In a case of “first impression”, The Superior Court of Pennsylvania has ruled that a restrictive covenant entered into after employment has already commenced is unenforceable if not supported by separate valuable consideration. Socko v. Mid-Atlantic Systems of CPA, Inc., No. 1223 MDA 2013.
The plaintiff in the case, David Socko, worked for Mid-Atlantic, a basement waterproofing business at various times. Upon his original hire in 2007, he signed an employment contract containing a two year covenant not to compete. Socko resigned his employment in February 2009, but in June 2009 he was rehired and again signed a new employment agreement containing a covenant not to compete. In December 2010, Socko signed a third covenant, the subject of the litigation. Socko resigned in January 2012 and accepted employment with a competitor of Mid-Atlantic. In February 2012, following his resignation, Mid-Atlantic sent a copy of the 2010 covenant to the new employer and threatened litigation. Ten days later, Socko was terminated. In April 2012 Socko brought suit for declaratory judgment declaring that the 2010 Covenant was not supported by sufficient consideration and was, therefore, unenforceable. Mid-Atlantic argued that because the agreement included the language “intending to be legally bound” the Uniform Written Obligations Act (“UWOA”) required enforcement, even in the absence of consideration.
The Superior Court began its analysis recognizing that Federal Courts in the Eastern and Western District of Pennsylvania had come down on both sides of this argument. The court then observed that non-competition agreements are disfavored in the Commonwealth of Pennsylvania because they are “viewed as a trade restraint that prevents a former employee from earning a living.” The Superior Court then turned to its 57-year old holding in Morgan’s Home Equipment Corp. v. Martucci, 136 A.2d 838 at 844 (Pa. 1957) and even reached back to Medieval England to explain the evolution of restrictive covenants. It noted that resistance to such agreements started after the Black Death left a shortage of qualified workers and then traced the law up through the 18th Century when English courts upheld contracts in partial restraint of trade that included geographic and temporal limitation but were directed to skilled employees.
Arriving at the holding in Socko, the Superior Court discounted what the employer argued should be the saving invocation of the UWOA’s language “that the parties intend to be legally bound” as adequate consideration for the agreement. Instead, the Superior Court recognized the language as having no value to the employee who was intended to be restrained. Thus it is now the case in Pennsylvania that “when the restrictive covenant is added to an existing employment relationship…the employee must receive a corresponding benefit or a change in job status.” It remains to be seen what Pennsylvania courts will require in terms of additional consideration, but the Court in Socko said that consideration must be more than continued employment, nominal consideration (such as one dollar), or a “seal” on the contract.
UPDATE: On December 11, 2014, the Pennsylvania Supreme Court announced it would hear an appeal by Mid-Atlantic of the Superior Court’s decision in this case. Socko v. Mid-Atlantic Systems of CPA, Inc., Pennsylvania Supreme Court Case Number 544 MAL 2014.