Written by Gauri Punjabi
Most jurisdictions in the United States hold that continued employment constitutes sufficient consideration in exchange for entering into a non-competition agreement. A handful of jurisdictions however – Minnesota, North Carolina, Texas, Washington, West Virginia and (in some cases) Illinois – require employers to provide additional consideration to an employee in order for the non-competition agreement to be enforceable. Add Pennsylvania to this list.
In a case of first impression, a Pennsylvania appellate court, in Socko v. Midatlantic Systems of CPA, Inc., affirmed a trial court order finding a non-competition agreement entered into after the commencement of employment unenforceable unless supported by new consideration. In other words, continued employment alone is not sufficient consideration for a restrictive covenant to be held enforceable under Pennsylvania law. In Socko, the appellate court brushed aside conflicting holdings by Pennsylvania federal district courts on this issue, finding them unpersuasive. Instead, the Court found, the employee must receive some type of “valuable consideration” in exchange for signing the agreement, and continued employment does not meet that definition. Neither does the provision of additional nominal monetary consideration to the employee. Instead, the employer must provide some “corresponding benefit or change in job status.”
Beyond Pennsylvania, Employers operating in jurisdictions where this issue remains unsettled (like Massachusetts) should seriously consider whether it makes sense to provide existing employees with some form of new consideration, such as a monetary payment, increased benefits, new responsibilities, or a job promotion, in exchange for entering into a non-competition agreement, as such consideration will only strengthen the argument for enforceability of the agreement when tested. The long-term savings in being able to enforce a non-competition agreement without prolonged litigation may be well worth the costs incurred up front.