Non-Compete Agreements: Non-Compete Invalid Due to Lack of Consideration

Employment law attorneys are frequently retained to advise employees on the enforceability of non-compete agreements / restrictive covenants under Pennsylvania law. In Socko v. Mid-Atlantic Systems of CPA, Inc. 2014 Pa. Super. LEXIS 702 (May 13, 2014), the Superior Court of Pennsylvania recently set forth a thorough analysis of the current state of Pennsylvania non-compete law.

Restrictive covenants not to compete have always been disfavored in Pennsylvania because they have been historically viewed as a restraint on trade that prevents a former employee from earning a living. This follows the principle set forth by the Pennsylvania Supreme Court that contracts in restraint of trade made independently of a sale of a business or contract of employment are void as against public policy regardless of the valuableness of the consideration exchanged therein. Restrictive covenants entered into at the sale of business or a contract to commence employment where none existed previously have been found to constitute consideration supporting that covenant. However, when a restrictive covenant in an employment contract is executed after the beginning of employment relationship, courts have found the agreements unenforceable for lack of consideration.

Forty years ago in Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279 (Pa. 1974), the Pennsylvania Supreme Court held that restrictive covenants in restraint of trade are enforceable only if the employer satisfies three requirements: (1) the covenant must relate to (i.e., be ancillary to) either a contract for the sale of goodwill or other subject property or to a contract of employment; (2) the covenant must be supported by adequate consideration; and (3) the application of the covenant must be reasonably limited in both time and territory. Each of these requirements must exist before a restrictive covenant is enforceable.

As to the nature of the consideration which is required to support a covenant not to compete, Pennsylvania law requires the presence of “valuable consideration.” Two types of consideration support a restrictive covenant in an employment contract. When the restrictive covenant is contained in the initial contract of employment, consideration for the restrictive covenant is the job itself. When the restrictive covenant is added to an existing employment relationship, however, it is only enforceable when the employee receives a corresponding benefit or change in status. An employee’s continued employment is not sufficient consideration for a covenant not to compete which the employee signed after the inception of his employment, where the employer makes no promise of continued employment for a definite term.

In George W. Kistler, Inc. v. O’Brien, 464 Pa. 475, 347 A.2d 311 (Pa. 1975), the Pennsylvania Supreme Court again found unenforceable a restrictive covenant set forth in an employment contract executed after the employee had previously entered into a binding oral employment agreement and commenced work, without any corresponding benefit or change in job status. In Kistler, the Supreme Court excluded three forms of consideration it found inadequate to support a covenant not to compete. First, the Court held that continued employment does not constitute sufficient consideration even if the employment relationship was terminable at the will of either party. Second, the execution of the employment agreement under seal did not constitute valuable consideration to support the restrictive covenant. Lastly, the recitation of nominal consideration ($1.00) was inadequate consideration for the restrictive covenant. Thus, when an employee enters into an employment contract containing a covenant not to compete subsequent to employment, the covenant must be supported by new consideration which could be in the form of a corresponding benefit to the employee or a beneficial change in employment status.

In Socko, the court held the restrictive covenant was not enforceable because the employer conceded that the non-competition restrictive covenant in an employment agreement was entered into after the commencement of employment, thus, there was a lack of consideration and the employer provided the employee with no benefit or change in job status at the time of execution. The court flatly rejected the employer’s contention that the insertion of language in the agreement which states that the mere insertion of language that the parties “intend to be legally bound” by itself is adequate consideration under the Uniformed Written Obligations Act. Thus, in Socko, the Superior Court of Pennsylvania concluded that the restrictive covenant was unenforceable for lack of valuable consideration.

For more information on Restrictive Covenants, Non-Compete Agreements and Abramson Employment Law, see http://www.job-discrimination.com/lawyer-attorney-2117941.html

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