In a case of first impression, a Pennsylvania appellate
court recently held that contractual language satisfying the state’s Uniform
Written Obligations Act (UWOA)—that is, a statement that the parties “intend to
be legally bound”—is not a sufficient form of employer consideration to support
the enforcement of a non-compete agreement. The Superior Court of
Pennsylvania’s ruling also serves as a reminder that continued employment will
not serve as sufficient consideration for an employee’s agreement not to
compete under Pennsylvania law.
In Socko v. Mid-Atlantic Systems of CPA, Inc., the Superior
Court unanimously upheld a trial court’s ruling that a non-compete agreement
could not be enforced against an at-will employee who signed the agreement
after being employed for more than a year as a waterproofing company salesman.
Although the agreement stated that the parties “intend to be legally bound” by
the contract’s terms, the court found that it was unenforceable because the
employee received no benefit or change in job status at the time he entered into
the agreement.
The agreement included a covenant for the employee not to
compete for two years after the termination of his employment. When the
plaintiff resigned and almost immediately accepted a position with another
basement waterproofing company, Mid-Atlantic sent a letter to the new employer
attaching the non-compete and threatening litigation. The plaintiff was
subsequently terminated from his new job and brought an action against
Mid-Atlantic seeking a declaratory judgment that the non-compete was
unenforceable. The company argued that, based on the “intend to be legally
bound” language, the UWOA prevented the avoidance of any written agreement for
lack of consideration.
The Superior Court first set aside two conflicting federal
district court decisions on the issue in Pennsylvania. The court did not find
the reasoning of either decision persuasive, “instead conclud[ing] that it is
necessary to review the history of the enforcement of restrictive covenants in
Pennsylvania to determine the precise nature of the consideration required to
support them.”
Reviewing that history, the Superior Court noted that
adequate consideration could take the form of a corresponding benefit to the
employee or beneficial change in job status. Citing the Pennsylvania Supreme
Court’s 1975 decision in George W. Kistler, Inc. v. O’Brien, the court also
identified three forms of consideration inadequate to support a non-compete:
• Continued
employment even if the employment relationship is terminable at will
• The
execution of the employment agreement under seal
• Recital of
nominal consideration (e.g., $1)
The Superior Court rejected Mid-Atlantic’s argument that
application of the UWOA rectified the lack of consideration for the plaintiff’s
non-compete. 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 court explained that, for most contracts, Pennsylvania
courts require consideration as a necessary element of enforcement, but do not
inquire into the adequacy of the consideration in determining the validity of a
contract. With restrictive covenants, however, Pennsylvania courts consistently
inquire into the adequacy of consideration sufficient to support the covenant.
The Superior Court held that “[l]anguage in an employment contract that the
parties intended to be legally bound does not constitute valuable consideration
in this context.”
Source: Ballard
Spahr
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