One of the issues that divides many states is whether a covenant not to compete that is offered after the start of employment is enforceable. Most states (such as Florida, Illinois, Massachusetts, New York and Ohio) recognize that mere continued employment is sufficient consideration to support a non-compete that is signed after an employee begins working for his or her employer.
However, a sizable minority of states (such as North Carolina, Pennsylvania and Texas) generally refuse to enforce a non-compete that is presented after an employee begins work. In those states, continued employment is considered insufficient consideration as a matter of law and those states require that any non-compete signed after an employee has begun working must be supported by new and independent consideration such as a genuine promotion, stock options or some other tangible exchange.
Not surprisingly, things can get tricky in jurisdictions that do not recognize “subsequent” non-competes when it is unclear when the employee actually begins working or where there is a potential number of employment agreements. On May 31, 2013, the Pennsylvania Supreme Court was forced to address this situation and determine whether a signed offer letter that did not mention a non-compete was the parties’ agreement or whether a subsequent employment agreement with a restrictive covenant signed on the employee’s first day of work constituted the actual employment contract.
In Pulse Technologies, Inc. v. Notaro, the Pennsylvania Supreme Court found that the signed offer letter that did not mention a non-compete was not a binding employment contract between the parties. Instead, the Supreme Court held that the non-compete included in the formal employment agreement signed on the employee’s first day was part of the actual contract between the employer and employee, and that the non-compete was therefore supported by consideration (new employment) and enforceable. (A copy of the opinion can be found as a PDF below; a special thanks to Mark Grace of Cohen & Grace for giving me an update on the opinion).
Background Facts: In 2005, Pulse Technologies extended an offer of employment to Peter Notaro in a letter that described the new position, responsibilities, location, base salary, benefits, effective date and confidentiality requirements. The offer letter stated “You will be asked to sign our employment/confidentiality agreement” and that “[w]e will not be able to employ you if you fail to do so.” Finally, the offer letter stated “the first day of employment you will be required to sign an Employment Agreement with definitive terms and conditions outlining the offer terms and conditions contained herein.” The letter did not mention any covenant not to compete.
Notaro signed the offer letter as instructed and on the first day of his employment with Pulse Technologies, he was asked to sign an employment agreement that contained a covenant not to compete. Notaro read, understood and signed the employment agreement and never objected or questioned the non-compete.
In 2010, Notaro resigned from Pulse Technologies to join a competitor, MK Precision, LLC. Pulse Technologies sued to enforce the non-compete and secured a preliminary injunction enforcing it. However, on appeal, the Pennsylvania Superior Court of Appeals reversed and vacated the preliminary injunction, reasoning that because the offer letter did not mention the non-compete, the subsequent non-compete was not supported by adequate consideration.
The Pennsylvania Supreme Court’s Reasoning: The Pennsylvania Supreme Court rejected that reasoning, reversed the Appellate Court’s holding and reinstituted the non-compete. The Supreme Court held that the offer letter was simply part of the hiring process and did not constitute the actual employment contract between Notaro and Pulse Technologies.
Focusing on the language and circumstances surrounding the offer letter, the Supreme Court concluded that the offer letter was simply intended to summarize a number of the key terms of the proposed employment relationship and that it was executed with “a view toward executing a binding contract in the future.” The Supreme Court emphasized that the offer letter’s language made clear that execution of an actual employment agreement would be required for any employment relationship and that as a result, the restrictive covenant was ancillary (or a essentially a condition) of the proposed employment relationship. Consequently, the subsequent non-compete was enforceable because it was supported by consideration — the offer and acceptance of employment at the start of the parties’ relationship.
The Takeaway: If you are an employer in a state that does not recognize continued employment as sufficient consideration for a non-compete, this is an important decision. To its credit, the Pennsylvania Supreme Court did not elevate form over substance and instead took a hard look at the language and the circumstances of the offer letter and properly recognized that it was not the actual employment agreement. This decision should provide comfort to employers who do not expect that an offer letter will summarize each and every term of the prospective employment.
However, on a practical level, the most effective step that an employer can take to avoid this situation is to be open from the beginning about its expectation that a new employee will have to sign a restrictive covenant. It is always preferable to explain to a prospective employee that a restrictive covenant will be part of any employment package. Not only will that approach ensure that an employer has conformed with the law in jurisdictions such as North Carolina, Pennsylvania and Texas, but it will reduce the potential for confusion, bitterness or litigation in the future.