In a much anticipated decision released on November 18, 2015, the Supreme Court of Pennsylvania closed the door—if it was ever open—on any arguments doing away with the separate consideration required for restrictive covenant agreements entered into after the commencement of employment. In Socko v. Mid-Atlantic Systems of CPA, Inc., the Commonwealth’s supreme court reaffirmed the claim that Pennsylvania’s decades-old Uniform Written Obligations Act (UWOA) does not change the long-standing common law rule that covenants not to compete entered into after the commencement of employment must be accompanied by new and valuable consideration.
Background
David Socko was a salesman for Mid-Atlantic Systems of CPA, Inc. Over a year after the start of Socko’s initial employment, Mid-Atlantic asked Socko to sign a new employment agreement that contained a two-year covenant not to compete. Socko did not receive consideration for entering into the new agreement. In January of 2012, Socko left Mid-Atlantic and began working for a competitor. After learning of Socko’s new employment, Mid-Atlantic sent his new employer a letter threatening litigation based on the noncompetition provision contained in Socko’s employment agreement. In response, Socko initiated an action in the York County Court of Common Pleas to have the noncompete agreement declared unenforceable. Socko argued that the noncompete was unenforceable for lack of consideration.
Analysis
In its defense, Mid-Atlantic argued that the language, “intend to be legally bound,” contained in Socko’s employment agreement, acted as a bar to a challenge to the validity of the agreement based upon the UWOA. Under the UWOA, 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.” 33 P.S. § 6. Rejecting Mid-Atlantic’s argument, the trial court held, and the superior court affirmed, that the UWOA does not permit enforcement of a noncompete agreement without a corresponding change in the employee’s benefits or job status. Because this was an issue of first impression, the Supreme Court of Pennsylvania agreed to review the matter.
In reaffirming the superior court’s decision, the supreme court acknowledged that, based solely upon the language of the UWOA, the agreement would be enforceable against Socko. However, contracts containing restrictive covenants receive unique treatment under the law. In order to maintain this unique status, the supreme court reasoned that an interpretation of the UWOA that would vitiate the need for new and valuable consideration when entering into an agreement containing a restrictive covenant after the initiation of employment would be unreasonable and, therefore, violate the dictates of Pennsylvania’s Statutory Construction Act of 1972. Consequently, the Supreme Court of Pennsylvania held that the UWOA cannot reasonably be interpreted as abrogating the need for new and valuable consideration to create a binding noncompetition agreement.
Key Takeaways
Pennsylvania continues to require separate and valuable consideration to support a restrictive covenant agreement entered into after the commencement of employment. For current employees, such consideration may include a promotion or change in benefits. Continuing employment of an at-will employee has long been held to be insufficient consideration. After Socko, the magic language, “intends to be legally bound,” will not suffice as a substitute for consideration either. To avoid being left unprotected, employers should review their employment agreements to ensure that sufficient consideration exists for restrictive covenants.
