Socko v. Mid-Atlantic Sys. of CPA, Inc.

Decision Date18 November 2015
Docket NumberNo. 142 MAP 2014,142 MAP 2014
Citation126 A.3d 1266
Parties David M. SOCKO, Appellee v. MID–ATLANTIC SYSTEMS OF CPA, INC., Appellant.
CourtPennsylvania Supreme Court

James W. Carroll Jr., Esq., Rothman Gordon, P.C., Christine Teresa Elzer, Esq., Samuel J. Cordes & Associates, for Western Pennsylvania Employment Lawyers Association, Amicus Curiae.

Richard Stephen Matesic, Esq., Pro Se, Amicus Curiae.

Scott M. Pollins, Esq., Willig, Williams & Davidson, for NELA Eastern Pennsylvania, Amicus Curiae.

Stephen C. Goldblum, Esq., Michael J. Torchia, Esq., Semanoff Ormsby Greenberg & Torchia, LLC, for Mid–Atlantic Systems of CPA, Inc.

Michael Edward Rowan, Esq., Shumaker Williams, P.C., for David M. Socko.

SAYLOR, C.J., EAKIN, BAER, TODD, STEVENS, JJ.

OPINION

Justice TODD.

In this appeal by allowance, we consider an issue of first impression: whether the enforcement of an employment agreement containing a restrictive covenant not to compete, entered into after the commencement of employment, may be challenged by an employee for a lack of consideration, where the agreement, by its express terms, states that the parties "intend to be legally bound," which language implicates the insulating effect of the Uniform Written Obligations Act ("UWOA").1 In light of our Commonwealth's long history of disfavoring restrictive covenants, and the mandate that covenants not to compete entered into after the commencement of employment must be accompanied by new and valuable consideration—a benefit or change in employment status—we conclude an employee is not precluded from challenging such an agreement executed pursuant to the UWOA. Thus, we affirm the order of the Superior Court.

The facts underlying this appeal are not in dispute. Appellant Mid–Atlantic Systems of CPA, Inc. ("Mid–Atlantic") is in the business of providing basement waterproofing services. Mid–Atlantic hired Appellee David Socko ("Socko") in March 2007 as a salesperson. At this time, Socko executed a two-year employment contract containing a covenant not to compete. In February 2009, Socko resigned from his employment with Mid–Atlantic, but the company rehired him four months later, in June 2009. At his time of rehire, Socko signed a new employment agreement containing another two-year covenant not to compete.

While still employed by Mid–Atlantic, on December 28, 2010, Socko signed a third, more restrictive, agreement, entitled "the Non–Competition Agreement" ("Agreement"), which, by its terms, superseded all prior agreements. Pursuant to the Agreement, which is at the heart of his appeal, Socko was not permitted to compete with Mid–Atlantic for two years after the termination of his employment in any of the following locations: Connecticut, the District of Columbia, Delaware, Maryland, New Jersey, Pennsylvania, New York, Virginia, West Virginia, or any other jurisdiction in which Mid–Atlantic did business. The Agreement also expressly provided for the application of Pennsylvania law, and stated that the parties intended to be "legally bound."

On January 16, 2012, Socko resigned from his employment with Mid–Atlantic and, a few weeks later, accepted a position with Pennsylvania Basement Waterproofing, located in Camp Hill, Pennsylvania, which was a competitor of Mid–Atlantic. Approximately one month later, Mid–Atlantic informed Socko's new employer of the terms of Socko's prior employment with Mid–Atlantic, attached a copy of the Agreement, and threatened litigation. Ten days later, Pennsylvania Basement Waterproofing terminated Socko's employment.

As a result of his termination, on April 13, 2012, Socko filed a Complaint and Action for Declaratory Judgment against Mid–Atlantic in the York County Court of Common Pleas. In support thereof, Socko filed a motion for partial summary judgment, asserting that the non-competition clause in the Agreement was unenforceable, as it was not supported by sufficient consideration. It was not disputed by the parties that the Agreement was signed during the course of Socko's employment, and that Socko did not receive any benefit or any change in his existing employment status in exchange for signing the Agreement. Mid–Atlantic, however, citing the parties' pledge in the Agreement to be "legally bound," contended that the UWOA did not allow Socko to challenge the validity of the terms of the Agreement on the basis of a lack of consideration.2

