In a decision that garnered very different reactions from several employment lawyers, the Pennsylvania Superior Court has ruled in a case of first impression that the Uniform Written Obligations Act does not relieve employers of the requirement to give employees valuable consideration in exchange for signing noncompete agreements.
While some employee-side attorneys said they thought the ruling merely upheld established Pennsylvania law, some employer-side attorneys said they thought the court overstepped its bounds and ignored the clear language of the UWOA.
In Socko v. Mid-Atlantic Systems of CPA, a three-judge Superior Court panel unanimously affirmed a York County trial judge’s ruling that defendant Mid-Atlantic Systems of CPA’s noncompete covenant with plaintiff David M. Socko was unenforceable because the employer failed to offer Socko, who was already working for the company, any benefit or change in job status.
While Mid-Atlantic had argued that it was not obligated under the UWOA to give Socko valuable consideration because the noncompete agreement stated that the parties “‘intend to be legally bound’” by its terms, the court disagreed.
The UWOA states that a “written release or promise … shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement … that the signer intends to be legally bound.’”
Judge Christine L. Donohue wrote for the panel that the Pennsylvania Supreme Court has previously ruled that a seal to a restrictive covenant does not eliminate the requirement that an employer offer an employee valuable consideration.
Because the UWOA and seals “have precisely the same legal effect,” Donohue said, it follows that the UWOA does not allow employers to contract away the consideration requirement in the context of a noncompete agreement.
“When the restrictive covenant is contained in the initial contract of employment, the consideration is the job itself,” Donohue said. “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.”
Donohue was joined by Judges Susan Peikes Gantman and Victor P. Stabile.
But Michael R. Greco, a partner at Fisher & Phillips in Philadelphia who was not involved in Socko, said he has successfully argued before the U.S. District Court for the Eastern District of Pennsylvania that the UWOA does replace the need for actual consideration.
While the federal court’s agreement with him on that issue was dicta in that case because it ultimately found that valuable consideration did exist, Greco said he believed that court correctly interpreted the UWOA, while the Superior Court in Socko ignored the plain language of the statute.
Greco said he thought the Socko court had engaged in “judicial activism.”
“To me, these are judges that are legislating from the bench,” Greco said. “This is a state statute; it says what it says.”
Counsel for Mid-Atlantic, Michael J. Torchia of Semanoff Ormsby Greenberg & Torchia in Huntingdon Valley, Pa., had a similar reaction to the ruling, saying he felt the court “disregarded” the language of the UWOA “because they didn’t like the result of what they view could happen to employees if they agreed to apply the statute.”
While Torchia said he agreed that, from a policy standpoint, allowing employers to use the UWOA to circumvent the consideration requirement could be detrimental to employees, the fact remains that the language of the statute is clear.
“The statute does not have an exception for restrictive covenants,” Torchia said. “It’s up to the legislature to create a statutory exception.”
But John Stember, an employee-side labor and employment partner at Stember Cohn & Davidson-Welling in Pittsburgh who also wasn’t involved in Socko, said he hasn’t encountered the UWOA defense in the context of restrictive covenants before and felt the Superior Court’s ruling merely upheld the longstanding tenet of Pennsylvania law that consideration is required in exchange for a noncompete agreement.
“I don’t think it changed much of anything,” Stember said.
Counsel for Socko, Michael E. Rowan of Shumaker Williams in Towson, Md., agreed, saying that while the defense’s argument was “clever,” the court’s ruling was consistent with longstanding precedent in Pennsylvania.
It wasn’t only employee-side attorneys who felt the court made the right call.
Theodore A. Schroeder, a shareholder at Littler Mendelson in Pittsburgh, said he found the Socko ruling “completely unsurprising.”
“Pennsylvania courts have always treated noncompetes as a different sort of animal” from other types of contracts, Schroeder said.
In Socko, Donohue acknowledged that some federal courts have determined that the UWOA relieves employers of the consideration requirement.
In the 2007 case Latuszewski v. Valic Financial Advisors, according to Donohue,the U.S. District Court for the Western District of Pennsylvania found just that.
However, according to Donohue, the Eastern District of Pennsylvania reached the opposite conclusion in its 1992 ruling in Surgical Sales v. Paugh.
Regardless, Donohue said neither ruling was persuasive in Socko.
Instead, Donohue pointed to several state Supreme Court decisions that held that restrictive covenants are generally disfavored by Pennsylvania courts because they restrain trade and can cause hardships to employees.
Because of this, Donohue said, Pennsylvania courts have consistently held that employers must offer employees valuable consideration in exchange for noncompete agreements.
Donohue added that while, for most contracts, courts tend not to look at the adequacy of the consideration, the state Supreme Court “has repeatedly inquired into the adequacy of consideration required to support” restrictive covenants in employment contracts.
“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,” Donohue said. “For these reasons, our Supreme Court … 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.”
Donohue said the Supreme Court has also held that continued employment does not constitute valuable consideration.
Donohue said Socko began working for Mid-Atlantic as a salesman in March 2007, signing a contract containing a two-year noncompete agreement.
Socko resigned in February 2009 but was rehired in June 2009 and signed a new employment agreement with another two-year noncompete clause, according to Donohue.
In December 2010, while still working for Mid-Atlantic, Socko signed another restrictive covenant barring him from competing with Mid-Atlantic for two years after termination of his employment in Pennsylvania and any of the other jurisdictions where the company does business, Donohue said.
But in January 2012, Socko left Mid-Atlantic and joined Pennsylvania Basement Waterproofing Inc., in Camp Hill, Pa., according to Donohue.
Mid-Atlantic responded with a letter threatening litigation and, 10 days later, Pennsylvania Basement fired Socko, Donohue said.
Socko then filed suit against Mid-Atlantic, alleging the noncompete agreement was unenforceable, according to Donohue.
(Copies of the 17-page opinion in Socko v. Mid-Atlantic Systems of CPA, PICS No. 14-0767, are available from Pennsylvania Law Weekly. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •