In Socko v. Mid-Atlantic Systems of CPA, Inc. (No. J-40-2015), the Pennsylvania Supreme Court ruled on an issue of first impression: whether the state’s Uniform Written Obligations Act (“UWOA”) allows employers to enforce a noncompete given to an employee while already employed without providing consideration. On November 18, 2015, the high court affirmed a Pennsylvania Superior Court’s May 2014 decision, ruling that without valuable consideration, noncompetes are unenforceable.
Pennsylvania Noncompete Law
A long-standing rule under Pennsylvania law is that a noncompetition agreement may be enforced in equity only if (among other things) the employee receives “consideration,” or “some corresponding benefit or . . . favorable change in employment status” in exchange for agreeing to the noncompete. For employees who sign noncompetition agreements at the beginning of their employment, the new employment itself fulfills the consideration requirement. In contrast, for current employees, Pennsylvania courts have required additional consideration (such as a bonus or promotion) to make a noncompete enforceable.
The UWOA and Socko
The UWOA provides that a written promise will be enforceable absent consideration if it “contains an additional express statement . . . that the signer intends to be legally bound.”
The Socko court acknowledged that, “based solely on the language of the UWOA, it appears that, despite the lack of consideration,” noncompetes containing the “intends to be legally bound” phrase would be enforceable. The court also recognized that “certain federal and trial court decisions” supported that conclusion. The court nevertheless held that it would be “unreasonable” to allow employers to use the UWOA to enforce noncompetes without providing consideration. The court reached this conclusion in light of Pennsylvania’s “long, and virtually uniform, history of strongly disfavoring covenants in restraint of trade,” particularly focusing on “the unique and heavy burden placed upon an employee in attempting to earn a living when subjected to a restrictive covenant.”
Employers should draw two practical lessons from Socko.
First, employers who relied exclusively on the language of the UWOA, and did not support their noncompetes given to individuals already employed with consideration, now have worthless noncompetes. Considering that there was judicial support for the approach these employers took, that may seem a harsh result, but it is the new reality after Socko. Such employers must either enter into new post-employment restrictions with their employees, supported by consideration, or resign themselves to losing the protection of their noncompetes.
Second, Socko may make it harder to uphold noncompetes. Although Socko did not directly address other aspects of the noncompete’s enforceability, Socko’s tenor is arguably hostile to noncompetes given its emphasis of Pennsylvania’s historical hostility to restraints on trade. . Even employers who did not rely on the UWOA as a substitute for consideration, therefore, should reassess the strength of their noncompetes to ensure that they meet all of the requirements under Pennsylvania law.