Rullex Co., LLC v. Tel-Stream, Inc. ( 2019 )

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NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
RULLEX CO., LLC, INCORRECTLY : IN THE SUPERIOR COURT OF
DESIGNATED AS RULLEX, INC. : PENNSYLVANIA
:
Appellant :
:
:
v. :
:
: No. 1171 EDA 2018
TEL-STREAM, INC. AND YURI :
KARNEI
Appeal from the Order Entered April 5, 2018
In the Court of Common Pleas of Philadelphia County Civil Division at
No(s): 180200961
BEFORE: PANELLA, J., OLSON, J., and McLAUGHLIN, J.
MEMORANDUM BY OLSON, J.: FILED JANUARY 11, 2019
Appellant, Rullex Co., LLC, appeals from the order entered on April 5,
2018 in the Civil Division of the Court of Common Pleas of Philadelphia County
that denied its request for preliminary injunctive relief preventing Tel-Stream,
Inc. and Yuri Karnei (collectively Tel-Stream) from competing with Appellant,
soliciting Appellant’s customers within a non-solicitation region, and
misappropriating Appellant’s trade secrets.1 We affirm.
The trial court made the following findings of fact.
A. The Parties
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1 “An appeal may be taken as of right and without reference to Pa.R.A.P.
341(c) [(final orders)] from … [a]n order that grants or denies, modifies or
refuses to modify, continues or refuses to continue, or dissolves or refuses to
dissolve an injunction[.]” Pa.R.A.P. 311(a)(4).
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1. [Appellant] is a Pennsylvania company that provides
telecommunications construction services, such as installing
equipment on cellular towers for clients including Nokia, Ericsson,
Verizon, and AT&T.
2. [Tel-Stream] is a company formed by Mr. Karnei in mid-2016 to
provide labor crews to businesses that service cellular towers.
B. The Non-Compete Agreement
3. Rullex and Tel-Stream entered into a Master Service Agreement
for Construction (“Master Service Agreement”), dated February 5,
2016, pursuant to which Tel-Stream would provide
telecommunications construction services.
4. On the same day, Rullex and Tel-Stream entered into a
Subcontractor Non-Disclosure, Non-Solicitation, and
Developments Agreement (the “Agreement”).
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] Subcontrator,
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
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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.
C. Procedural History
11. On February 13, 2018, Rullex filed a complaint against Tel-Stream
and Mr. Karnei, alleging that, in violation of the Agreement,
Tel-Stream in late 2017 began working as a subcontractor for
Invertice, Inc. (“Invertice”), a company that previously had
employed Rullex as a subcontractor.
12. On February 14, 2018, Rullex filed its Motion for a Temporary
Preliminary Injunction.
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13. The Court issued a rule to show cause on February 16, 2018, and
held an evidentiary hearing on February 27, 2018.
D. The Tel-Stream Rullex Relationship
14. Tel-Stream started working for Rullex in January or February
2016, according to the testimony of Rullex’s Vice President and 50
percent shareholder Alex Aliakhnovich, who testified at the
preliminary injunction hearing.
15. Mr. Aliakhnovich admitted that the Agreement was signed “a
couple of months” after Tel-Stream started to perform work for
Rullex.
16. Mr. Aliakhnovich testified that Invertice is Rullex’s strongest
competitor in Pennsylvania. He testified that Tel-Stream’s
president, [Mr.] Karnei, became aware of Invertice through
Rullex.
17. Mr. Aliakhnovich further testified that in late 2017 Tel-Stream
began performing work for Invertice.
18. Rullex’s business model involved hiring subcontractors such as
Tel-Stream to provide the labor for the telecommunications
construction Fullex was hired to perform. Rullex’s customers
were unaware that subcontractors were used. Mr. Aliakhnovich
testified that Rullex’s customers thought that Mr. Karnei and the
Tel-Stream workers were part of Rullex.
19. Mr. Aliakhnovich further readily testified in open court about the
identity of many of Rullex’s customers.
20. Mr. Karnei’s testimony contradicted the testimony of Mr.
Aliakhnovich. Mr. Karnei testified that, while Tel-Stream started
working for Rullex in June or July 2016, neither the Master
Service Agreement nor the Agreement was signed until early
2017.
21. Mr. Karnei further testified that his native language is Russian;
he does not understand written English well; and that he signed
the Master Service Agreement and Agreement after they were
explained to him page by page by Rullex President Russell
Razhko.
