In November, in a case of first impression, the Pennsylvania Supreme Court held that employers must provide “new and valuable consideration” to bind current employees to newly executed non-compete agreements. The Court, in Socko v. Mid-Atlantic Systems of CPA, Inc., reasoned the additional consideration is necessary in light of Pennsylvania’s public policy disfavoring restrictive covenants generally. Although impacting only restrictive covenants governed by Pennsylvania law, the result in Socko underscores the importance of ensuring that restrictive covenants are supported by sufficient consideration under the applicable state law.
Consideration—the benefit conferred to the employee—is a fundamental requirement of any employment agreement, regardless of its provisions, in most jurisdictions. For a new employee, the job itself can supply the necessary consideration. However, according to the Socko Court, if an employer seeks to enter into a new non-compete agreement with an existing employee, the employer must provide some “new and valuable” benefit to the employee in exchange for the non-compete. Examples of such a benefit include a promotion, bonus, change in compensation or additional benefits.
Under prior Pennsylvania law, employers could enforce non-compete agreements against existing employees without providing additional consideration for the agreement so long as the agreement specified that the employee was “intending to be legally bound,” as authorized by the Uniform Written Obligations Act, enacted in Pennsylvania. That language will no longer be sufficient in light of the Socko ruling. Other jurisdictions, such as Arkansas, have recently taken the position that the employee’s continued employment serves as sufficient consideration.
Practically, the Socko ruling serves as a reminder to employers everywhere to ensure that the applicable jurisdiction does not clearly require additional consideration when entering into new or different non-compete agreements with its existing employees. Further, it may be beneficial to reevaluate existing non-competes entered into with current employees to take additional steps which may be required to protect the employer’s ability to enforce the non-compete if it someday becomes necessary to do so. As demonstrated in Socko, an employee may be successful when challenging the enforceability of any non-compete which is not supported by sufficient consideration under the applicable state law, putting the employer’s otherwise protectable business interests, such as trade secrets, customer lists, and intellectual property, at risk.