Pa. Supreme Court: Non-Compete Restrictions Need Clarifying - Ballard Spahr

The Pennsylvania Supreme Court has agreed to review Socko v. Mid-Atlantic Systems of CPA, Inc., a case of interest to employers regarding what consideration is necessary to support employee non-compete agreements. The court will decide whether a non-compete agreement executed after the outset of an at-will employee's tenure requires consideration beyond a statement that the parties "intend to be legally bound." As we reported earlier this year, the Superior Court in Socko upheld a trial court's decision that non-compete agreements are invalid in the absence of additional consideration, even where the employee expressly agrees to such contractual language.

In Socko, the Superior Court unanimously ruled that a non-compete agreement could not be enforced against a salesman who signed a new agreement after being employed for more than three years at Mid-Atlantic. David Socko had signed a new employment agreement that contained a non-compete clause prohibiting him from working for any competing firm in the surrounding states for two years following his time at Mid-Atlantic. Mr. Socko later resigned, and within a matter of weeks accepted a job with a competing firm in the restricted area. Mid-Atlantic promptly sent a letter to Mr. Socko's new employer, attaching a copy of the non-compete agreement and threatening to sue. Ten days later, the competitor fired Mr. Socko.

Shortly thereafter, Mr. Socko filed an action for declaratory judgment, requesting a determination that the non-compete agreement was unenforceable due to insufficient consideration. Mid-Atlantic pointed to specific language in the agreement expressing the parties' intent "to be legally bound," and argued that under Pennsylvania's Uniform Written Obligations Act (UWOA), such language prevents a party to the agreement from later challenging its validity on grounds that it lacks consideration. The trial court sided with Mr. Socko, and the Superior Court agreed on appeal.

The decision to invalidate the non-compete agreement in Socko highlights an inherent contradiction at the intersection of the UWOA and Pennsylvania case law. Time and again, Pennsylvania courts have rejected non-compete agreements signed by employees after the commencement of employment in the absence of additional consideration—despite the presence of contractual language sufficient to satisfy the UWOA. Arriving at this intersection, the trial court in Socko essentially framed the contradiction as an exception to the UWOA in the context of non-compete agreements.

The Supreme Court will consider three related questions in light of the Superior Court's decision.

The court will:

·         Review the Superior Court's characterization of the UWOA as either a "substitute for consideration" or an attempt to "rectify a lack of consideration."

·         Focus on whether the Superior Court properly compared Mr. Socko's case to cases in which a seal on a non-compete agreement was found to be inadequate consideration. The court's question possibly supports the view that the UWOA does not replace consideration, but rather allows the parties to avoid the issue altogether.

·         Decide whether the Superior Court inappropriately amended the UWOA in lieu of interpreting it.

The answers to these questions will impact the drafting and enforceability of non-compete agreements under Pennsylvania law.

Source: Ballard Spahr