Rullex Co. v. Tel-Stream, Inc.

• Decision Date: 16 June 2020
• Docket Number: No. 27 EAP 2019,27 EAP 2019
• Citation: 232 A.3d 620
• Parties: RULLEX CO., LLC, Incorrectly Designated as Rullex, Inc., Appellant v. TEL-STREAM, INC. and Yuri Karnei, Appellees
• Court: Pennsylvania Supreme Court

232 A.3d 620

RULLEX CO., LLC, Incorrectly Designated as Rullex, Inc., Appellant

v.TEL-STREAM, INC. and Yuri Karnei, Appellees

No. 27 EAP 2019

Supreme Court of Pennsylvania.

Argued: March 11, 2020

Decided: June 16, 2020

Alan Lee Frank, Esq., Jeffrey J. Goldin, Esq., Alan L. Frank Law Associates, P.C., for Appellant

Gary Green, Esq., Philadelphia, Samantha Farren Green, Esq., Larry M. Keller, Esq., Philadelphia, Sidkoff, Pincus & Green, P.C., for Appellees

SAYLOR, C.J., BAER, TODD, DONOHUE, DOUGHERTY, WECHT, MUNDY, JJ.

OPINION

CHIEF JUSTICE SAYLOR

In this appeal by allowance, a covenant not to compete was executed by an employee after the first day of employment. We address whether the employer can enforce that provision in the post-employment timeframe although no new consideration was supplied in connection with its execution.

Appellant Rullex Company performs contracting work for telecommunications businesses such as AT&T, Verizon, and Ericsson, as well as several smaller concerns. The work includes installing, repairing, and maintaining equipment on cellular towers and at cellular base sites. Individuals who complete such tasks must undergo training in terms of both the equipment involved and occupational safety.

Rullex often subcontracts its cell-tower work to entities such as Appellee Tel-Stream, Inc., founded and operated by Appellee Yuri Karnei. Although Tel-Stream at times employed other individuals, for present purposes Tel-Stream was, in effect, Karnei's alter-ego. As such, and for ease of discussion, we will refer only to Karnei and his actions as are relevant to this dispute. Karnei, as well as Rullex's two owners – Aliaasi Aliakhnovich and Ruselon Razhko – are all from Belarus and they ordinarily converse with each other in Russian. They speak and read English as a foreign language with varying degrees of fluency.

In connection with his work for Rullex, Karnei executed two agreements, both facially dated February 5, 2016. The first was a master service agreement (the "MSA") describing the services Karnei would perform for Rullex. The second was a non-disclosure, non-competition agreement, which included provisions stating that: (a) Karnei would not disclose confidential Rullex information such as trade secrets, client lists, and training techniques; and (b) after working for Rullex, Karnei would not compete with Rullex for 24 months within a radius of 200 miles. Only the second agreement is at issue in this appeal – and only its non-competition facet, as discussed below. See infra note 2. Thus, we will refer to it as the non-compete agreement, or the "NCA."

Karnei performed subcontract work for Rullex from early 2016 through mid-2017. Thereafter, in late 2017, Karnei began subcontracting his services to a company called Invertice, Inc., which competes with Rullex as a general contractor for wireless communications providers.

In early 2018, Rullex commenced the present action by filing a complaint in the common pleas court alleging that Karnei's work for Invertice violated the terms of the NCA. Rullex asserted that Karnei became acquainted with Invertice and its business when he was employed by Rullex – which, in turn, performed contract work for Invertice through May 2017 notwithstanding that the two companies are competitors. Rullex averred that, after Karnei stopped working for Rullex, he used information about Invertice that he had learned while working for Rullex, along with the goodwill Rullex had built up with Invertice, to secure subcontracting work from Invertice to the detriment of Rullex. Rullex requested that the court enforce the NCA and award compensatory and punitive damages. The day after it filed its complaint, Rullex filed a motion for a preliminary injunction to prevent Karnei from continuing to work for Invertice while the litigation proceeded. The common pleas court held a hearing on the motion, at which Aliakhnovich and Karnei each testified to their versions of the events surrounding Karnei's being hired by Rullex and executing the two agreements mentioned above, that is, the MSA and the NCA.

