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The Pennsylvania Supreme Court is set to determine whether a restrictive covenant discussed, but not physically signed, prior to the start of work can be enforceable without an offer of additional consideration.

The state Superior Court in Rullex Co. v. Tel-Stream held Jan. 11 that it cannot.

"References to non-compete clauses found in unsigned draft agreements are not binding on the parties," Judge Judith Ference Olson wrote for a unanimous three-judge panel in a memorandum opinion. "Thus, since the written contract upon which appellant 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. Appellant has not come forward with evidence of such new and valuable consideration beyond the original award of cellular tower work. Thus, appellant is unlikely to succeed based on any claim asserting an enforceable restrictive covenant."

Olson was joined by President Judge Jack Panella and Judge Maria McLaughlin.

Plaintiff Rullex, a Pennsylvania company that provides telecommunications construction services, subcontracted work to defendant Tel-Stream, a company that provides labor crews to businesses that service cellular towers. It is not in dispute that Tel-Stream signed a "Subcontractor Non-Disclosure, Non-Solicitation, and Developments Agreement" with Rullex months after it actually began performing work for Rullex. The agreement barred Tel-Stream from competing with Rullex, soliciting Rullex's customers within a nonsolicitation region, and misappropriating Rullex's trade secrets.

In February 2018, Rullex sued Tel-Stream in the Philadelphia Court of Common Pleas alleging Tel-Stream breached the restrictive covenant by contracting with Rullex's main competitor, Invertice.

The trial court ruled in favor of Tel-Stream and its owner, defendant Yuri Karnei, and rejected Rullex's petition for injunctive relief, finding that the noncompete was invalid because it was signed after the first day of employment.

Rullex appealed to the Superior Court, arguing that the trial court improperly disregarded the fact that the noncompete agreement was drafter prior to the first day of employment, but the appeals panel upheld the ruling.

"It is not disputed that Tel-Stream's work commenced before the parties executed the written contract upon which appellant now relies," Olson said. "Appellant'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."

In a one-page Sept. 10 order granting allocatur, the Supreme Court agreed to consider two issues: "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?"

Counsel for Rullex, Alan Frank of Alan L. Frank Law Associates in Jenkintown, said similar issues have arisen in "case after case after case" in Pennsylvania and guidance from the Supreme Court is welcome.

"This case is important because it really clarifies whether agreements contemplated at the inception of an employment arrangement can contain enforceable restrictive covenants even if the document is signed later," Frank said.

Counsel for Tel-Stream and Karnei, Gary Green of Sidkoff, Pincus & Green in Philadelphia, could not be reached for comment.