SCOPA Rejects Superior Court’s Bright Line Rule for Enforcement of Non-Compete
Civil Litigation Update, a publication of the Pennsylvania Bar Association
In Rullex Co. v. Tel-Stream, Inc., — A.3d —, No. 27 EAP 2019 (June 16, 2020) (Opinion by Saylor, C.J.), the Supreme Court of Pennsylvania held that a non-compete agreement executed after the first day of employment was not enforceable because the parties did not agree to its essential provisions when the employment relationship began.
Rullex Company (Rullex) performs contracting work for telecommunications businesses and subcontracts with Tel-Stream, Inc. and its founder, Yuri Karnei. In 2016, Karnei executed a non-disclosure and non-competition agreement (the NCA) in which he agreed to not compete with Rullex for 24 months within a radius of 200 miles after working for Rullex. In 2017, Karnei began subcontracting his services to a competitor of Rullex. Rullex responded by filing a complaint alleging that Karnei violated the terms of the NCA, and Rullex sought a preliminary injunction. The trial court held a hearing on the preliminary injunction, during which both Rullex and Karnei testified that Karnei signed the NCA after he had begun working for Rullex. The trial court subsequently denied Rullex’s preliminary injunction. The trial court found that Rullex was not likely to succeed on the merits of its underlying claim — one of the six prerequisites to preliminary injunctive relief — because Karnei’s physical execution of the NCA took place after his first day of work. The trial court therefore reasoned that additional consideration was required to render the NCA enforceable. A three-judge panel of the Superior Court affirmed in a memorandum opinion. The Superior Court held that any covenant executed after the first day of employment may be enforced only if accompanied by new consideration.
On appeal, the Supreme Court affirmed, but rejected the bright line rule promulgated by the Superior Court. The court held that for a restrictive covenant executed after the first day of employment and without new consideration to be enforceable, the parties must have agreed to its essential provisions at the beginning of the employment relationship. The court found that based upon the record from the preliminary injunction hearing, there was no evidence that Karnei manifested assent to the provisions of the NCA at the time the employment relationship began. Since Rullex bore the burden of proof during the preliminary injunction hearing and failed to demonstrate a likelihood of success on the merits, the Supreme Court held that the trial court acted properly in denying the motion.