Noncompetes: Is Consideration Needed, or Just the intention to be Legally Bound?

By Thomas D. Rees, Esquire

June 16, 2014

It has long been an article of faith – and precedent – that a Pennsylvania employer must provide an employee with consideration for an enforceable agreement prohibiting post-employment competition with the employer. In short, the employer must provide the employee with a benefit to offset the burden on an employee who may be unable to work freely after employment.

Now, in the aptly-named case of Socko v. Mid-Atlantic Systems of CPA, Inc., 2014 WL 1898584, 2014 Pa. Super. 103 (May 13, 2014), the consideration requirement is being tested. So far, the courts have upheld the requirement, but Socko raises important issues and warrants a review of the law on consideration for post-employment restrictions.

Post-Employment Restrictions

For new employees, the start of employment itself is enough of a benefit to constitute consideration. For current employees, the employer has to provide valuable benefits in addition to continued employment. Why has additional consideration been necessary for current employees? The answer is that Pennsylvania is an employment-at-will state; therefore, continued employment itself does not provide any benefit to offset the burden of the non-compete. Also, non-competes are disfavored under Pennsylvania law because the restrictions interfere with employees’ rights to earn a living.

The consideration requirement has led to a number of court decisions on questions, like, “How much in pay or benefits is enough consideration?” for current employees; or, “When does employment actually begin?” for new employees. On the latter question, some courts have required employers to treat new employees as current employees (and thus to provide additional benefits) if the employer fails to inform the employee of the non-compete while extending a comprehensive employment offer.

The Uniform Written Obligations Act

Pennsylvania’s Uniform Written Obligations Act, 33 P.S. §6 (“UWOA”), throws a wild card into this debate. The UWOA provides, “[A] written release or promise, hereafter made and signed by the person releasing or promising, 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.” In short, no consideration is necessary when the agreement provides that the parties “intend to be legally bound.” Despite UWOA’s “uniform” name, Pennsylvania is apparently the only state that has enacted and retained the UWOA. (Utah enacted the law but later repealed it.)

“Uniform” or not, the UWOA is all-encompassing; the law contains no exception for non-competition or non-solicitation agreements. The UWOA seems at odds with the time-honored requirement of consideration for non-competes. By and large, the courts have overlooked the UWOA until recently. The great majority of Pennsylvania courts have required additional consideration beyond continued employment in actions to enforce a non-compete. These courts have not even mentioned the UWOA in ruling on the issues. Even those courts that have expressed support for the UWOA have often found ways to side-step the issue. Some courts have held that the UWOA eliminates the need for consideration, but have gone on to find that the employer gave the employee enough consideration to enforce the non-compete. Other courts have used the UWOA to dispense with the need for consideration but have gone on to find that the non-compete itself was too burdensome to be enforced. In this uncertain context, Pennsylvania employment lawyers have continued to advise employers to provide consideration to employees who sign non-competes.

As mentioned, in Socko v. Mid-Atlantic, the consideration requirement appears to have won the battle against the UWOA. Socko dealt with a waterproofing company’s enforcement of a non-compete against an individual who had signed the document while a current employee. The covenant contained the key UWOA clause: “intending to be legally bound hereby.” The employer had provided no consideration other than continued at-will employment. The Superior Court, affirming the trial court’s grant of summary judgment, held that the non-compete was unenforceable for lack of consideration. Continued at-will employment plus an intent to be legally bound were not enough to support the restrictions. Actual valuable consideration in the form of a benefit or change in job status was necessary to support the non-compete.

What the Future May Bring

The Superior Court’s decision preserves the status quo, for now. But it is important to keep an eye on this issue. The Superior Court’s decision is likely to be challenged by petition for allowance of appeal. And, whatever the final result, questions will remain: If the courts continue to require valuable consideration, what is the purpose of the UWOA? On the other hand, if the courts say that the UWOA governs, what are the implications of dispensing with consideration for restrictive agreements that the courts disfavor?

If you wish to learn more about consideration and other employment issues, feel free to contact Tom Rees at 610-679-9588 or trees@highswartz.com.

