Post-Employment Restrictive Covenants are Vulnerable to Consideration Challenges Despite UWOA's 'Intend to be Legally Bound' Clauses

Introduction

The Supreme Court of Pennsylvania's 2015 decision in Socko v. Mid–Atlantic Systems of CPA, Inc. establishes a pivotal precedent concerning the enforceability of restrictive covenants within employment agreements. This case addresses whether an employee can challenge a non-compete agreement for lack of consideration, despite the agreement containing language that the parties "intend to be legally bound" under the Uniform Written Obligations Act (UWOA). The appellant, Mid–Atlantic Systems of CPA, Inc., sought to uphold a restrictive covenant against David Socko, the appellee, who had executed such agreements post-commencement of his employment without receiving additional consideration.

Summary of the Judgment

The Pennsylvania Supreme Court affirmed the Superior Court's decision, which had granted Socko's motion for partial summary judgment declaring the restrictive covenant unenforceable due to lack of consideration. The Superior Court had emphasized Pennsylvania's longstanding disfavor toward restrictive covenants, especially those entered into after employment has commenced without providing new and valuable consideration to the employee. Despite the restrictive covenant including an express statement that the parties "intend to be legally bound" under the UWOA, the court held that this language does not substitute for the necessary consideration required to enforce such agreements. Consequently, Socko was entitled to challenge the non-compete clause successfully.

Analysis

Precedents Cited

The Judgment extensively references historical and contemporary cases to elucidate the legal landscape surrounding restrictive covenants:

• Kirk v. Hartman & Co. (1870): Established the at-will employment doctrine in Pennsylvania, allowing either party to terminate employment at any time without cause.
• MORGAN'S HOME EQUIP. CORP. v. MARTUCCI (1957): Discussed the relationship between the UWOA and contracts of restraint of trade, noting that even contracts under seal are subject to scrutiny when they restrain trade.
• Pulse Technologies, Inc. v. Notaro (2013): Reinforced the necessity of new and valuable consideration for enforcing restrictive covenants entered into after employment has commenced.
• Maintenance Specialties Inc. v. Gottus (1974): Affirmed that mere continuation of employment does not suffice as consideration for non-compete agreements.
• McGUIRE v. SCHNEIDER, INC. (1987): Interpreted the UWOA's "intends to be legally bound" language as barring challenges based on lack of consideration, although later deemed distinguishable in this context.

These precedents collectively emphasize the stringent requirements for enforcing restrictive covenants, particularly the necessity of fresh consideration when such agreements are introduced post-employment commencement.

Legal Reasoning

The court's legal reasoning navigated the interplay between the Uniform Written Obligations Act and Pennsylvania's historical stance on restrictive covenants. Although the UWOA generally prevents contracts from being invalidated for lack of consideration if they express an intent to be legally bound, the court determined that this provision does not override specific public policies that disfavor certain types of agreements, such as non-compete clauses.

Specifically, the court held that:

• The UWOA's "intend to be legally bound" language does not supply the actual, valuable consideration required for enforcing a restrictive covenant entered into after employment has begun.
• Pennsylvania's public policy against restraints of trade mandates that additional benefits or changes in employment status must accompany such restrictive covenants to render them enforceable.
• The unique treatment of restrictive covenants, which are subject to more rigorous scrutiny, overrides the blanket protection the UWOA might otherwise afford to written agreements.

As a result, the absence of new and valuable consideration in Socko's case rendered the non-compete agreement unenforceable, despite the parties' expressed intention to be bound.

Impact

This Judgment has significant implications for both employers and employees in Pennsylvania:

• For Employers: Employers must ensure that any restrictive covenants introduced after the commencement of employment are supported by new and valuable consideration, such as promotions, salary increments, or additional benefits. Merely asserting an intent to be legally bound under the UWOA is insufficient to uphold non-compete clauses.
• For Employees: Employees retain the right to challenge restrictive covenants on the grounds of insufficient consideration, even if the agreements contain language indicating an intent to be legally bound. This empowers employees to seek fair terms and prevents employers from unilaterally imposing restrictive terms without just cause.
• Legal Precedent: The decision reinforces the necessity of adherence to public policy considerations in contract enforcement, especially concerning restraints of trade. It underscores that statutory provisions like the UWOA do not override established public policies that protect against unfair contractual terms.

Future cases involving restrictive covenants will likely reference this Judgment to evaluate the enforceability of similar agreements, ensuring that employers provide adequate consideration when imposing such restrictions post-employment commencement.

Complex Concepts Simplified

To fully grasp the implications of this Judgment, it's essential to understand certain legal concepts:

• Restrictive Covenant: A contractual clause that limits an individual's ability to engage in certain activities after the termination of employment, such as working for competitors or starting a competing business.
• Consideration: Something of value exchanged between parties in a contract, which is necessary for the contract to be legally binding. In employment contracts, this often refers to benefits or changes in employment terms.
• Uniform Written Obligations Act (UWOA): A Pennsylvania statute that provides certain protections for written contracts, including provisions that prevent contracts from being invalidated for lack of consideration if they state an intent to be legally bound.
• At-Will Employment: A type of employment relationship where either the employer or employee can terminate employment at any time, for any lawful reason, without prior notice.
• Public Policy Exception: A principle where courts will not enforce contracts that violate societal norms or public interests, such as agreements that unfairly restrain trade.

In essence, while the UWOA seeks to uphold the enforceability of written agreements by preventing challenges based on the absence of consideration if parties intend to be legally bound, this Judgment clarifies that such protections do not extend to overriding established public policies that oppose restrictive covenants lacking sufficient consideration.

Conclusion