Is new consideration required for a valid covenant not to compete presented to an employee at the inception of their employment after they sign their offer letter?
Under the majority approach, recognized in many states continued employment is sufficient consideration for a valid non-compete agreement. However, a minority of jurisdictions, will not enforce a non-compete agreement offered for signature after the employee has already begun work unless it is supported by new consideration. In those jurisdictions, continued employment is typically not considered sufficient consideration and they instead require that any non-compete be supported by new consideration such as a promotion, stock options or some other tangible benefit. The minority rule can prove problematic in situations where there are multiple employment documents which may be construed as a non-compete agreement and, therefore, the commencement of employment date and the date of execution of employment agreements are often essential. The Pennsylvania Supreme Court recently addressed the issue of whether a covenant not to compete is enforceable when offered after the employee has already accepted an offer letter and employment has commenced in the case of Pulse Technologies, Inc. v. Notaro.
In 2005, Pulse Technologies, Inc., offered a position to Peter Notaro in an offer letter describing his responsibilities, salary, benefits, start date, and confidentiality requirements. The letter stated that he would be asked to sign an employment agreement on his first day of work, which he subsequently signed, along with a covenant not to compete. Four years later, Notaro resigned and joined a competitor, MK Precision, LLC, and Pulse sued to enforce the non-compete agreement. The superior court granted a preliminary injunction enforcing the non-compete agreement, and the appellate court subsequently vacated the decision, finding that there was inadequate consideration.
On appeal, however, the Supreme Court of Pennsylvania reversed the appellate court and reinstated the non-compete agreement, finding that “the offer letter was simply part of the hiring process and did not constitute the actual employment contract.” Instead, the court found that the letter simply summarized the relationship between the parties, which would eventually be memorialized in the employment contract. According to the court, because the letter indicated that an actual employment agreement would be required, the non-compete agreement was a condition of the employment relationship, and thus, was enforceable because it was supported by consideration.
Employers in Pennsylvania and potentially other states enforcing the minority rule regarding consideration for a non-compete agreement should be aware of this decision, as it indicates that courts will closely analyze the language and circumstances of an offer letter in order to determine whether it is an actual employment agreement. Employers should be careful about clearly indicating to employees that they are expected to sign an employment agreement or restrictive covenant, and make sure to explain this prior to finalizing an employment contract so that there is no confusion between the parties. Doing so may reduce the potential for litigation in the future. For more details on this important decision, please see John Marsh’s instructive analysis of the decision.