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22. Mr. Karnei and Mr. Razhko were both born in Belarus.
23. Mr. Karnei testified that he trusted Mr. Razhko as a countryman
with whom he previously had worked. Based on Mr. Razhko’s
explanation of the Agreement, Mr. Karnei understood that Tel-
Stream was free to perform work for any customers if Rullex did
not work with them.
24. Mr. Karnei also testified that Invertice contacted him in December
2017 and asked him if he could work for the company. Mr. Karnei
testified he had never worked with Invertice when he was
working for Rullex. He further testified that he informed Rullex
in January 2018 that he was performing work for Invertice.
Trial Court Opinion, 4/5/18, at 1-5 (footnotes and record citations omitted).
Appellant raises two claims for our review:
1. Did the trial court err in its interpretation of Pennsylvania law
when it determined that the restrictive covenants were not
enforceable because they were signed after [Tel-Stream’s] first
day of employment, despite being provided evidentiary proof
that the covenants were created prior to [Tel-Stream’s] first
day?
2. Did the trial court err when it immediately denied Rullex’s
emergency motion for reconsideration despite being presented
with: (a) affidavit testimony which explained the history
between the parties and the justifiable absence of Rullex’s 50%
owner and signatory, Russel Razhko, from the evidentiary
hearing, (b) evidence in the form of an e-mail dated in January
2016 providing proof of the creation of the restrictive
covenants prior to the inception of Tel-Stream’s employment,
and (c) relevant Pennsylvania case law which specifically
indicated that the interpretation of “ancillary to employment”
should not be narrowly construed?
Appellant’s Brief at 5.
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Appellant’s claims challenge the trial court’s order denying entry of a
preliminary injunction. Our review of such claims is well settled.
[A]n appellate court reviews an order granting or denying a
preliminary injunction for an abuse of discretion. Summit Towne
Centre, Inc. v. Shoe Show of Rocky Mount, Inc., 828 A.2d
995, 1000 (Pa. 2003). Under this highly deferential standard of
review, an appellate court does not inquire into the merits of the
controversy, but examines the record “to determine if there were
any apparently reasonable grounds for the action of the [trial
court].” Id., quoting Roberts v. Board of Dirs. of Sch. Dist.,
341 A.2d 475, 478 (Pa. 1975)). “Apparently reasonable grounds”
exist to support a lower court's denial of injunctive relief where
the lower court has properly found that any one of the six
“essential prerequisites” for a preliminary injunction is not
satisfied. Id. at 1002. [Our] scope of review in preliminary
injunction matters is plenary. Warehime v. Warehime, 860
A.2d 41, 46 n.7 (Pa. 2004).
The six essential prerequisites that a moving party must
demonstrate to obtain a preliminary injunction are as follows: (1)
the injunction is necessary to prevent immediate and irreparable
harm that cannot be compensated adequately by damages; (2)
greater injury would result from refusing the injunction than from
granting it, and, concomitantly, the issuance of an injunction will
not substantially harm other interested parties in the proceedings;
(3) the preliminary injunction will properly restore the parties to
their status as it existed immediately prior to the alleged wrongful
conduct; (4) the party seeking injunctive relief has a clear right to
relief and is likely to prevail on the merits; (5) the injunction is
reasonably suited to abate the offending activity; and, (6) the
preliminary injunction will not adversely affect the public interest.
[Warehime, 860 A.2d at 46–47, citing Summit Towne Centre,
Inc., 828 A.2d at 1001].
SEIU Healthcare Pennsylvania v. Commonwealth, 104 A.3d 495,
501-502 (Pa. 2014) (footnote in original quote incorporated into body of text;
parallel citations omitted).
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Here, the trial court determined that Appellant was not entitled to
injunctive relief since it failed to establish an enforceable restrictive covenant
and because Appellant failed to show that Tel-Stream threatened its protected
interests. Appellant raises two challenges to these assessments. First,
Appellant argues that 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. Appellant also
claims that the trial court erred in refusing to consider Appellant’s goodwill
and customer relationships as protected interests. For these reasons,
Appellant asks this Court to enter a preliminary injunction prohibiting
Tel-Stream from soliciting customers and working with Appellant’s
competitors within the designated non-solicitation region. We disagree and
conclude that the trial court had reasonable grounds to reject injunctive relief.
[C]urrently in Pennsylvania, restrictive covenants are enforceable
only if they are: (1) ancillary to an employment relationship
between an employee and an employer; (2) supported by
adequate consideration; (3) the restrictions are reasonably limited
in duration and geographic extent; and (4) the restrictions are
designed to protect the legitimate interests of the employer.
