Friday, May 16, 2014

An Enforceable PA Noncompete Without Consideration? Not on the Superior Court's Watch!

A couple of years ago, I blogged about a legal theory in a Legal Intelligencer article that would create enforceable noncompetes without any consideration.

The premise was pretty simple, Pennsylvania has a law called the Uniform Written Obligations Act (UWOA) that generally provides that a written contract will not be rendered unenforceable for lack of consideration if it expressly indicates that each party "intends to be legally bound." So, attorneys in Pennsylvania effectively use the magic words "intending to be legally bound" in contracts. Could such a thing work in the world of noncompetes?

Generally, noncompetes require consideration. That consideration may be the initial job offer, but generally not continued employment after the employee has already been hired. Does the UWOA allow employers to circumvent that requirement?

Well, when I blogged about the theory that the UWOA might get around the consideration requirement, I cautioned: "But be careful - as the article warns: no Pennsylvania appellate court has weighed in on this issue yet" . . . until Tuesday.

In Socko v. Mid-Atlantic Systems of CPA, Inc. (opinion here), the Superior Court addressed exactly this issue:
[F]or a restrictive covenant to be enforceable, the employee must receive actual valuable consideration in exchange for signing an employment agreement containing one. When the restrictive covenant is contained in the initial contract of employment, the consideration is the job itself. But when the restrictive covenant is added to an existing employment relationship, however, to restrict himself the employee must receive a corresponding benefit or a change in job status. Contractual language satisfying the UWOA does not provide the employee with any actual benefit, and thus cannot suffice as a form of consideration that is adequate to support the later enforcement of the covenant not to compete against the employee.
Sorry employers - if you want the noncompete, you gotta fork over the consideration. Then again, the Superior Court is an intermediate appellate court. This case could go up to SCOPA for a final decision.

HT to Eric Meyer, who was quick on the draw on this one: PA Superior Court Closes Non-Competition Agreement Loophole.

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