United States: The Last Word On The Uniform Written Obligations Act And Restrictive Covenants In Pennsylvania?

If you follow this blog, you know that a very interesting case involving restrictive covenants has been winding its way through the Pennsylvania courts. The facts of the case are pretty simple. David M. Socko is a salesman, generally working in the commercial waterproofing industry. In December 2010, while already employed, Socko signed a new non-competition agreement with his employer. Socko and the employer agree that no new consideration was provided for the agreement. However, the agreement has language stating that Socko and the employer "intend to be legally bound" by its terms.

The "legally bound" language is key to this case. Pennsylvania is unique because in 1927 it adopted the Uniform Written Obligations Act (the "UWOA" or "Act") and today is the only state with the Act in force. Only one other state–Utah–adopted the Act, and it repealed the Act 4 years later. The UWOA provides that

The question before the courts of Pennsylvania was what this language means in the context of a case involving restrictive covenants. The employer urged upon the courts a conclusion that the Act prevented Socko from challenging the validity of the agreement based on a lack of consideration. Socko, and at least one amicus brief, argued that the Act–which must be read narrowly under Pennsylvania rules of statutory construction–is inconsistent with the well-established principle that a restrictive covenant entered into after the commencement of employment is not enforceable if it lacks good and valuable consideration.

The trial court and the Superior Court both held that the UWOA does not replace the law of the Pennsylvania requiring good and valuable consideration for restrictive covenants for agreements entered into after the commencement of employment. The Supreme Court, in a majority decision authored by Madame Justice Todd, after an exhaustive review of common and statutory law respecting covenants and the UWOA, agreed.

First, the Supreme Court reaffirmed the principle under Pennsylvania law that restrictive covenants, because they are agreements in restraint of trade, require good and valuable consideration and, if they are entered into after the commencement of employment, there must additionally be new consideration beyond mere continued employment. The Court noted that a promotion, a change from part-time to full-time employment, a bonus, or a significant change to benefits packages have all been held to be valuable new consideration.

Second, rejecting the position of employer, the Supreme Court held that, pursuant to the UWOA, a contract containing an express written statement of intent to be "legally bound" does in fact supply the necessary consideration to support the enforceability of a contract. The Court cited the author of the UWOA, the "famed professor" Samuel Williston, in support of this conclusion because Professor Williston intended for the Act to revive the function of the seal as it formerly existed but without the "formality, ritual, and shortcomings associated with seals."

Finally, despite reaching the conclusion that language to the effect that a signer intended to be "legally bound" was sufficient consideration in most circumstances, the Court concluded that any construction of the UWOA that would vitiate the need for new and valuable consideration when the parties to an employment relationship enter into a restrictive covenant after the initiation of employment would be unreasonable. The Court found significant that, even under the common law, an exception was recognized to the enforceability of contracts under seal for restraints of trade.

Takeaway: It is now clear that Pennsylvania will not permit the UWOA to supply consideration for the enforceability of a contract where the contract restrains trade, including restrictive covenants entered into after the commencement of employment. One can speculate that Socko's employer simply did not realize that such contracts needed new and valuable consideration, and the UWOA arguments were a creative (and ultimately costly) attempt to enforce the restrictive covenant. Instead, employers know the law of the relevant jurisdiction regarding restrictive covenants and follow it. Because they restrain trade, restrictive covenants will be strictly construed and the cost can be high. Consider here that Socko's employer had written a letter to his new employer, which resulted in Socko's termination. Given the outcome, Socko and the new employer may assert claims for tortious interference with contract.

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