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Continued Employment is Not Sufficient Consideration to Enforce a Non-Compete Agreement


Socko v. Mid-Atlantic Systems of CPA, Inc. - Pennsylvania Supreme Court


Facts:  David Socko ("Socko") was hired as a salesperson at Mid-Atlantic in March 2007.  Upon being hired, Socko signed an employment contract which contained a two year non-compete covenatn.  Socko resigned in February 2009 but upon being rehired in June 2009, he hired a new employment agreement which contained another two year non-compete covenant.  While still employed at Mid-Atlantic, Socko signed a third employment contract in December 2010 which contained a non-compete for two years after his termination of employment.

Socko resigned from Mid-Atlantic in January 2012 and accepted a position elsewhere a few weeks later.  After Mid-Atlantic sent a letter to Socko's new employer and threatened litgiation, Socko was terminated from his new position.  Socko filed suit against Mid-Atlantic and alleged that the non-compete was not enforceable because it was not supported by sufficient consideration.  The trial court granted summary judgment in favor of Socko in regard to the continued employment portion of the case.  Mid-Atlantic subsequently appealed the issue to the Pennsylvania Supreme Court.

Holding:  The Pennsylvania Supreme Court noted that the issue over whether continued employment was sufficient consideration in a non-compete agreement was a matter of first impression at the appellate level in the state.  While federal cases on the issue provided arguments for both sides, the Supreme Court discarded with those cases and pointed to the fact that traditionally, non-competes had been disfavored in Pennsylvania.  

The Court turned to prior cases which provided support for the argument that the initial taking of employment constituted adequate consideration to permit the enforcement of a non-compete agreement.  However, when the non-compete was entered into after employment had already begun, it had been previously held that the non-compete was unenforceable as a result of a lack of consideration.  However, if the non-compete was entered into after employment had begun and there was a change in employment status, that could be sufficient consideration.

In this case, the Supreme Court held that the facts demonstrated that no "new and valuable consideration" was given in exchange for the non-compete.  As the Court wrote, the fact that Socko had continued employment in exchange for the restrictions of the non-compete was not enough to establish valid consideration.  Given the fact that non-competes have long been disfavored in the state, the Court reached the conclusion that the non-compete was unenforceable for want of consideration.

Judgment:  The Pennsylvania Supreme Court affirmed the granting of summary judgment in favor of Socko on the grounds that the non-compete he entered into was unenforceable as continued employment was not valid consideration to enforce the non-compete.

The Takeaway:  Readers might remember several cases I have written about before in regard to the validity of continued employment in regard to non-compete agreements.  A District Court in Hawaii previously held that continued employment was not sufficient consideration, while the Wisconsin Supreme Court has held that it is.  

It goes without saying that there remains wide disagreement on the issue, depending upon the state.  This case certainly highlights the importance of reviewing the laws in a particular state beforehand to know whether that particular jurisdiction holds that continued employment is valid consideration in regard to non-compete agreements.  (Or perhaps more importantly in this case, reviewing developments at the appellate level...given that this was an issue of first impression).  Failure to do so could result in an unwanted surprise down the road...and a costly one at that. 

Majority Opinion Judge:  Judge Donohue

Date:  November 18, 2015

Opinion:  www.pacourts.us/assets/opinions/Superior/out/J-A07028-14o%20-%201018076762221145.pdf?cb=1

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