On May 13, a Pennsylvania Superior Court held in a case of first impression that non-compete agreements entered into by an existing employee will be unenforceable unless the employee receives additional benefits in return. Socko v. Mid-Atlantic Systems of CPA Inc., 1223 MDA 2013.
In March 2007, Mid-Atlantic Systems of CPA Inc., hired David Socko as a salesman. At the time of his hire, he signed an employment agreement containing a two-year covenant not to compete. Socko resigned in February 2009, but was rehired later that year, when he signed a new employment agreement also containing a two-year covenant not to compete. While still employed by the company, in December 2010, Socko signed a third employment agreement containing a two-year covenant not to compete.
In 2012, Socko resigned and accepted a position with a competitor. Weeks later, Mid-Atlantic sent a letter to Socko’s new employer, attaching the non- compete agreement and threatening litigation. The new employer subsequently terminated Socko and Socko filed a complaint and declaratory judgment in the York County Court of Common Pleas seeking a determination that the non-competition agreement was unenforceable. The trial court granted partial summary judgment in his favor.
Affirming, the three-judge panel noted that restrictive covenants have always been disfavored in Pennsylvania, and thus are only enforceable if the covenant is supported by adequate consideration. The panel stated that Pennsylvania law is clear that continued employment, even in employment terminable at will, does not constitute sufficient consideration. The panel concluded that when an employee enters into a covenant not to compete subsequent to employment, the covenant must be supported by new consideration. This new consideration may be in the form of a corresponding benefit to the employee or a beneficial change in his employment status.
Here, the non-competition agreement was entered into while Socko was already employed. Socko did not receive any additional benefit or change in his employment status in exchange for signing the agreement. Therefore, the court held the restrictive covenant was not supported by valuable consideration and was unenforceable.
Although the Pennsylvania Supreme Court has yet to weigh in on this issue, cautious employers may want to consider offering employees an additional benefit besides continued employment when executing non- competition agreements subsequent to the initiation of employment.
Click here for the full opinion.