The trial court granted Socko's motion for partial summary judgment, offering in a well-written opinion, that there was a want of consideration in exchange for Socko's execution of the Agreement after he had commenced his employment. Further, the court reasoned that the mere intent by Socko, as expressed in the Agreement, to be "legally bound," did not constitute adequate consideration under the UWOA.3

On appeal, a unanimous panel of the Superior Court, in a thorough and scholarly published opinion authored by Judge Christine Donohue, affirmed the trial court's granting of Socko's motion for partial summary judgment. Socko v. Mid–Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa.Super.2014). After tracing the history of the treatment, and disfavor of, restrictive covenants in Pennsylvania, the court explained that, when an employee enters into an employment contract subsequent to the commencement of employment, which contains a covenant not to compete, the covenant must be supported by new consideration in the form of a benefit to the employee or a beneficial change to his or her employment status.

The court went on to consider the effect of the UWOA in light of the substantial common law public policy disfavoring restrictive covenants. The court acknowledged that the statute provided that a written promise shall not be invalid or unenforceable for lack of consideration if the writing also contains an express statement that the signer "intends to be legally bound," 33 P.S. § 6, and that Pennsylvania courts have interpreted this section to mean that, in certain circumstances, a written agreement containing the express statement to be legally bound is not void for lack of consideration. Nevertheless, the Superior Court observed that, while, typically, and under the UWOA, courts will not inquire as to the adequacy of consideration, the area of restrictive covenants in employment contracts is an exception to this general rule. Importantly, the court pointed out that, while our Court has held that a contract under seal imports consideration which a party is not permitted to deny, such a seal is deemed inadequate consideration to support a covenant in restraint of trade; furthermore, the Superior Court reasoned that the seal and the UWOA had the same legal effect—to import consideration into a contract and eliminate the need for evidence of consideration.

Thus, the court concluded that for a covenant not to compete to be enforceable, an employee must receive actual and valuable consideration for signing an employment agreement containing such a restrictive covenant, and that contract language "agreeing to be legally bound," which satisfies the UWOA, nevertheless fails to provide the employee an actual benefit, and, therefore, is inadequate to support the enforcement of such a covenant. As Mid–Atlantic did not provide actual and valuable consideration to Socko when he executed the Agreement, the Superior Court concluded that the trial court properly found the Agreement to be unenforceable.

Mid–Atlantic filed a petition for allowance of appeal, which we granted to address the following question: whether an employment agreement containing a restrictive covenant not to compete, entered into after the commencement of employment, is unenforceable for lack of consideration where the employer provided the employee with no benefit or change in employment status at the time of execution, but where the agreement expressly states that the parties "intend to be legally bound" by its terms. See Socko v. Mid–Atlantic Systems of CPA, Inc., ––– Pa. ––––, 105 A.3d 659 (2014) (order).4 As the issue before us concerns the construction of the UWOA, and, thus, raises a pure question of law, our standard of review is de novo , and our scope of review is plenary. DEP v. Cumberland Coal Resources, LP, –––Pa. ––––, 102 A.3d 962, 970 (2014) ; Buffalo Twp. v. Jones, 571 Pa. 637, 813 A.2d 659, 664 n. 4 (2002).

Mid–Atlantic's primary argument is that the Superior Court improperly determined that the UWOA serves as "consideration, or a substitute for consideration" and that the statute intended to "rectify a lack of consideration." Appellant's Brief at 15. Mid–Atlantic submits that the UWOA is not a substitute for consideration, but, rather, prohibits a party to a written agreement in which the party expresses an intention to be "legally bound" from later challenging the contract based on a lack of consideration.5 Mid–Atlantic agrees with Socko that additional valuable consideration must be provided to an employee that signs a non-compete subsequent to the commencement of the employment relationship, but takes the position that, even if there is not additional valuable consideration, as the case here, nevertheless, under the UWOA, the "legally bound" language acts as a bar to a challenge to the validity of the agreement based upon a lack of consideration, citing McGuire v. Schneider, Inc., 368 Pa.Super. 344, 534 A.2d 115, 118 (1987) ("Under the [UWOA], that statement of intent removes lack of consideration as a ground for avoiding the contract."), as well as certain federal and trial court decisions in support of its position.

Mid–Atlantic goes on to list numerous rights which a party may contract away for a benefit, such as the right to a jury trial, forum selection, right to seek relief in court, and choice of law. Here, according to Mid–Atlantic, the agreement to be legally bound contracts away the right to later challenge the contract on the basis of a lack of consideration. For this reason, Mid–Atlantic further asserts that the...

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