A recent decision from a Pennsylvania appellate court should prompt employers to review their existing non-compete agreements. They may be unenforceable if applicable state laws have changed.
In Socko v. Mid-Atlantic Systems of CPA, Inc., a Pennsylvania appellate court considered a common non-compete concern, but it was the first time that a Pennsylvania appellate court addressed it in the context of a written agreement. The question was this: Does “continued employment” provide sufficient consideration for a written non-compete agreement entered after the employment relationship begins and that contains a clause that the parties “intend to be bound” by the covenants?
The court answered no, holding that “continued employment” and the written intention were simply not enough. The decision aligns Pennsylvania with several states that have reached the same conclusion, while rejecting the trend of other states, like Texas, that have gone the opposite direction.
In the case, the employer and an at-will employee’s agreement stated that the parties “intend to be legally bound” by the non-compete—but that was it. There was no mention that the employee received any other benefit (except continuing to be employed) or a change in his job status when signing the agreement. This omission was fatal—and the non-compete could not be enforced. While this case could be headed to the Pennsylvania Supreme Court, employers doing business through Pennsylvania employees will need to rework their non-compete agreements to make sure they’re supported by sufficient consideration, at least for now.
Of course, in the meantime, it’s always good practice to know the laws of the state that could potentially govern your restrictive covenants. Non-compete laws vary from state to state, including rules for interpreting choice-of-law and forum-selection clauses. Unwary employers may think they have a solid non-compete—when, in fact, they don’t. For instance, a non-Louisiana company may have non-competes with its Louisiana employees that contain choice-of-law provisions calling for a state law other than Louisiana. The choice-of-law provision will only be enforceable in Louisiana if the employee ratifies it after a dispute arises (when very little loyalty remains). A non-compete drafted to comply only with another state’s law will almost certainly not comply with Louisiana’s strict requirements—and like the non-compete in Socko—may be unenforceable.
Employers need to be proactive and consistently ensure that their non-competes have the greatest chance of being enforceable. A yearly audit would do the trick—keeping your non-competes up to date for the best possible results when they are needed the most.