HARRISBURG – On Nov. 18, the Pennsylvania Supreme Court upheld the state’s strict regulations limiting an employer’s ability to prevent an employee from working for its competition, continuing the Commonwealth’s unique treatment of noncompete contracts.
In Socko v. Mid-Atlantic Systems of CPA, Inc., David Socko violated a two-year covenant not to compete when he left Mid-Atlantic and began working for a competitor; however, because the two-year covenant Socko signed with Mid-Atlantic did not offer consideration, Socko argued that the contract was invalid.
Mid-Atlantic argued the contract was valid, relying upon the Uniform Written Obligations Act (UWOA), which states that if “the writing also contains an additional express statement, in any form of the language, that the signer intends to be legally bound,” consideration is not required.
However, the Supreme Court, showing special consideration to noncompete contracts, exempted them from this requirement, and decided in favor of Socko.
According to labor and employment law specialist Donald Gamburg of law firm Ogletree Deakins, the court’s decision does not greatly change the way that employers contract employees.
“As a practice, I always include [the UWOA] language; however, I’ve never relied upon it solely for consideration purposes,” Gamburg told Legal Newsline. “Most practitioners were advising companies not to rely on that language alone. For the most part, I don’t think that it has changed the playing field for lawyers.”
Noncompete clauses in contracts between employers and employees effectively limit an employee from entering into a similar profession or trade that is directly in competition with the employee’s present employer.
Pennsylvania, like other states, requires that employers must accompany all noncompete contracts with sufficient consideration – basically, some long-term benefit or change in position. Most states consider assurance of continued employment to be sufficient consideration; however, Pennsylvania has always required additional consideration for a noncompete contract to be enforceable.
Gamburg said noncompete clauses are subject to heightened regulations for a number of reasons.
“They are looked at very differently than a standard agreement because they are viewed by the courts as restraints on trade. Obviously, we have a free market society here. We want people to be able to learn a living, and compete, as long as they do so fairly,” he said.
Pennsylvania’s substantial consideration requirements are designed to discourage employers from entering into noncompete contracts. Gamburg said in order for a noncompete contract to be considered enforceable, it must be reasonable in time frame and geographic scope, specifically protect legitimate business interest, and it must include sufficient consideration.
“For instance, maybe now [employees] are a participant in the severance program – if they get terminated, they would have this severance now. Or, now they are a participant in this incentive bonus plan, or they are promoted,” Gamburg said.
He discourages businesses from merely offering one-time bonuses as sufficient consideration.
“I’ve always steered away from that, because, in my view, that is not the kind of consideration that really holds up although it has held up. I would not typically recommend it,” Gamburg said.
Had the courts gone the other way, Gamburg speculated, employment law would have dramatically changed in Pennsylvania. If it had ruled that the UWOA applied to noncompete contracts, employers would have had “magic language” that rendered merely specifying the contract as legally binding to be sufficient consideration.
“I was hoping that it would go the other way,” he said. “I think that the company made good arguments.”
But Gamburg said the decision did not come as surprise.
“The outcome is consistent with the way that employers were conducting themselves,” he said. “However, the Supreme Court clearly made an exception and disregarded the statute to find the way they did.”