This article was written by John H. Riordan, Jr. Of Counsel in Ogletree Deakins’ Pittsburgh Office.
In general, contracts “in restraint of trade” have been considered to be illegal. One exception under most state laws is the “Non-Compete Agreement,” wherein an employee agrees – typically upon being hired – not to compete with his/her employer for a reasonable period of time after that employment relationship ends. This restriction, however, typically is disfavored by the Pennsylvania Courts because it is viewed to limit the employee’s professional mobility.
Nonetheless, such agreements have been enforced where the Non-Compete Agreement has been entered into properly, where the restriction on an employee’s ability to work elsewhere is reasonable in prohibited territory and duration, and where the restriction is reasonably necessary for the protection of a legitimate business interest of the employer.
With the arrival of the Digital Age, when large amounts of data can be stored on a small, portable device, and with the corresponding shift in emphasis in the American economy to knowledge-based businesses, the use of Non-Compete Agreements has become relatively commonplace. The result has been an increase in litigation over the enforceability of these Agreements.
Contributing to that increase is the fact that there is no single “standard” form of non-compete clause. Instead, so long as the non-compete restraint is reasonable in duration and territorial reach, each employer, with an awareness of its own business needs, can script its own language. As a consequence, the controlling legal principles to be applied when evaluating the validity of these agreements have been developed by the Pennsylvania Courts over the last 50 years on more-or-less a case-by-case basis.
One of the controlling legal principles in the Non-Compete Agreement arena is the requirement that such an agreement be supported by “consideration.” Even where an employee is hired at-will – meaning that the parties have no agreement for a definite duration of employment, and that the employee can be terminated at any time, unless for a discriminatory reason – the Non-Compete Agreement is interpreted as a legally binding contract, so long as “consideration” exists.
The benefit to the employer from a Non-Compete Agreement is clear; and in the case where the employee is a new hire, the benefit to that employee clearly consists of the employment relationship itself. However, where the employee already is on the payroll, the benefit received for his or her agreement to limit future employment opportunities is less clear.
Over the years, Pennsylvania Courts have decided that merely allowing a current employee to continue in at-will job is not valid consideration for a promise not to compete. Instead, the employer must confer some additional benefit upon the employee (e.g., a raise) or a beneficial change in status (e.g., a promotion). However, in difficult economic times, or for small enterprises, this additional benefit may not make financial sense. Might there be a less expensive solution, a so-called “Easy Button”?
Within the last decade there have been two opinions from the U.S. District Court for the Western District of Pennsylvania suggesting that no consideration is necessary to support a non-compete with an existing employee if the agreement is in writing and contains certain specific language. These cases cite to the Pennsylvania version of the Uniform Written Obligations Act (“UWOA”), a 1927 law which provides that a written release or promise, signed by the person releasing or promising, will not be invalid or unenforceable for lack of consideration, if the writing also contains an express statement that the signer “intends to be legally bound.” This provision has been referred to as the “Easy Button.”
However, on May 13, 2014, a three judge panel of the Pennsylvania Superior Court disapproved of using the UWOA as the Easy Button. Socko v. Mid-Atlantic Systems of CPA, Inc., 2014 Pa. Super. LEXIS 702.
In that case, the Court made clear that an employer failed to provide any “fresh” consideration/beneficial change in status upon an existing employee in return for a new Non-Compete Agreement. There, the Court distinguished between non-compete contracts (disfavored by the law) and the more ordinary kind of contracts, and held that held that the Easy Button is insufficient consideration in circumstances where a non-compete agreement is required from an existing employee without additional actual consideration:
The reasons for this differing approach are clear, as restrictive covenants are disfavored in Pennsylvania because they are in restraint of trade and may work significant hardships on employees agreeing to them. For these reasons, our Supreme Court, as reviewed hereinabove, has held that only valuable consideration will support their enforcement, and has rejected as inadequate various forms of consideration that would support the enforcement of other types of contracts, including the benefit of the continuation of at-will employment, contracts under seal, and nominal consideration.
The Court further concluded that:
When the restrictive covenant is contained in the initial contract of employment, the consideration is the job itself. But when the restrictive covenant is added to an existing employment relationship, however, to restrict himself the employee must receive a corresponding benefit or a change in job status. Contractual language satisfying the UWOA does not provide the employee with any actual benefit, and thus cannot suffice as a form of consideration that is adequate to support the later enforcement of the covenant not to compete against the employee.
The employer in Socko has filed a request for re-argument with the Superior Court. If that request is denied, the employer then can request allowance of appeal to the Pennsylvania Supreme Court. Therefore, it may be several months until the panel’s decision is fully final. However, the panel’s opinion will be published and is precedential, meaning that unless vacated or reversed it will apply in both state and federal court cases in which Pennsylvania law provides the rule of decision.