Publication

December is the holiday season.  Lights, song, Christmas cheer, and consumer shopping galore. Traditionally, it is also the time of year for employee performance reviews, compensation adjustments, and bonuses. While December is the season of giving, February is the season where many employees, disappointed with recent comp and performance reviews, look to move on to greener pastures. It is also the time of year when many employers turn to their legal counsel and ask, is my non-compete agreement enforceable?  According to a recent Pennsylvania Supreme Court decision, maybe not.

Restrictive covenants in employment contracts, commonly in the form of non-disclosure and non-compete restrictions are important and valuable tools for businesses to protect their business interests. A non-disclosure agreement limits the dissemination of proprietary (confidential) information by a former employee, while a non-compete agreement precludes the former employee from competing with his former employer. However, many poorly crafted restrictive covenants are not enforceable and, to the surprise of many employers, completely worthless.  

An overwhelming majority of jurisdictions, including Pennsylvania, hold that restrictive covenants are enforceable only if they are: (1) ancillary to an employment relationship between an employee and an employer; (2) supported by adequate consideration; (3) the restrictions are reasonably limited in duration and geographic scope; and (4) the restrictions are reasonably designed to protect the legitimate interests of the employer.   Restrictive covenants are not favored in Pennsylvania as a matter of public policy, because they can prevent a former employee from earning a living. As a result, courts will weigh the employer's business interests against the employee’s right to earn a living in his or her chosen profession, and will usually interpret the restriction narrowly to protect the employee. See Hess v. Gebhard & Co., 808 A.2d 912 (Pa. 2002).    

As with all contracts, for an employment agreement containing a restrictive covenant to be enforceable a mutual exchange of some value, in legal terms – adequate consideration – is crucial. If a non-compete clause is executed at the inception of employment, the consideration to make the agreement enforceable may be the job offer itself. But what happens if you want an existing employee to agree to a non-compete or nondisclosure agreement? The Pennsylvania Supreme Court recently redefined this issue.

Under Pennsylvania’s Uniform Written Obligations Act (UWOA), 33 Pa. Stat. Ann. § 6, where parties use the magic words in an agreement that they “intend to be legally bound" the “consideration” requirement of an agreement will be satisfied. However, as a matter of first impression, the Pennsylvania Supreme Court in Socko v. Mid-Atlantic Systems of CPA, Inc., 126 A.3d 1266 (Pa. Nov. 18, 2015), ruled that the UWOA is not applicable to restrictive covenant agreements.  

In Socko, an employee named David Socko signed a restrictive non-compete agreement with the “intent to be legally bound” by its terms. The employee resigned and took a sales position with a competitor. Litigation ensued to enforce the agreement. It was not disputed by the parties that the Agreement was signed during the course of Socko's employment, and that Socko did not receive any benefit or any change in his existing employment status in exchange for signing the Agreement. Socko’s former employer relied upon the parties' pledge in the Agreement to be "legally bound," contended that the UWOA did not allow Socko to challenge the validity of the terms of the Agreement on the basis of a lack of consideration. The Court, for the first time, held otherwise, noting the unique issues presented by non-compete agreements. The Court held that when a non-compete clause is required after an employee has commenced his or her employment, it is enforceable only if the employee receives "new" and valuable consideration — that is, some corresponding benefit or a favorable change in employment status, such as a promotion, a change from part-time to full-time employment, or change to a compensation package.  Without new and valuable consideration, a restrictive covenant is unenforceable. More specifically, the mere continuation of the employment relationship at the time of entering into the restrictive covenant is insufficient to serve as consideration for the new covenant, despite it being an at-will relationship terminable by either party.  

This case serves as an important reminder for employers to take a thoughtful and strategic approach to protecting business interests through the enforcement of restrictive covenant agreements, and the risks in failing to do so.
 

Joshua Romirowsky concentrates his practice on a range of complex civil and commercial matters and is a member of Gordon & Rees' commercial, construction, real estate, and employment practice groups.

Mr. Romirowsky is a trusted advisor to small and medium-sized companies, assisting clients involved in business disputes, employment and human resources issues, and risk management. In 2015, for the third consecutive year, Mr. Romirowsky was selected by Super Lawyers as a Rising Star in the fields of Business and Commercial Litigation and Product Liability Defense. The recognition is awarded to attorneys who are 40 or under, or who have been practicing for 10 years or less. No more than 2.5 percent of the lawyers in a geographical region are named to the Rising Stars® list. He is licensed to practice law in Pennsylvania and New Jersey.