Pennsylvania Supreme Court Rules Non-Compete Agreement Signed After Employment Had Already Commenced is Invalid for Lack of New Consideration

What You Need to Know About Non-Compete Agreements

The Pennsylvania Supreme Court has ruled that an employment agreement that contains a covenant not to compete signed after employment has started is not valid unless additional consideration is provided to the employee. The Supreme Court entered such decision despite the provisions of the Uniform Written Obligations Act (UWOA) which states that a written agreement is binding if the agreement states that both parties “intend to be legally bound”.

An employee was re-hired by a basement water proofing company in June 2009 and signed an employment agreement containing a two-year covenant not to compete. In December 2010, while still employed by the company, he signed another agreement entitled “Non-Competition Agreement” which was more restrictive than the agreement signed in 2009 and which superseded such prior agreement. (The parties during the litigation agreed that no new consideration was provided to the employee for the 2010 Non-Competition Agreement).

In January 2012, the employee resigned from the company and went to work for a competing company. The prior employer notified the new company of the Non-Competition Agreement. Ten days later, the new company fired the employee.

The Supreme Court ruled that the Non-Competition Agreement was not valid as there was no new consideration exchanged by the parties for such agreement. The Court noted that “when a non-competition clause is required after an employee has commenced his or her employment, it is enforceable only if the employee receives ‘new’ and valuable consideration – that is, some corresponding benefit or a favorable change in employment status”.

The Non-Competition Agreement contained a specific statement that the parties “intended to be legally bound”. Pursuant to the UWOA, 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”. The Supreme Court in considering the unequivocal terms of the UWOA stated the following:

“Upon consideration of the historic background regarding covenants not to compete, their relative positive and negative impact upon the employer-employee relationship, and their unique treatment in the law, including more rigorous scrutiny by our courts, we conclude that a construction of the UWOA which would vitiate the need for new and valuable consideration when entering into an agreement containing a restrictive covenant after the initiation of employment would be unreasonable. Thus, we hold 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”.

The Non-Competition Agreement signed by the employee while he was already employed with the company was ruled invalid for lack of “new” consideration. Thus, the employee was not prohibited from seeking employment with a competitor.

If you have an employment law matter that requires review by an attorney, please call John J. Stanzione, Esq. of the law firm of Lamb McErlane, P.C. at 610-430-8000. Mr. Stanzione has over 30 years of experience representing employees with respect to multiple employment matters including employment agreements, non-compete agreements, severance agreements, wage loss claims, claims for wrongful termination and discrimination claims. In addition, the law firm of Lamb McErlane is a multi-service law firm with attorneys specializing in several legal disciplines such as business law, family law, personal injury law, criminal law, corporate transactions, social security disability, wills and trusts, estate planning and real estate law.