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.

Leave a Reply

Your email address will not be published.

Contact Us