Employers Must Provide "Valuable Consideration" To Current Employees When Entering A Non-Compete Agreement During Employment

This post was contributed by Stephanie Carfley, a Member in McNees Wallace & Nurick LLC's Litigation and Injunction practice groups in Lancaster, Pennsylvania.

In a case of first impression for the appellate courts of this Commonwealth, the Pennsylvania Superior Court recently ruled in Socko v. Mid-Atlantic Systems of CPA, Inc. that language contained in an employment agreement entered into after commencement of employment, which indicated the parties' "intent to be legally bound" was insufficient consideration to support a non-compete agreement. In reaching its decision, the Superior Court rejected the application of the Uniform Written Obligations Act ("UWOA"), which provides that a written agreement may not be avoided for lack of consideration if it contains language expressing the intent of the parties to be legally bound, in the context of an agreement containing a covenant not to compete. The Superior Court declined to follow the reasoning of a Pennsylvania federal court which previously had held that the UWOA applied to non-competition agreements and permitted enforcement of such agreements even in the absence of any additional consideration. In so holding, the Superior Court also clearly distinguished between the "valuable consideration" required to support a non-compete entered into after employment had commenced and the consideration that would support other types of contracts, i.e. continuation of at-will employment, contracts signed under seal and nominal consideration ($1.00).

The Superior Court's ruling in Socko definitively resolves the issue of the insufficiency of "intent to be legally bound" language as consideration for a restrictive covenant agreement and offers employers and employees alike some clear guidance as to the "valuable consideration" required to uphold the validity of a non-compete entered into after the commencement of employment. Employers should keep this decision in mind when preparing non-compete agreements for current employees and when considering whether to hire an employee subject to a non-compete agreement.

Source: PA Labor and Employment Blog