Back in May 2014, I reported on a significant case from the Pennsylvania Superior Court regarding restrictive covenants. Specifically,the Superior Court held that the Pennsylvania Uniform Written Obligations Act (the “UWOA”) would not supply consideration for a restrictive covenant. Instead, the Superior Court reiterated that, under Pennsylvania law, some additional consideration was necessary for restrictive covenants, such as entering into the restrictive covenant at the beginning of the employment relationship or a corresponding benefit like a bonus.
But the issue is not settled. As many hoped because this is a case of first impression in Pennsylvania, the Pennsylvania Supreme Court has agreed to hear an appeal of the Superior Court decision. The issues on appeal as identified by the Supreme Court are:
- Did the Superior Court misconstrue the UWOA in concluding the that UWOA is not a “substitute for consideration” or intended to “rectify a lack of consideration”?
- Was the Superior Court’s reliance upon “seal” cases (where a document had been sealed) erroneous because a “seal” inputs consideration whereas the UWOA does not input consideration but “merely prevents” later challenge to the contract based on consideration?
- Did the Superior Court impermissibly amend the UWOA under the guise of interpreting it?
The Supreme Court’s allowance of appeal did not include a stay of the Superior Court decision nor did it vacate that decision. Consequently, as of right now, the UWOA will not remedy a lack of consideration for restrictive covenants in Pennsylvania.
That said, the issues identified by the Supreme Court suggest that the Court has serious questions about the basis for the Superior Court’s opinion. Importantly, a finding by the Supreme Court that employees party to a restrictive covenant who signed the covenant intending to be legally bound by it cannot challenge the covenant raising a lack of actual consideration would be a sweeping change to Pennsylvania law benefiting employers. It would place great responsibility on employees to understand their rights at the time of contracting and substantially limit the opportunity for later challenge of the covenant. So stay tuned.