Summary
Earlier this week, the Pennsylvania Supreme Court rejected a challenge to the longstanding requirement that post-employment restrictive covenants must be supported by actual consideration to be enforceable under Pennsylvania law. In recent years, several lower courts in Pennsylvania have ruled that a restrictive covenant that included the words “intending to be legally bound” could not be deemed unenforceable due to lack of consideration, based upon a somewhat obscure Pennsylvania statute, the Uniform Written Obligations Act (UWOA). The Supreme Court’s decision in Socko v. Mid-Atlantic Systems of CPA, Inc., slams the door on this approach and affirms that restrictive covenants must be supported by actual consideration to be enforceable.
In the case before the Supreme Court, the plaintiff-employee, David Socko, entered into an employment agreement including a non-compete covenant at the commencement of his employment in March 2007 with Mid-Atlantic Systems of CPA, Inc., a basement waterproofing company. A few years later, in December 2010, Mid-Atlantic had Socko sign another, more restrictive non-compete agreement (“Non-Competition Agreement”), which, by its terms, superseded the prior restrictive covenants between the parties. Significantly, Mid-Atlantic did not provide Socko with new or additional consideration for the Non-Competition Agreement. However, the Non-Competition Agreement included a statement that the parties “intend[ed] to be legally bound” by the agreement.
After Socko left Mid-Atlantic and went to work for a competitor, he sought a judicial ruling that the Non-Competition Agreement was unenforceable due to lack of consideration. In response, Mid-Atlantic argued that under the UWOA, the “legally bound” language in the Non-Competition Agreement prevented Socko from challenging its enforceability based on lack of consideration. In this regard, the UWOA provides that an agreement “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.” (Emphasis added.)
In a case of first impression, the Pennsylvania Supreme Court first determined that pursuant to the clear language of the UWOA, a party challenging the validity of a contract containing an express intent to be legally bound will not be entitled to relief from the agreement on the basis that the promises made therein lack consideration. However, the Court went on to note that it must also determine whether this interpretation of the statute would lead to an absurd or unreasonable result. The Court also noted Pennsylvania’s “long, and virtually uniform, history of strongly disfavoring covenants in restraint of trade,” the burdens such covenants impose upon employees, and the Court’s own longstanding rule that restrictive covenants be supported by new and valuable consideration, beyond mere continued employment, to permit enforcement.
Therefore, the Court concluded, it would be unreasonable to construe the UWOA in a manner which would vitiate the need for new and valuable consideration when entering into a restrictive covenant agreement. And, the Court held, an employment agreement containing a restrictive covenant may be challenged for a lack of consideration even if it reflects that the parties intend to be legally bound as per the UWOA.
Takeaways
The Court’s decision puts to rest the debate whether a restrictive covenant that is not supported by consideration might still be “saved” based upon its inclusion of the “legally bound” language. It is clear that employers requiring employees to sign restrictive covenants after the inception of the employment relationship must provide additional consideration, such as increased compensation or benefits. Likewise, employees bound by restrictive covenants that are not supported by adequate consideration (or prospective employers of such employees) are not prevented from challenging the covenants’ enforceability based upon the UWOA. Nevertheless, despite the clarity around the UWOA issue, restrictive covenant enforcement remains a complex area of the law, and employers are urged to consult with legal counsel in drafting or interpreting such agreements.
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