Last week, the Pennsylvania Supreme Court upheld a May 2014 ruling by a Pennsylvania Superior Court that employers must provide new and valuable consideration to bind current employees to a non-compete agreement, notwithstanding the Pennsylvania Uniform Written Obligations Act, 33 P.S. § 6 (UWOA), which states that simply reciting the phrase, "intending to be legally bound," supplies the necessary consideration for an agreement. Socko v. Mid-Atlantic Systems of CPA, Inc., 2015 WL 7283317 (Pa. 2015). Socko is a case of first impression in Pennsylvania and has significant implication for employers.
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." Nonetheless, The Superior Court rejected the employer’s argument (which had been adopted by several federal district courts) that by including the phrase "intending to be legally bound" in a non-compete agreement, a current employee could not challenge the agreement for lack of consideration. The Superior Court reasoned that because non-competition agreements are disfavored, only true, valuable consideration can support their enforcement.
On appeal, the Supreme Court acknowledged that, on its face, the UWOA appears to support the employer’s position. Nonetheless, the Court concluded that given the disfavored and unique nature of non-compete agreements, an interpretation of UWOA that would permit the phrase "intending to be legally bound" to supply the required consideration for a non-compete agreement would be unreasonable.
The Court explained that for a new employee, the job itself can supply the required consideration. However, for a current employee, a non-compete agreement will be "enforceable only if the employee receives 'new' and valuable consideration – that is, some corresponding benefit or favorable change in employment status … Sufficient new and valuable consideration has been found by our courts to include, inter alia, a promotion, a change from part-time to full-time employment or even a change to a compensation package of bonuses, insurance benefits and severance benefits."
For Pennsylvania employers, the Socko decision means they cannot require an existing employee to sign a non-compete agreement without providing some new and valuable consideration; simply including the “intending to be legally bound” language from the UWOA is no longer sufficient.