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PA Supreme Court Finds Non-Compete Ancillary to Commencement of Employment is Enforceable Even Though Not Mentioned in Offer Letter

On June 14, 2013 by Schnader in Labor and Employment

By Scott J. Wenner

Employers often present candidates they wish to hire with an offer letter. While some offer letters are sufficiently detailed to comprise employment agreements if the candidate signs, others simply list some of the terms of the offer.  Sometimes a brief offer letter is followed by a formal employment agreement after the candidate accepts; other employers do not use formal agreements and instead require new employees to sign only restrictive covenant and intellectual property agreements.

What if the offer letter a successful applicant receives fails to refer to the employer’s plan to require the candidate to sign a post-employment non-compete and no-solicitation agreement as a condition of starting work?  If the candidate signs the restrictive covenant agreement, are the post-employment restrictions enforceable?

State law provides the answer, which may be different from state to state. In Pennsylvania, the Supreme Court considered this question in Pulse Technologies Inc. v. Notaro, No. 6 MAP 2012 (May 29, 2013).  In Pulse Technologies, a trial court enforced a non-compete covenant in Notaro’s employment agreement and enjoined him from working for Pulse’s competitor.  The Superior Court, on review of the trial court decision, reversed. It held that because Pulse’s offer letter failed to disclose that Notaro would have to sign a non-compete before beginning his job, the covenant was invalid as there was no new consideration for it.  The Supreme Court disagreed, however, reversing and remanding the case for further proceedings.  The participating Justices unanimously supported reversal, finding that the covenants were supported by adequate consideration and that Pulse’s offer letter did not preclude it from adding new terms to Notaro’s employment agreement.

The Facts.  Pulse’s offer letter to Notaro described the position and its duties, location, salary, benefits, effective date, and Pulse’s confidentiality requirements.  It also stated: “You will also be asked to sign our employment/confidentiality agreement. We will not be able to employ you if you fail to do so.” It later reiterated that to start work Notaro would have to sign an employment agreement  “with definitive terms and conditions outlining the offer terms and conditions contained herein.”  The offer letter did not disclose that this employment agreement included post-employment restrictive covenants.  When Notaro reported for work, before commencing his duties, he signed Pulse’s employment agreement with the restrictive covenants – which he read and understood – without objection.

Nearly five years later Notaro accepted a job with a competitor as general manager of its directly competitive product line after disclosing his restrictive covenant to his prospective new employer.  Pulse filed suit for an injunction to prevent Notaro from holding that position, which the trial court granted.  A reviewing court reversed and dissolved the trial court’s injunction.  Its unpublished ruling relied largely on the procedural errors by the trial court to vacate the injunction.  However, it also cited the offer letter’s failure to tell Notaro of the restrictive covenant to which he’d have to agree, and suggested that the terms of the employment agreement would match those recited in the offer letter, which in its view meant that Notaro was given no consideration for the non-compete, making it invalid.

The Supreme Court’s Holding. The Justices unanimously agreed that the offer letter’s failure to refer to a non-compete did not render the restrictive covenant in Notaro’s employment agreement unenforceable.  While the majority offered several largely technical reasons to support this result, the Justices all agreed on only one: that the consideration for the covenants in the employment agreement was sufficient.  To be supported by sufficient consideration under Pennsylvania law, restrictive covenants must be ancillary to the taking of employment. The majority and concurring Justices all found that inclusion of the covenants in the employment agreement that Notaro signed when he commenced employment made the covenants properly ancillary to taking employment.

Disagreement over Offer Letter’s Significance. The majority opinion observed that the offer letter was not an employment contract, but instead had some lesser status as merely “a part of the hiring process.”  It pointed out specific references in the offer letter to a future agreement that was to embody the contractual terms and concluded “the clear references to future specific terms show the offer letter is not a contract, but only evidence of negotiation.” The two concurring justices took sharp exception to the finding that the offer letter was less than a contract.  One noted, however, that the offer letter confirmed the parties contemplated a further agreement and that Notaro, an experienced executive, should have been well aware that one contingency to entering into a formal agreement likely would be a restrictive covenant.

Importance of Decision. The Pennsylvania Supreme Court did not break new ground with its decision in Pulse Technologies. If anything, the divergent opinions illustrate how elusive the law of contracts can be in the employment setting.  Perhaps the most important point to be taken from the Court’s opinions is a more general one on the value of clarity at every step of the employment process.  Although Pulse Technologies ultimately prevailed in its dispute with Mr. Notaro, it could have saved itself significant time and expense had it clearly advised him up front in its initial offer letter of its expectation that he sign an employment agreement containing a non-compete as a condition of commencing employment.

Moreover, under the law of some states, e.g., New Hampshire, a prospective employee must be advised at the time an offer is made of the terms of any non-compete agreement with which the new hire will be expected to comply.  Pulse Technologies would not have been permitted to enforce its non-compete under that set of laws.