Restrictive covenants: can a restrictive covenant be enforceable if it is signed after employment begins?

Rullex Co., LLC v. Tel-Stream, Inc., 2019 WL 168285 (Pa. Super. 2019) (unreported), allocatur granted Sept. 10, 2019, appeal docket 27 EAP 2019

The Pennsylvania Supreme Court granted allocatur to consider issues related to Superior Court’s affirmance of the trial court’s order denying a preliminary injunction to enforce a non-compete agreement. In 2016, Rullex Co., LLC (“Rullex”), a PA telecommunications construction services company, and Tel-Stream, Inc. (“Tel-Stream”), a company that provides labor crews to businesses that service cellular towers, began a business relationship pursuant to which Tel-Stream provided cell tower construction crews to service Rullex’s customers. Tel-Stream began work before the parties executed a formal contract, and during that time the parties discussed many terms that were subject to amendment and alteration.  At least a month after work commenced in 2016, the parties executed a Master Service Agreement and a Subcontractor Non-Disclosure, Non-Solicitation, and Developments Agreement (the “Agreement”). The Agreement included several non-competition provisions, summarized by the trial court as follows:

5. The Agreement defines “Proprietary Information” as “information or material which is not generally available to the public,” including “customer identities or other information about customers, prospect identities or other information about prospects[.]”

6. The Agreement provides that during or after the duration of its relationship with Rullex, Tel-Stream would not “disclose any Proprietary Information to anyone outside of the Company [Rullex], or use or permit to be used any Proprietary Information for any purpose[.]”

7. Tel-Stream further agreed that, for 24 months following the termination of the Agreement, it would not solicit Rullex customers. The Agreement provides:

[During Subcontractor’s relationship with the Company and for a period of twenty-four (24) months following the termination of this Agreement for any reason (the “Restricted Period”), Subcontractor agrees not to, either individually or jointly, directly or indirectly, either as an [sic] Subcontractor, employer, operator, agent, independent contractor, owner, consultant, partner, investor or otherwise, (i) offer to provide and/or provide any products or services that compete (whether directly or indirectly) with the products and serviced offered or planned to be offered by the Company from time to time to any actual or prospective customer of the Company (A) who was serviced by Subcontractor, (B) about whom Subcontractor obtained Proprietary Information, or (C) with whom Subcontractor otherwise has dealt while employed by the Company (collectively, a “Rullex Customer”)[.]

8. In addition, Tel-Stream agreed it would not compete with Rullex. The Agreement provides:

[D]uring Subcontractor’s relationship with the Company and for a period of (24) months following the termination of this Agreement for any reason (the “Restricted Period”), Subcontractor agrees not to, either individually or jointly, directly or indirectly, either as an [sic] Subcontractor, employers, operator, agent, independent contractor, owner, consultant, partner, investor or otherwise, in any manner offer to perform services for, or engage in, any business that provides services that are directly competitive with those provided by the Company within the same geographic territory of a 200 mile radius of each site where Subcontractor performed work for the Company during this Agreement[.] 

9. In addition, Tel-Stream agreed that any breach of the Agreement “will irreparably and continually damage the Company in such a manner that money damages will not be a sole adequate remedy.”

10. Finally, Tel-Stream acknowledged that it had the opportunity to seek the advice of independent legal counsel and that it had read and understood all the terms and provisions of the Agreement.

Slip Op. at 2-3.

In 2018, Rullex filed a complaint and sought preliminary injunctive relief  against Tel-Stream for violating the non-competition provisions of the Agreement when Tel-Stream began working as a subcontractor for a company that previously employed Rullex as a subcontractor, Invertice, Inc. The trial court denied Rullex’s request for a preliminary injunction prohibiting Tel-Stream from soliciting Rullex’s customers within a non-solicitation region and from misappropriating trade secrets because Rullex failed to establish an enforceable restrictive covenant and because Rullex failed to show that Tel-Stream threatened its protected interests. Rullex appealed to Superior Court arguing  that (1) Pennsylvania law permits the enforcement of restrictive covenants that are ancillary to an agreement; hence, the non-compete agreement between the parties in this case is enforceable and (2) the trial court erred in refusing to consider Appellant’s goodwill and customer relationships as protected interests.

The Superior Court affirmed the trial court’s denial of the injunction and found that the restrictive covenants were not enforceable, because Tel-Stream signed them after its first day of employment,  reasoning that:

Applying these principles to the record before us, we agree with the trial court that [Rullex] has not shown that the restrictive covenant in the parties’ agreement was enforceable. It is not disputed that Tel-Stream’s work commenced before the parties executed the written contract upon which [Rullex] now relies. [Rullex’s] own witnesses confirm that, while the parties discussed many terms at the inception of their relationship and before Tel-Stream’s work commenced, these discussions formed part of ongoing negotiations and were subject to amendment and alteration. [Citation omitted]. References to non-compete clauses found in unsigned draft agreements are not binding on the parties. Thus, since the written contract upon which [Rullex] relies was executed after Tel-Stream commenced work, the trial court correctly determined that new and valuable consideration, beyond mere continued work, was needed to support the restrictive covenant. [Rullex] has not come forward with evidence of such new and valuable consideration beyond the original award of cellular tower work. Thus, [Rullex] is unlikely to succeeded based on any claim asserting an enforceable restrictive covenant.

Slip Op. at 9-10.

Further, raising the issue sua sponte based on facts in the trial court record, the Superior Court found that Rullex failed to meet its burden in establishing that Tel-Stream had misappropriated trade secrets, reasoning that:

We also agree that [Rullex] failed to establish that Tel-Stream possessed [Rullex’s] trade secrets or that [Rullex’s] customer lists were proprietary. [Rullex] essentially raises no challenge to the trial court’s determination that installation of telecommunications equipment does not involve techniques that are proprietary to [Rullex]. Moreover, the record that reflects that . . . [Rullex’s] sole witness at the preliminary injunction hearing, readily identified [Rullex’s] customers in open court without a request to protect that information as confidential. For these reasons, [Rullex] is not entitled to relief.  

Slip Op. at 10.

The Supreme Court granted allocatur to address the following issues:

(1) Did the Superior Court err as a matter of law when it determined that a restrictive covenant is only enforceable if it is physically executed before an employee begins his employment, despite the agreement being contemplated prior to the commencement of employment?

(2) Did the Superior Court exceed its scope of review when it based its opinion on an argument raised by the Court sua sponte?

Allocatur grants present an excellent opportunity for your group or association to advance your legal and policy goals by filing an amicus brief. Participating as an amicus has proven to be an effective method of advising and influencing courts and often can involve far fewer resources than traditional lobbying.

If you are interested or would like more information, contact Kevin McKeon or Dennis Whitaker.