Preliminarily, Aliakhnovich stated that Rullex provides training for the employees and subcontractors it hires to complete field work (i.e. , work on the equipment, base sites, and towers), and he estimated that the training period lasts twelve months. See N.T., Feb. 27, 2018, at 10. Although the parties differed as to when in 2016 Karnei began working for Rullex, as well as the date on which he physically executed the agreements, both witnesses related that Karnei signed them some time after February 5, 2016, the date which appears next to Karnei's signature. Aliakhnovich testified that Karnei started working for Rullex on February 5, 2016, and that Karnei was given the NCA at that time to look over. According to Aliakhnovich, his business partner, Razhko, explained the NCA's provisions to Karnei in Russian, see id . at 60-61, and he (Aliakhnovich) permitted Karnei's delay in signing it so that Karnei could ensure he was comfortable with its terms. Aliakhnovich added that Karnei returned to Rullex's offices approximately two months after the February 5, 2016, employment start date and signed the NCA with no requested changes. See id . at 57-59.

For his part, Karnei testified that he does not understand written English well, and confirmed that he signed the two agreements after Razhko explained them to him page by page in Russian. See id . at 89-90. However, his testimony concerning the timing of events relating to the NCA diverged from that of Aliakhnovich. Specifically, Karnei stated that Razhko sent the NCA to him electronically through a "Dropbox" system in December 2016, and that he did not actually sign them until February 2017. See id . at 87. He separately expressed that he did not work for Invertice while subcontracting for Rullex, and that, per his understanding of the NCA, after he finished working for Rullex he was free to work for Invertice so long as Rullex was not working for Invertice at the time. See id . at 93. Karnei testified, further, that, in January 2018 he had occasion to visit Aliakhnovich and Razhko in Rullex's offices, where he mentioned to them that he was working for Invertice. See id . at 93-94.

The common pleas court issued an order dated April 5, 2018, denying Rullex's motion for a preliminary injunction. In an accompanying opinion, the court focused on the question of whether Rullex was likely to succeed on the merits – one of the six prerequisites to preliminary injunctive relief. See Weeks v. DHS , ––– Pa. ––––, ––––, 222 A.3d 722, 726 (2019) (discussing these requirements). In answering that question, the court observed that, to be enforceable, a non-competition agreement must, inter alia , be supported by adequate consideration. See Rullex, Inc. v. Tel-Stream, Inc. , Civil Action No. 180200961, 2018 WL 9903637 (C.P. Phila. Apr. 5, 2018) (citing Insulation Corp. of Am. v. Brobston , 446 Pa. Super. 520, 528, 667 A.2d 729, 733 (1995) ). It noted that a position of employment can comprise such consideration where the non-compete agreement is executed at the inception of the employment relationship. Here, however, the court explained it was undisputed that physical execution of the covenant took place after the first day of work – meaning that additional consideration was needed to render it enforceable.¹ The court noted that Rullex did not adduce evidence that it had furnished Karnei with consideration specifically connected with the NCA's execution. As such, the court held that Rullex failed to establish a likelihood of success on the merits. See id . at 6-7.²

A three-judge panel of the Superior Court affirmed in a memorandum opinion. See Rullex Co., LLC v. Tel-Stream, Inc. , No. 1171 EDA 2018, 2019 WL 168285 (Pa. Super. Jan. 11, 2019).³ The panel explained, initially, that "consideration is crucial" to a restrictive covenant's enforceability, "whether the covenant is entered into prior to, during, or after employment ends." Id . at *4 (citing Capital Bakers, Inc. v. Townsend , 426 Pa. 188, 190-91, 231 A.2d 292, 293-94 (1967) (finding unenforceable for lack of consideration a non-competition agreement executed twelve years after the start of employment)). It agreed with the common pleas court that, if a restrictive covenant is executed at the inception of the employment relationship, the position itself can constitute adequate consideration. See id . at *4 (citing, inter alia , Morgan's Home Equip. Corp. v. Martucci , 390 Pa. 618, 630, 136 A.2d 838, 845 (1957) ).

The Superior Court panel noted, as well, that a restrictive covenant need not be included in the initial employment agreement, particularly as the restriction may only be relevant after the employee "has developed a certain expertise, which could possibly injure the employer if unleashed competitively[.]" Id . at *5 (quoting Jacobson & Co. v. Int'l Env't Corp. , 427 Pa. 439, 450, 235 A.2d 612, 618 (1967) ). However – and most germane to this appeal – the intermediate court, like the common pleas court, held that any such covenant executed after the first day of employment can only be enforced if accompanied by fresh consideration; it added that such may arise from a favorable change in employment conditions, such as a promotion, a change from part-time to full-time status, or an increase in benefits. See id . By contrast, the court indicated, the "mere continuation of the employment relationship at the time of entering into the restrictive covenant is insufficient[.]" Id .

Applying these principles, the intermediate court concluded:

It is not disputed that [Karnei'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 [Karnei's] work commenced, these discussions formed part of ongoing negotiations and were subject to amendment and

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