Employment Contracts: A pending Pennsylvania Supreme Court decision could make non-competes tougher to contest

A new case before the Pennsylvania Supreme Court could make certain employment contracts more enforceable than ever before. 

That’s why, before you put pen to paper, it’s a good idea to consider negotiating some of the fine points.

What if you’ve already signed a contract – can you get out of it? Depending on the details, there’s still a chance many items aren’t enforceable.

An employment lawyer can help pinpoint the key items to negotiate before you sign, or help you decide if the contract has loopholes if the employment relationship has soured.

 Changes may be coming

Restrictive covenants are currently being examined in the case Socko v. Mid-Atlantic Systems of CPA, Inc., 2014 PA Super 103 (2014).

What are restrictive covenants, and what do they mean to you? 

Many folks see restrictive covenants as non-compete agreements, although they can also include non-solicitation and non-disclosure commitments. 

Simply stated, they are restrictions on what an employee can do typically once the employment relationship ends.  These agreements used to be applied almost exclusively in the brokerage industry or in highly sensitive job positions (involving, for example, a secret recipe or sensitive technology) but now restrictive covenants are becoming more rampant.

In Pennsylvania, courts have always looked at restrictive covenants with disfavor because they restrain free trade.  Restricting an employee after he or she leaves an employer is seen as un-American.    As a matter of public policy in Pennsylvania, competition and free trade are generally seen as a good thing.  Therefore, courts have found many restrictive covenants are invalid as a matter of law unless the employer can show that they are reasonable and their enforcement advances legitimate interests. 

Also, unlike most other agreements and promises, the courts in Pennsylvania have examined the adequacy of what is exchanged by the employer for the employee to sign the restrictive covenants.  In legal contract-speak, courts will examine the adequacy of the “consideration” employers give to employees for restricting their future rights.

For restrictive covenants to be valid, they must be supported by independent consideration other than “continued employment.”  That is, an employer cannot willy-nilly approach employees and subject them to a restrictive covenant or else fire them.  In light of the unequal status of an employee who needs a job to pay the bills verses an employer to whom employees are replaceable, Pennsylvania courts have repeatedly delved into the adequacy of what the employee receives in exchange for the restrictive covenant.

What does Socko have to do with it?

In the Socko decision, this notion of requiring some additional benefit to the employee in exchange for the covenant was challenged because the contract stated that the parties intended to be “legally bound.”  The employer argued that these magic words alters the relationship between the parties because, well, the legislature said so in the passage of the Uniform Written Obligations Act (“UWOA”), 33 P.S. § 6, passed circa 1927. 

The UWOA is a bit of an oddity.  It was proposed by the American Bar Association in 1925 in an effort to make the treatment of certain written promises uniform but it appears to have only been passed by Pennsylvania.  See The Uniform Written Obligations Act, Columbia Law Review Vol. 29, No. 2 (Feb., 1929), pp. 206-209.  In a sense, it was seen as a way to modernize the law concerning gratuitous promises.  Gratuitous promises are promises by one person to give something to another person.  In many states, if one made a promise under a wax seal, one would be bound by the promise without anything more.  With the UWOA, the wax seal is unnecessary so long as the person making the promise used the right words, manifesting an intention to be “legally bound.” 

Although the intent to be “legally bound” language might confer some hallow formality, the Act was criticized shortly after it was proposed because most folks signing the agreements probably didn’t draft them or know the meaning of these magic words.  Id.  at p. 207.  Words do not lend the significance of making a wax seal.  This is even more valid in today’s world where words are often works of machines and templates copied and pasted.  

Why might the PA High Court reverse?

It is possible that the Pennsylvania Supreme Court will reverse the Superior Court decision.  Public policy is, well, public policy.  Statutes trump public policy and common law.  The plain language of the UWOA is arguably straightforward in application.  As such, it could be held to trump the common law.  Of course, that would not explain the reversal of almost a hundred years of jurisprudence ignoring the UWOA when it comes to restrictive covenants.

Do magic words really change the relationship?

 The Court probably will not reverse based on these “magic words” but the case raises an interesting issue of statutory interpretation.  Notwithstanding the above analysis, an examination of the UWOA, shows that it was only intended to apply to “certain written transactions” and, more particularly, to certain “written promises.”  See 33 P.S. § 6.  This language gives rise to ambiguity as to what contracts, if any, the law should apply.  Where there is an ambiguity, legislative intent controls.  1 Pa.C.S.A. § 1921.   Looking at the legislative intent includes an inquiry into the circumstances in which the statute was passed and the “mischief” it was intended to remedy.  Id.  As noted above, it appears the statute was originally proposed to make gratuitous promises enforceable without the need for a wax seal or other consideration.   

Based on this language and the legislative history, the UWOA should apply to gratuitous promises, not personal service contracts or employment restrictive covenants which have traditionally been examined differently. 

If the court reviews the Act consistent with the context in which it was passed, the UWOA will likely remain what has been during most of its history – a largely forgotten piece of legislation belonging to a very particular context.    

In any case, it is a good idea for employees to have an employment contract containing these types of restrictions reviewed by an employment counsel before signing, or, at least, before making a jump to a new employer.

Brendan Hennessy is an employment-focused attorney in Malvern, PA and can be reached at 484-875-3111.

 

Written by

Brendan D. Hennessy, Esquire is an experienced attorney and provides an assortment of legal services, focusing in the area of Employment Law.
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