Friday, December 11, 2015

Enforceability of Unilaterally Imposed Covenants Not to Compete

Covenants not to compete are common terms of employment in the private sector.  When an employee is to be given access to an employer’s trade secrets or client lists, or is expected to perform other valuable services for the employer, an employer often will require the employee to sign, usually at hire, a non-compete agreement as a condition of employment.  To be enforceable, a non-compete agreement must be limited in time and geographical scope, but a properly constructed non-compete agreement will restrict the employee’s ability to take the knowledge he has gained from working for the employer and put it to immediate use in the service of a competitor.  But what happens if the employer decides he wants the employee to sign a non-c
ompete agreement during the term of the employee’s employment, even though the employee was not required to sign such an agreement when he was hired?  

Recently, in Socko v. Mid-Atlantic Systems of CPA, Inc., 142 MAP 2015 (Nov. 18, 2015), the Pennsylvania Supreme Court ruled that if an employer imposes a covenant not to compete during the term of an employee’s employment, the covenant will not be enforceable unless it is accompanied by some form of consideration other than the employee’s continued employment.  In the Socko case, David Socko was asked to sign (and did sign) a covenant not to compete agreement with his employer whereby he was precluded from working for a competitor for two years beyond the term of his employment.  When Socko resigned to take a job with a competitor, Mid-Atlantic informed his new employer of the covenant not to compete and the new employer then fired Socko.  Socko filed a declaratory judgment action asking for a ruling that the covenant was unenforceable for lack of consideration.  The Supreme Court sustained the rulings of the trial court and appellate court in favor of Socko.

The Socko holding is to be contrasted with a decision earlier this year by the Wisconsin Supreme Court in Runzheimer Int’l. v. Friedlen, 2015 WI 45, in which the Wisconsin court ruled that consideration was supplied by the employer’s “forbearance in exercising its right to terminate an at-will employee”.  While it was suggested that this consideration, if it be such, was inadequate because the employer could require the employee to sign the agreement, then fire him shortly thereafter, the Wisconsin court said that the employee would be protected from such an action by equitable principles such as fraudulent inducement or the covenant of good faith and fair dealing.  In other words, the Wisconsin court seemed to suggest, the signing of the covenant in effect would protect an at-will employee, at least for a time, from being fired except for cause.

While the Illinois Supreme Court has not ruled on this precise issue, the case of Doyle v. Holy Cross Hospital, 186 Ill.2d 104 (1999) is instructive.  In Doyle, the plaintiffs contended that they were terminated under circumstances that violated the termination provisions of the hospital’s employee handbook that were in effect at the time they were hired, even though those provisions were later changed.  The Supreme Court ruled that the modifications in the handbook were ineffective to change the termination rules applying to the plaintiffs because they were implemented without additional consideration.  Applied to the restrictive covenant situation, the Doyle holding suggests that Illinois would side with Pennsylvania on this issue and would require additional consideration to support a post-hire covenant not to compete.