A recent published opinion from the Superior Court of Pennsylvania, an intermediate state appellate court, has called into question the enforceability of some restrictive covenants in Pennsylvania. In David M. Socko v. Mid-Atlantic Systems of CPA, Inc., the Superior Court considered whether the Uniform Written Obligations Act ("UWOA"), as adopted in Pennsylvania, permitted the enforcement of a restrictive covenant entered into after the beginning of employment and without additional consideration. The Court decided that such a restrictive covenant cannot be enforced.
The facts were straightforward. Socko, a salesman, having once left the company, signed onto a second period of employment with Mid-Atlantic in June 2009. At that time, Socko signed an employment agreement with a two-year covenant not to compete. Then, in December 2010, while still employed by Mid-Atlantic and without any new consideration, Socko signed another employment agreement, this one also containing a two-year covenant not to compete. This new covenant would only begin to run upon termination and included an expanded territorial restriction of any jurisdiction where Mid-Atlantic does business.
You can guess what happened next. Socko left Mid-Atlantic to go to work for a competitor. Mid-Atlantic sent a letter to the competitor, enclosing a copy of the non-competition agreement and threatening litigation. Socko was then terminated by the new employer. Socko filed suit, seeking a declaration that the covenant not to compete was unenforceable because it was not supported by adequate consideration. Mid-Atlantic did not deny that no consideration had been given to Socko in exchange for the 2010 non-compete. Instead, it argued because the UWOA prevents the avoidance of any written agreement for lack of consideration, the 2010 covenant had to be enforced. The trial court granted summary judgment to Socko, and Mid-Atlantic appealed.
On appeal, the Superior Court engaged in a broad review of the history of non-competition agreements in Pennsylvania, as well as decisions of federal district courts in Pennsylvania that had considered the effect of the UWOA on such agreements under Pennsylvania law. In that sweeping review, the Superior Court noted that the Pennsylvania Supreme Court has long disfavored covenants not to compete because they are restraints on trade that may prevent former employees from earning a living. As such, a covenant must be entered into when beginning initial employment ("ancillary to the taking of employment") or accompanied by new consideration, such as a corresponding benefit to the employee (for example, a bonus specifically linked to the non-compete and not related to anything else) or a beneficial change in employment status (like a promotion to a new position). Moreover, the Superior Court noted the Supreme Court had regularly examined the quality of the consideration given in exchange for signing a non-compete agreement, rejecting recitations of value like "good and valuable" consideration readily accepted in other contractual circumstances.
The Superior Court therefore examined the Socko scenario to see if Socko received valuable consideration in exchange for the December 2010 covenant not to compete. It decided that language added to a contract to the effect that the parties intended to be legally bound–even if perfectly adequate for other contracts–would not suffice for contracts that restrain the ability of employees to seek new employment. The Court analogized to contacts under seal, which Pennsylvania Courts had long held provided insufficient consideration to support a restrictive covenant, saying that the UWOA had precisely the same legal effect, "namely to import consideration into a contract and thus eliminate the need for proof of the existence of consideration".
This decision provides a good reason to review any covenants not to compete you have with employees that are governed by Pennsylvania law. If they were not entered into at the beginning of an employment relationship or supported with either a corresponding benefit like a special bonus or a positive change in job status, the UWOA will not supply a reason for restrictive covenants to be enforceable in Pennsylvania. Even more, while it does not seem to have happened in this case, recall that Mid-Atlantic did send a letter to the new employer threatening litigation. That letter led to Socko's termination. The failure of a non-compete for lack of consideration likely means that a former employer has opened itself up to lawsuits from both the former employee and new employer for tortious interference with contractual relations. If the employee is a high performing salesperson, success in such a suit could lead to significant damages.
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