Supreme Court of Pennsylvania Rules that Non-Competes May Be Challenged For Lack of Consideration Even If Parties Agreed to be Bound by UWOA
Pennsylvania courts have a long history of disfavoring non-compete clauses. The Pennsylvania Supreme Court continued that history with their November 18, 2015 ruling in Socko v. Mid-Atlantic Systems of CPA Inc. The Court held that an employer may not take away the requirement that an employee must receive an actual benefit in exchange for signing a non-compete agreement. In Socko, Mid-Atlantic Systems had Plaintiff sign a non-compete agreement stating that the parties “intend to be legally bound” by the Uniform Written Obligations Act (“UWOA”). While the Court agreed that the language within the UWOA would prevent any challenges against the agreement, the Court determined there needed to be further analysis into whether this reading would produce an unfavorable result.
By its terms, the UWOA states that a written promise “shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement, in any form of language that the signer intends to be legally bound.” Mid-Atlantic claimed that the “legally bound” does not act as a substitute for consideration, but rather, bars the signer from challenging the agreement on the basis of a lack of consideration. The Court rejected Mid-Atlantic’s argument.
The Court held that a contract containing a written express statement of intent to be “legally bound” supplies the necessary consideration to support the enforceability of the agreement. However, the Court continued by questioning whether the UWOA is in derogation of the common law mandating that restrictive covenants be supported by actual consideration. 1 Pa.C.S. § 1928(b)(8).
Relying on the State’s prior history of disfavoring non-competition agreements, the Court determined that an employment agreement containing a restrictive covenant not to compete may be challenged for a lack of consideration even though the agreement, by its express terms, indicates that the parties “intend to be legally bound” pursuant to the UWOA.