PA Superior Court Holds Intent to be Legally Bound Insufficient Consideration for Purposes of Non-Compete
By: Sally Griffith Cimini, Esq.
The Pennsylvania Superior Court recently ruled that an employment agreement containing a non-competition clause, which includes a provision acknowledging the employee’s intent to be legally bound, does not replace the requirement that the employee be provided with valuable consideration for the non-competition provision if the agreement is entered into after the employment relationship has begun. In Socko v. Mid-Atlantic Systems of CPA, Inc., a current employee signed an employment agreement containing a two-year covenant not to compete. This agreement was executed by the employee over one year after he commenced employment. The employment agreement included a provision stating that the employee signed “intending to be legally bound.” After the employee quit and started working for a competitor, the company sought to enforce the non-compete. In response, the employee sought to have the non-competition provision within the employment agreement declared unenforceable because it was not supported by adequate consideration.
The Superior Court, noting that restrictive covenants in employment agreements are disfavored in Pennsylvania, re-affirmed that to be enforceable, an employee must receive “actual valuable consideration” in exchange for agreeing to a restrictive covenant. Generally, when an employment agreement containing an agreement not to compete is signed at the inception of employment, the start of employment itself serves as consideration. However, in situations where an employee has already accepted the job, is working, and the restrictive covenant is then added to the existing employment relationship, the employee must receive a corresponding benefit or beneficial change in his/her employment status.
The PA Superior Court was clear that the adequacy of the consideration would be examined and rejected the employer’s argument that the provision in the agreement stating that the employee signed “intending to be legally bound” constituted adequate consideration. The employer’s argument was based on a provision in the Uniform Written Obligations Act (“UWOA”) that states an agreement will not be invalid for lack of consideration if an agreement contains language explicitly stating the parties “intend to be legally bound.” However, the Superior Court determined the UWOA does not apply with respect to an agreement not to compete.
The decision in Socko v. Mid-Atlantic Systems of CPA, Inc. is an important one for employers as it affects the content of their employment agreements. In order to enforce restrictive covenants, employers need to ensure their employees have received valuable consideration in exchange for their acceptance of a restrictive covenant.
Leech Tishman’s Employment Practice Group is available to help you navigate through the implications of restrictive covenants or any other legal issue affecting employers.
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