Posted on November 20, 2015
Earlier this week, the Pennsylvania Supreme Court released its long-awaited decision in a case presenting the issue of whether a post-employment non-compete agreement for which the employer gave no actual consideration would still be enforced under Pennsylvania law. Specifically, the Court considered whether such an agreement would be valid under a statutory provision that allows courts to enforce contracts that lack consideration if the signer expresses an “intent to be legally bound.” The Court said that, because non-compete agreements restrain trade and are disfavored by law, more than just a bare recital is necessary for such agreements to be enforceable when signed by existing employees.
The case, Socko v. Mid-Atlantic of CPA, Inc., Case No. 142 MAP 2014 (2015), involved an outside salesman for basement waterproofing company Mid-Atlantic of CPA, Inc. (“Mid-Atlantic”). During his employment at Mid-Atlantic, David Socko (“Socko”) signed a non-compete agreement to replace one that he had signed when he was initially hired. The new non-compete agreement contained language stating it superseded all prior agreements. Mid-Atlantic did not give Socko any consideration for the new non-compete agreement, other than allowing him to remain employed, but the contract did contain language stating that both parties “intend to be legally bound” by the restrictive covenants.
In legal terms, “consideration” is something of value that each party to an agreement gives to the other to make the contract binding. Every contract requires that both parties provide consideration, however, courts generally will not review the adequacy of such consideration. This practice gave rise to the metaphor that all the consideration required for a contract to be valid is a peppercorn, something of nominal value used only to satisfy the minimum requirements for the creation of a legal contract. Pennsylvania has had a statute in effect since the 1930’s that rules any contract cannot be declared invalid based upon a lack of consideration when the parties express an “intent to be legally bound” in the contract. That statute is one reason that language is seen in many contracts.
Socko resigned from Mid-Atlantic and went to work for a competitor within the territory covered by the Mid-Atlantic non-compete agreement. Mid-Atlantic found out and notified Socko’s new employer that he was subject to a non-compete. Apparently not wanting a fight, Socko’s new employer fired him. Socko then filed a lawsuit against Mid-Atlantic to declare the non-compete unenforceable as against public policy (a legal reason courts will set aside some contracts), on the grounds that Mid-Atlantic did not give him anything of real value in exchange for signing it. Socko claimed that since he was given nothing, he should not be bound by the covenant not to compete. Mid-Atlantic took the position that the aforementioned Pennsylvania statute nonetheless bound Socko, even without any exchange of consideration, because the contract recited their “intent to be legally bound.” The issue for the Supreme Court was whether that language, by itself, was enough to hold an employee to a non-compete agreement. The Court said it was not.
The decision is significant because the Court opened the door to allowing employees to challenge enforcement of non-compete agreements that were signed when they got nothing of real value in exchange for it. The Court’s opinion keeps with a long history of legal decisions in Pennsylvania generally hostile to non-compete agreements because they restrain free trade. The Court agreed that continued employment is not enough, and the consideration must be both “new” and “valuable” or it won’t count. This means that, to be valid, the non-compete must either be given in exchange for a job (at the time of hire), or in exchange for some significant change in employment status – like a promotion, a raise, a bonus, or something significantly beneficial to the employee. No longer will Pennsylvania employers be able to slide new or amended non-compete agreements in front of their existing employees and presume their enforceability just because they recite an “intent to be legally bound.”
This also means that if you are an employer that uses non-compete agreements subject to Pennsylvania law, all of them need to be immediately reviewed to determine whether they are still valid. If those agreements did not include an exchange of value between employer and employee, then they won’t be enforced no matter how much “intent to be legally bound” language they include. If an employer is not in a position to make status changes as consideration, then in all likelihood, bonuses will be required to bind the employees to such restrictive covenants.
This case also draws a stark contrast to the law in other states, like Ohio, where continued employment has been considered valid consideration for a non-compete agreement for years. This is an example of where an agreement may be valid in one state, but not another, and so choice of law terms in such contracts can be very important. It also means that if you have questions regarding a specific non-compete agreement, you should have that reviewed by experienced legal counsel before just presuming it is either valid or not-valid. If you have questions regarding the non-compete agreements, or any other aspect of Ohio or Pennsylvania labor law, please contact Todd Harpst or Nick Horrigan, at Harpst Ross, Ltd. – Business Lawyers for the Construction Industry®, at (330) 983-9971 or email@example.com or firstname.lastname@example.org.
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