The Pennsylvania Supreme Court recently reminded employers that an employee agreement containing a non-compete clause is only enforceable if the employee receives valuable consideration in exchange for signing the agreement. In addition the court found that a statement in a non-compete agreement that the parties “intend to be legally bound” did not prohibit an employee from challenging the enforceability of the non-compete agreement for lack of consideration. What does this mean for employers?
In Socko v. Mid-Atlantic Systems of CPA, Inc., an employee sued his former employer seeking a declaration that his non-compete agreement with the former employer, which prohibited him from competing with his former employer for two years, was not enforceable because it was not supported by consideration. The parties did not dispute that the employee did not sign the non-compete agreement until well after he started employment and at the time he signed it he did not receive any additional benefits or change in job status. The former employer asserted, however, that the non-compete agreement stated that the parties “intend to be legally bound” and that pursuant to the Uniform Written Obligations Act (“UWOA”), 33 P.S. §6, this statement prohibited the employee from challenging the non-compete agreement for lack of consideration. Section 6 of the UWOA provides that “[a] written release or promise, hereafter made and signed by the person releasing or promising, 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.” The Socko case was the first time that the Pennsylvania Supreme Court addressed the issue of whether language consistent with Section 6 of the UWOA could operate to prevent an employee from challenging a non-compete agreement for lack of consideration.
The Socko Court reviewed the history of non-compete agreements in Pennsylvania, noting that they are viewed as contracts in restraint of trade and have been disfavored. The Court then recognized that such agreements are enforceable if certain conditions are satisfied, including that the agreement is supported by adequate consideration. The Court found that consideration exists if:
- the employee enters into the non-compete at the inception of employment; or
- the employee receives new and valuable consideration at the time of entering into the agreement where the agreement is entered into after the commencement of employment.
The Court defined new and valuable consideration as a corresponding benefit or change in employment status and provided several examples of what it previously had found constituted new and valuable consideration, including: (i) a promotion; (ii) a change from part-time to full-time employment; and (iii) a change in compensation and benefits. Ultimately, the Court held that valuable consideration was needed to support a non-compete agreement and that language consistent with Section 6 of the UWOA in a non-compete agreement did not prevent an employee from challenging the agreement for lack of consideration.
Socko is a strong reminder to employers that a non-compete agreement must be supported by real consideration. An employer either needs to have an employee sign a non-compete agreement at the commencement of employment or provide the employee with a valuable benefit or change in job status when a non-compete agreement is added to an existing employment relationship. Otherwise, a non-compete agreement will be unenforceable for lack of consideration. Employers in Pennsylvania should pay careful attention to this ruling, particularly where they attempt to have an employee sign a non-compete agreement after the commencement of employment.
For questions on this issue or other employment related issues please contact Eric J. Schreiner at eschreiner@kleinbard.com or 215.496.7217.