PA Superior Court closes non-competition-agreement loophole

In Pennsylvania, a company and an employee can enter into an agreement whereby, in exchange for some form of consideration, the employee agrees not to compete with the company after the employment ends.

Consideration can come in a variety of forms; for example, a raise, bonus, promotion, or sugar. Initial employment can also be sufficient consideration.

However, in Pennsylvania, continued employment won’t cut it. That is, a non-competition agreement will be invalid if an employee signs it after commencing employment — even if you tell the employee that he/she will lose his job by not signing.

However, some smart lawyer out there — even smarter than I am — figured out that, by inserting the language “intending to be legally bound” into a non-competition agreement, Pennsylvania’s Uniform Written Obligations Act (“UWOA“) would validate the agreement — even without any additional consideration.

Until now, son.

Earlier this week, in Socko v. Mid-Atlantic Systems of CPA, Inc. (opinion here; Socko here), the Pennsylvania Superior Court said the UWOA exception be like this won’t save a non-competition agreement otherwise lacking in consideration:

“Language in an employment contract that the parties intend to be legally bound does not constitute valuable consideration in this context….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.”

While the Pennsylvania Supreme Court has yet to weigh in on this issue, employers would be wise to play it safe and offer employees sufficient consideration to support a covenant not to compete: either initial employment or, if the employee signs the agreement after employment begins, something else of sufficient value.

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