PA Superior Court Hands Down Ruling on Non-Compete Agreements
On May 13, 2014, Pennsylvania’s Superior Court handed down a decision stating that in order for a non-competition agreement or clause in an agreement to be enforceable, there needs to be valuable consideration.
Both the parties agreed on the facts, so the dispute was based purely on the law. David Socko had worked for Mid-Atlantic Systems of CPA, Inc. as a salesman, and during his employment, had signed a non-compete without receiving any consideration beyond the continuation of his employment with Mid-Atlantic. In 2012, Socko left Mid-Atlantic and began working for Pennsylvania Basement Waterproofing, Inc. Shortly after he started, Mid-Atlantic sent Pennsylvania Basement Waterproofing the non-compete along with threats of litigation, and Socko was fired. Socko brought suit a few months later.
Mid-Atlantic argued that because the non-competition agreement contained the words “intending to be legally bound,” the Uniform Written Obligations Act prevented Socko from avoiding the agreement for lack of consideration.
Both parties had opposing district court opinions in their favor. Mid-Atlantic had a decision from the Western District of Pennsylvania stating that the UWOA permits the enforcement of restrictive covenants in the absence of consideration and Socko had a decision from the Eastern District of Pennsylvania finding the opposite.
The opinion summarizes the history on non-competes in the Commonwealth, beginning with noting that non-competes have always been disfavored in Pennsylvania because they permit the former employer to restrict the former employee’s ability to earn a living, citing decisions from 1866 through 2002.
The court does state that non-competes, entered into at the beginning of employment or at the sale of a business, have sufficient consideration to be upheld on those grounds. In the employment context, the job itself is the valuable consideration. The Court did note that contrary to some opinions, the employer can offer a non-compete at any time during an employment relationship, as long as it is supported by sufficient consideration. Some case law seemed to suggest that the only time a non-compete could be offered and be enforceable was at the beginning of the employment relationship. The Superior Court noted that this would be a ridiculous conclusion. It articulated a hypothetical situation wherein an employer hires someone as a novice, where it does not matter whether or not he works for a competitor after he leaves the job if he leaves the job right away, because he has no ascertainable skills that could harm the company. However, after a few years, the novice may have acquired numerous skills and significant experience from working for the company, and at that time the Employer may want to enter into a non-competition agreement with the employee.
The Court decided that the UWOA does not control non-competes. It noted that for most contracts, the court will not consider whether there was adequate consideration or not. However, because non-competition restrictive covenants are so unfavored by the Commonwealth, the courts do tend to look at whether or not the consideration was valuable. Continuing employment, contracts under seal, and consideration of $1.00 have all been held to not be sufficient consideration. Now, writing “intends to be legally bound” has joined the list of things that are not sufficient consideration to support a non-compete.