Non-Compete Agreements Require Consideration
Most know that a restrictive covenant, usually found within an employment agreement, can serve to protect a company from training an employee and then losing that employee to a competitor down the street. Most also know that generally restrictive covenants are only enforceable if that restraint on trade is being given in exchange for consideration. Consideration is something of value given in exchange for the performance or the promise to perform such as higher pay or additional benefits. But what about a situation where an employment agreement contains a restrictive covenant and no consideration is given, but the agreement uses the magic words set forth in the Uniform Written Obligations Act (“UWOA”), 33 P.S. § 6, which says that a written contract “shall not be invalid or unenforceable for lack of consideration” when it states that the “the signer intends to be legally bound.” Then is the restrictive covenant enforceable?
This precise question was answered recently by the Pennsylvania Supreme Court in Socko v. Mid-Atlantic Systems of CPA, Inc.
Mid-Atlantic Systems of CPA, Inc. (“Mid-Atlantic”) hired David Socko in 2007 as a salesman. At that time, Mr. Socko signed an employment agreement that contained a restrictive covenant. After leaving Mid-Atlantic in 2009 for a few months to work for another company, Mr. Socko returned to Mid-Atlantic and again signed an employment agreement containing a restrictive covenant. A year or so later, while still working for Mid-Atlantic, Mr. Socko signed another employment agreement with more stringent terms. This latter employment agreement contained wording that the parties intended to be “legally bound.” When Mr. Socko resigned to work for a competitor, Mid-Atlantic sent his new employer a cease-and-desist letter. The new employer obliged and fired him, and consequently Mr. Socko filed a lawsuit seeking a judicial declaration that his restrictive covenant was void because it was not supported by consideration.
In Socko v. Mid-Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa.Super. 2014), the Superior Court held that the UWOA did not replace consideration for a restrictive covenant that otherwise was not supported by any “benefit or change in job status.” Mid-Atlantic argued that its restrictive covenant was enforceable because it recited that the parties intended to be legally bound by its terms. The Superior Court disagreed and held that “the employee must receive actual valuable consideration in exchange for signing an employment agreement containing [a restrictive covenant].”
Socko was appealed to the Supreme Court and ultimately affirmed by a 4–1 decision. The Supreme Court focused on the long common-law history of disfavoring restrictive covenants and other agreements in restraint of trade. In light of that history, the Supreme Court held it would be an “absurd result” to interpret the UWOA to remove the requirement of consideration for an agreement in restraint of trade. Thus, an employment agreement containing a restrictive covenant not to compete may be challenged for a lack of consideration even though the agreement says that the parties “intend to be legally bound” under the UWOA.