 

The information above is general: we recommend that you consult an attorney regarding your specific circumstances. The content of this information is not meant to be considered as legal advice or a substitute for legal representation.

Pennsylvania Supreme Court to Decide Whether HICPA Allows Recovery under a Theory of Unjust Enrichment

By Kevin Cornish, Esq. June 1, 2014

HICPA Background

In 2009, the Pennsylvania Home Improvement Consumer Protection Act (“HICPA”) went into effect (73 P.S. 517.1 et seq.).  HICPA requires all home improvement contractors to register with the Bureau of Consumer Protection.  Additionally, HICPA sets forth numerous requirements that must be followed in order for a home improvement contract to be valid and enforceable.  For example, HICPA requires, among other things, that all home improvement contracts be in writing, include the contractor’s registration number, address, and phone number, include the date of the transaction and approximate start and finish date of the work, and include a description of the work to be performed and materials to be used.  HICPA also outlines various clauses that, if contained in a home improvement contract, are voidable by the owner.If a home improvement contract does not comply with HICPA, it is not valid or enforceable against a homeowner.  This means that a home improvement contractor would not be able to assert a breach of contract claim against a homeowner to recover monetary damages for work that a homeowner did not pay for.  Likewise, it provides homeowners with additional defenses to avoid paying for a home improvement contractor’s negligent or improper work.

HICPA and Unjust Enrichment

However, HICPA was not clear as to whether a home improvement contractor could recover against a homeowner under the theory of unjust enrichment or quantum meruit for work performed in the absence of a valid home improvement contract.  Unjust enrichment is an equitable doctrine allowing a party to recover on the basis of a quasi-contract, or contract implied in law, when one party is enriched unjustly at the expense of another.  Essentially, unjust enrichment provides an alternate means of recovery when a contract does not exist between the parties.

Shafer Electric & Construction v. Mantia

The Pennsylvania Supreme Court will soon decide this issue in the case of Shafer Electric & Construction v. Mantia (Docket no. 28 WAP 2013).  In Shafer Electric, the Mantias contracted with Shafer Electric whereby Shafer Electric would construct an addition to the Mantias’ garage.  Certain disputes arose between the parties relating to changes to the scope of work.  Shafer Electric alleged that the Mantias owed in excess of $37,000 for labor and materials provided.  Shafter Electric filed a lawsuit seeking to recover under theories of breach of contract and unjust enrichment.To Shafer Electric’s detriment, it was not registered as a home improvement contractor under HICPA.  Therefore, it did not have a valid and enforceable contract under HICPA with the Mantias.  The Washington County Court of Common Pleas dismissed Shafer Electric’s complaint holding that it could not maintain a breach of contract action and that HICPA bars recovery under the theory of unjust enrichment.  On appeal, the Pennsylvania Superior Court reversed and held a home improvement contractor could maintain an action for unjust enrichment even though the contractor did not comply with HICPA’s contract requirements.The Supreme Court granted an appeal to determine whether HICPA bars a contractor from recovery for unjust enrichment in the absence of a valid and enforceable home improvement contract.   The Court heard oral argument on April 8, 2014.  Contractors and homeowners are awaiting the Supreme Court’s decision.

Importance of Decision

The Supreme Court’s decision will affect home improvement contractors and homeowners alike.  If the Court rules that home improvement contractors can recover under the theory of unjust enrichment without complying with HICPA, then HICPA’s force will be greatly reduced.  Home improvement contractors that have not complied with HICPA will still be able to pursue certain claims.On the other hand, if the Supreme Court holds that home improvement contractors cannot recover under unjust enrichment, then homeowners will have greater protection against claims by unregistered contractors and contractors that do not comply with HICPA’s requirements.  Likewise, it will be even more important for home improvement contractors to comply with all of HICPA’s registration and contract requirements.

[Updated March 11, 2015] – Click here to read.

If you are a homeowner or home improvement contractor with questions regarding HICPA, feel free to contact Kevin Cornish at 610-275-0700 or kcornish@highswartz.comThe information above is general: we recommend that you consult an attorney regarding your specific circumstances.  The content of this information is not meant to be considered as legal advice or a substitute for legal representation.