Non-Compete Agreements: Pennsylvania Will Not Enforce Restrictive Covenants Entered Into After Commencement of Employment Unless Employer Offers New Valuable Consideration Beyond Continuing Employment

Today, in Socko v. Mid-Atlantic Systems of CPA, Inc., No. 142 MAP 2014, the Supreme Court of Pennsylvania reaffirmed that the enforcement of an employment agreement containing a restrictive covenant not to compete, entered into after the commencement of employment, may be successfully challenged as unenforceable by an employee for a lack of consideration. Such an agreement is unenforceable even where the agreement, by its express terms, states that the parties “intend to be legally bound,” which language implicates the Uniform Written Obligations Act (“UWOA”).

In Socko, while already employed, the employee signed a third, more restrictive Non-Competition Agreement which, by its terms, superseded all prior agreements. Pursuant to the agreement, the employee was not permitted to compete for two years after the termination of his employment in any of the following locations: Connecticut, the District of Columbia, Delaware, Maryland, New Jersey, Pennsylvania, New York, Virginia, West Virginia, or any other jurisdiction in which the employer did business. The Agreement also expressly provided for the application of Pennsylvania law, and stated that the parties intended to be “legally bound.” In Socko, the employee filed a motion for partial summary judgment, asserting that the non-competition clause in the agreement was unenforceable, as it was not supported by sufficient consideration. It was not disputed that the agreement was signed during the course of the employee’s employment and the employee did not receive any benefit or any change in his existing employment status in exchange for signing the new agreement.

The Supreme Court of Pennsylvania noted that while a covenant not to compete may be desirable and justified in some circumstances on the part of an employer, Pennsylvania courts have historically viewed such covenants as contracts in restraint of trade that prevent a former employee from earning a livelihood, and, therefore, have disfavored such provisions in the law. While generally disfavored, Pennsylvania law, however, has recognized the validity and enforceability of covenants not to compete in an employment agreement, assuming adherence to certain requirements. Currently in Pennsylvania, restrictive covenants are enforceable only if they are: (1) ancillary to an employment relationship between an employee and an employer; (2) supported by adequate consideration; (3) the restrictions are reasonably limited in duration and geographic extent; and (4) the restrictions are designed to protect the legitimate interests of the employer. The Court noted as with other contracts, for an employment agreement containing a restrictive covenant to be enforced, consideration is crucial, whether the covenant is entered into prior to, during, or after employment ends. Thus, to be valid, a covenant not to compete must be consummated with the exchange of consideration.

If a noncompetition clause is executed at the inception of the employment, the consideration to support the covenant may be the award of the job itself. A restrictive covenant is not required to be included in the initial employment contract to be valid. However, when a non-competition clause is required after an employee has commenced employment, it is enforceable only if the employee receives new and valuable consideration that corresponds with a benefit or a favorable change in employment status. In Pennsylvania sufficient new and valuable consideration has been found to include a promotion, a change from part-time to full-time employment, a compensation package of bonuses, insurance benefits or severance benefits.
Socko confirms that without new and valuable consideration, a restrictive covenant is unenforceable. More specifically, the continuation of the employment relationship at the time an employer and employee enter into the restrictive covenant is insufficient by itself to serve as consideration for the new covenant, despite the fact that there may be an at-will relationship terminable by either the employer or the employee. As a consequence, in Socko the Court held that in “light of the clear and unambiguous language of the UWOA, and consistent with our prior case law, we reject Mid-Atlantic’s (the employer’s) view and conclude that a contract containing a written express statement of intent to be “legally bound” does not supply the necessary consideration to support the enforceability of an agreement.

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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Filed under Breach of Contract, Employment Law, Non-Compete Agreements, Restrictive Covenant

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