In a case of first impression, the Pennsylvania Supreme Court recently held that an employee may challenge an employment agreement containing a restrictive covenant for lack of consideration, even though the agreement expressly states the employee’s intent to be legally bound by the terms of the agreement. In Socko v. Mid-Atlantic Systems of CPA, Inc., the Court reinforced Pennsylvania courts’ general disfavor of restrictive covenants, in the process carving out an exception regarding the applicability of the Uniform Written Obligations Act (UWOA) to certain restrictive covenants. As a result, employers are required to provide consideration to employees for restrictive covenants entered into after the outset of employment.

The underlying dispute concerned a restrictive covenant in an employment agreement that David Socko signed two years into his second tenure at Mid-Atlantic. Under the terms of the agreement, Mr. Socko was prohibited from competing with the company in at least nine states for a period of two years following termination of his employment. In lieu of any new benefit or change in his existing employment status, the agreement contained a clause designed to satisfy the UWOA, explicitly stating that Mr. Socko intended to be legally bound by the terms of the agreement, including the restrictive covenant. A year later, Mr. Socko resigned and accepted a job at a competitor. After Mid-Atlantic informed the competitor of the restrictive covenant, the competitor fired Mr. Socko.

Mr. Socko filed an action for declaratory judgment, requesting a determination that the restrictive covenant was unenforceable due to lack of consideration. Pointing to the language in the contract expressing Mr. Socko’s intent to be legally bound by its terms, Mid-Atlantic argued that the UWOA prevented Mr. Socko from challenging the agreement for lack of consideration. The trial court sided with Mr. Socko, and the Superior Court agreed on appeal. Mid-Atlantic then appealed the case to the Pennsylvania Supreme Court.

On appeal, the primary issue was whether an agreement containing a restrictive covenant, executed during employment, is unenforceable if the employer has provided the employee no new benefit or change in employment status, even though the agreement satisfies the requirements of the UWOA. Interestingly, Mid-Atlantic conceded that additional consideration must be provided to an employee that signs a restrictive covenant after the commencement of the employment relationship, but argued that the UWOA prohibits a party from later challenging an agreement for lack of consideration. According to Mid-Atlantic, the Superior Court effectively amended the UWOA by carving out an exception with respect to its application to restrictive covenants.

In response, Mr. Socko argued that such a position would effectively eliminate the consideration requirement for restrictive covenants, given that most employment agreements contain UWOA-inspired boilerplate language to the effect that the employee is legally bound by the terms of the agreement. According to Mr. Socko, applying the UWOA to restrictive covenants would upend more than a century of Pennsylvania precedent regarding employment agreements and the restraint of trade. Historically, Mr. Socko argued, Pennsylvania courts have demonstrated a clear distaste for such arrangements, finding restrictive covenants to be burdensome to trade and unfairly restrictive of a former employee’s right to earn a living.

In an opinion rich in the history of at-will employment relationships, the UWOA, restrictive covenants, and Pennsylvania’s Statutory Construction Act, a majority of the Supreme Court agreed with Mr. Socko. After pointing out that employment itself generally is sufficient consideration for those agreements executed at the outset of employment, the Court affirmed that additional consideration is required for those agreements executed after the commencement of employment, despite an employer’s attempt to sidestep the requirement via the UWOA. Examples of additional consideration mentioned by the Court include “a promotion, a change from part-time to full-time employment, or even a change to a compensation package of bonuses, insurance benefits, and severance benefits.”

The dissent “question[ed] the [majority’s] notion that continued employment is not valuable consideration.” With this decision, Pennsylvania remains in a minority of states where additional consideration must be provided for any restrictive covenant entered into after employment begins.

Ballard Spahr’s Labor and Employment Group routinely assists employers with drafting and reviewing employment agreements, including employment agreements that contain restrictive covenants. If you have any questions or concerns about this issue, or any other employment issue or workplace policy, please contact Shannon D. Farmer at 215.864.8221 or farmers@ballardspahr.com, Rogers Stevens at 215.864.8409 or stevensro@ballardspahr.com, or the member of the Group with whom you work.


Copyright © 2015 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.






Related Practice