 1975).

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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