Pennsylvania Superior Court Rules that Employers Must Provide Additional Consideration to Bind Current Employees to a Non-Compete Agreement

In Socko v. Mid-Atlantic Systems of CPA, Inc., 2014 WL 1898584 (Pa. Super. Ct. 2014), a case of first impression, the Pennsylvania Superior Court ruled that simply reciting, in a non-competition agreement with a current employee, that the parties intend to be legally bound will not supply the consideration needed to bind the employee. Instead, the employer must provide a current employee (as distinguished from a new hire) with an actual benefit or a change in job status to supply the required consideration.

Mid-Atlantic hired the plaintiff in 2007, at which time he signed a covenant not to compete that applied for the next two years. Later, the plaintiff resigned and was rehired and again signed another covenant not to compete that ran for two years. At the end of 2010, after his non-compete agreement had expired and while still employed for Mid-Atlantic as an at-will employee, the plaintiff signed a third covenant not to compete that ran for two years.

In January 2012, the plaintiff resigned to take a position with a competitor. Shortly thereafter, Mid-Atlantic sent a letter to the plaintiff’s new employer, including the most recent non-competition agreement the plaintiff had signed and threatening litigation. Ten days later, the new employer fired the plaintiff.

The plaintiff sued Mid-Atlantic, seeking a declaration that the non-competition agreement was unenforceable because it was not supported by sufficient consideration. The trial court agreed, and Mid-Atlantic appealed.

The Superior Court affirmed the lower court’s decision. The court expressly rejected the argument (which had been adopted by several federal district courts) that based on the Pennsylvania Uniform Written Obligations Act, 33 P.S. § 6, simply reciting the phrase “intending to be legally bound” supplied the necessary consideration. Although the statute 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 court determined that because non-competition agreements are disfavored, only true, valuable consideration will support their enforcement.

The court explained that, “for a restrictive covenant to be enforceable, the employee must receive actual valuable consideration in exchange for signing an employment agreement containing one. When the restrictive covenant is contained in the initial contract of employment, the consideration is the job itself. But when the restrictive covenant is added to an existing employment relationship, however, to restrict himself the employee must receive a corresponding benefit or change in job status.”

For Pennsylvania employers, this holding means that they can no longer require an existing employee to sign a non-competition agreement without providing that employee valuable consideration, such as a boost in compensation or benefits, a positive change in job status or a promise of a fixed term of employment; simply including the language as set forth in the Uniform Written Obligations Act is no longer sufficient.

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