Defining Occurrence – When Policy Definitions Do Not Apply To All Coverages
September 24, 2020
In what will be a case of the first impression, the Pennsylvania Supreme Court has agreed to hear argument on whether Pennsylvania’s Uniform Written Obligations Act (“UWOA”) relieves an employer of its obligation under Pennsylvania common law to provide an existing employee with valuable consideration in exchange for signing a non-compete agreement.
In Pennsylvania, restrictive covenants that are part of the formation of an employment relationship are supported by adequate consideration as a matter of law (i.e., the job itself). However, these same covenants are generally not enforceable if the consideration is simply the continuation of existing employment. An employee who is asked to sign a non-compete agreement after the inception of employment must also be provided some additional consideration in order for the non-compete to be upheld (e.g., a promotion, increased compensation, additional benefits).
On the other hand, Pennsylvania’s UWOA states that a release or promise made in writing will not be unenforceable for lack of consideration (i.e., it is enforceable even without consideration) if the agreement states that the signer “intends to be legally bound.”
Previously, at least two Pennsylvania federal court decisions determined that UWOA applies to restrictive covenants contained in employment contracts, and held that the statement by the employee of an intent “to be legally bound” to an agreement acts as a substitute for consideration, fulfilling the requirement under Pennsylvania law that non-compete covenants added after the commencement of employment be supported by new consideration.
On May 13, 2014, the Pennsylvania Superior Court held in Socko v. Mid-Atlantic Systems of CPA that the UWOA does not relieve an employer of the obligation to provide valuable consideration to an existing employee who is asked to sign a non-compete agreement as a condition of his continued employment. The Superior Court held that plaintiff David Socko’s non-compete agreement with his employer, Mid-Atlantic, was unenforceable because Socko had signed it when he was already employed with the company and had not been offered additional valuable consideration. Mid-Atlantic contended that consideration was unnecessary as the agreement contained a statement that Socko “intended to be legally bound” by the agreement. The Pennsylvania Superior court disagreed, opining that mere contractual language does not provide the employee with any real benefit, and cannot substitute for adequate consideration. It emphasized that restrictive covenants are disfavored in Pennsylvania, and, unlike other types of contracts, courts have routinely examined the adequacy of consideration when determining whether a non-compete is enforceable.
The Pennsylvania Supreme Court will have the final say on the issue. Suffice to say that if the Court determines that the Uniform Written Obligations Act applies to restrictive covenants, employers across Pennsylvania will be able to require existing employees to sign non-compete agreements without providing any additional consideration, so long as the employee agrees “to be legally bound.” It appears unlikely, in our view, that the Court would permit such an easy end-around the long-established rule that requires valuable consideration in return for signing a non-compete, but business and employment lawyers in Pennsylvania should closely watch this case.