By: Michelle Patrick, Esquire
For years, courts in Pennsylvania have determined that non-compete agreements signed after an employee was already employed were not enforceable unless additional consideration had been tendered for the non-compete. Retaining the job was not enough to constitute additional consideration. On June 16, 2020 the Pennsylvania Supreme Court clarified that rule holding that there are situations in which non-compete agreements signed during an employee’s tenure do not need additional consideration to be binding. See Rullex Co., LLC v. Tel–Stream, Inc., 2020 Pa. LEXIS 3294 (June 16, 2020)
In Rullex, Defendant Karnei, founder and alter-ego of Tel-Stream, was hired by Rullex as a sub-contractor. Karnei did not sign his non-compete agreement until several months into his work for Rullex. Karnei subsequently began sub-contracting work for a Rullex competitor. Rullex requested a preliminary injunction against Karnei arguing that the work Karnei was doing for the competitor violated the terms of the non-compete agreement. The lower court denied Rullex’s preliminary injunction request, finding that there was a lack of adequate consideration since Karnei signed the agreement several months into his employment. On appeal, the Superior Court affirmed the lower court’s holding that “fresh consideration” is necessary when a non-compete is signed after employment and that “mere continuation of the employment relationship at the time of entering into the restrictive covenant is insufficient.”
On appeal, the Pennsylvania Supreme Court rejected the bright line rule that additional consideration is always necessary when a non-compete agreement is signed during the employment period and stated that instead, the focus must be on intent. The Court recognized that employers and employees may both understand that a non-compete is part of the relationship however the agreement may not be signed on the first day for a variety of reasons. In such a case, where there was a “meeting of the minds” and both parties intended that the agreement be part of the employment relationship, then the bright line rule regarding additional consideration is not applicable. In Rullex, the Court determined there was no such meeting of the minds so the lower courts had not erred. The Court cited to the fact that when Karnei was given the non-compete agreement he was told to take time his time look over it, discuss it with a lawyer and to let Rullex know if he was agreeable to signing it or if anything needed to be changed. The Court agreed that there was clearly no meeting of the minds on the agreement at the time it was tendered to Karnei.
Please note that this is not the usual employer/employee relationship because Karnei owned his own company which competed against Rullex, thereby complicating the case. It is therefore unclear if the court would rule the same way regarding an employee whose status was that of employee not contractor.