Pennsylvania Non-Compete Update

by Morgan Lewis
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The Superior Court of Pennsylvania reaffirms that restrictive covenants added to existing employment relationships must be supported by “valuable consideration.”

Pennsylvania courts have long held that an employer seeking an employee’s covenant not to compete must provide the employee with valuable consideration. When the restrictive covenant is in the initial terms of employment (e.g., in an offer letter or employment contract), the employment offer is the valuable consideration. But when the restrictive covenant is introduced during the course of an existing employment relationship, Pennsylvania courts have held that the employer must give the employee additional valuable consideration (beyond ongoing employment) in exchange for the restrictive covenant—a view that the Superior Court of Pennsylvania recently re-affirmed with its ruling in Socko v. Mid-Atlantic Systems of CPA, Inc.[1]

The Socko Decision

Pennsylvania’s Uniform Written Obligations Act (UWOA) provides that a written release or promise “shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement . . . that the signer intends to be legally bound.”[2] In Socko, the Superior Court of Pennsylvania was presented with what it called “an issue of first impression in this Commonwealth”—whether the UWOA applies to restrictive covenants not to compete. Federal district courts interpreting Pennsylvania law had split on the issue.[3]  

In Socko, the employer conceded that it imposed the restrictive covenant on an existing employee without giving the employee any additional consideration in exchange for the non-compete agreement. The employer argued that, pursuant to the UWOA, the restriction could not be void for lack of consideration because the restriction was in an agreement signed by the employee with a clause providing that the employee “intended to be legally bound” by its terms. The Socko court disagreed, rejecting any erosion of the valuable consideration requirement for restrictive covenants not to compete.

The court held that the UWOA does not apply to restrictive covenants in the employment context, reasoning that non-compete covenants “are disfavored in Pennsylvania because they are in restraint of trade and may work significant hardships on employees agreeing to them.”[4] The court distinguished non-compete covenants from other agreements by noting that the Pennsylvania Supreme Court “has repeatedly inquired into the adequacy of consideration” and has rejected “as inadequate various forms of consideration that would support the enforcement of other types of contracts, including the benefit of the continuation of at-will employment, contracts under seal, and nominal consideration.”[5]

Implications

The Socko holding reaffirms that Pennsylvania courts will examine whether employers that impose non-competes during existing employment relationships have provided adequate consideration. Potential forms of consideration include participation in training programs, a change in position, and an increase in compensation. Employers that wish to impose non-compete covenants on existing employees or modify existing restrictive covenants should evaluate these and other forms of potential consideration under existing Pennsylvania case law to ensure that the non-compete agreements are supported by adequate valuable consideration.


[1]. 2014 WL 1898584 (Pa. Super. May 13, 2014).

[2]. 33 Pa. Cons. Stat. Ann. § 6 (West. 1967).

[3]. Compare Surgical Sales Corp. v. Paugh, 1992 WL 70415, at *10 fn.3 (E.D. Pa. Mar. 31, 1992) (suggesting that the UWOA did not apply to non-compete covenants), with Wound Care Center, Inc. v. Catalane, 2011 WL 553875, at *19 (W.D. Pa. Feb. 8, 2011) (holding that the UWOA applied to non-compete covenants); Latuszewski v. Valic Financial Advisors, Inc., 2007 WL 4462739, at *10–11 (W.D. Pa. Dec. 19, 2007) (same).

[4]. 2014 WL 1898584, at *6.

[5]. Id.

 

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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