[Hess v. Gebhard & Co. Inc., 808 A.2d 912, 917 (Pa. 2002)];
Piercing Pagoda, Inc. v. Hoffner, 351 A.2d 207, 210 (Pa.
1976); [Morgan's Home Equip. Corp. v. Martucci, 136 A.2d
838, 844-846 (Pa. 1957)].
As with other contracts, for an employment agreement containing
a restrictive covenant to be enforced, consideration is crucial,
whether the covenant is entered into prior to, during, or after
employment ends. Thus, to be valid, a covenant not to compete
must be consummated with the exchange of consideration.
Capital Bakers Inc. v. Townsend, 231 A.2d 292, 293–294 (Pa.
1967) (restrictive covenant in employment contract executed 12
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years after the start of employment was unenforceable for lack of
consideration). If a noncompetition clause is executed at the
inception of the employment, the consideration to support the
covenant may be the award of the position itself. Barb–Lee
Mobile Frame Co. v. Hoot, 206 A.2d 59, 61 (Pa. 1965);
Morgan's, 136 A.2d at 845 (holding covenant not to compete
may be enforceable if contained in an employment agreement
executed upon the “taking of employment”). However, a
restrictive covenant is not required to be included in the initial
employment contract to be valid. Jacobson & Co. v. Int'l.
Environment Corp., 235 A.2d 612, 618 (Pa. 1967); see
generally Jordan Liebman and Richard Nathan, The Enforceability
of Post–Employment Noncompetition Agreements Formed After
At–Will Employment Has Commenced: The “Afterthought”
Agreement, 60 S. Cal. L.Rev. 1465 (1987). There are legitimate
reasons for this, including the development of a worker's
expertise, but only after employment for a period of time:
[I]n many instances, … the insertion of a restrictive covenant
in the original contract would serve no valid purpose. An
employer who hires a novice has no desire to restrict his
present competitive force. Only when the novice has
developed a certain expertise, which could possibly injure the
employer if unleashed competitively, will the employer begin
to think in terms of the protection of a restrictive covenant.
Jacobson & Co., 235 A.2d at 618.
When a non-competition clause is required after an employee has
commenced his or her employment, it is enforceable only if the
employee receives “new” and valuable consideration—that is,
some corresponding benefit or a favorable change in employment
status. [See Pulse Technologies, Inc. v. Notaro, 67 A.3d 778,
781-782 (Pa. 2013)]. Sufficient new and valuable consideration
has been found by our courts to include, inter alia, a promotion, a
change from part-time to full-time employment, or even a change
to a compensation package of bonuses, insurance benefits, and
severance benefits. Without new and valuable consideration, a
restrictive covenant is unenforceable. Maintenance Specialties
Inc. v. Gottus, 314 A.2d 279, 281 (Pa. 1974). More specifically,
the mere continuation of the employment relationship at the time
of entering into the restrictive covenant is insufficient to serve as
consideration for the new covenant, despite it being an at-will
relationship terminable by either party. Pulse Technologies,
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Inc.[, supra.]; George W. Kistler, Inc. v. O'Brien, 347 A.2d
311, 316 (Pa. 1975) (plurality).
In sum, while at common law, covenants in restraint of trade have
long been disfavored by Pennsylvania courts, an agreement
containing a non-compete clause will be upheld, if, among other
considerations, it is supported by adequate consideration. In the
context of requiring an employee to agree to a restrictive covenant
mid-employment, however, such a restraint on trade will be
enforceable only if new and valuable consideration, beyond mere
continued employment, is provided and is sufficient to support the
restrictive clause.
Socko v. Mid-Atlantic Syaytems of CPA, Inc., 126 A.3d 1266, 1274-1276
(Pa. 2015).
Applying these principles to the record before us, we agree with the trial
court that Appellant 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
Appellant now relies. 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. See e.g.
Appellant’s Brief at 8, quoting Testimony of Alexey Aliakhnovich (advising Mr.
Karnei to “take a look at the contract” and “[i]f you do not agree with
something, you could tell us and we can change that before signing[]”).
References to non-compete clauses found in unsigned draft agreements are
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not binding on the parties.2 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.
We also agree that Appellant failed to establish that Tel-Stream
possessed Appellant’s trade secrets or that Appellant’s customer lists were
proprietary. Appellant essentially raises no challenge to the trial court’s
determination that installation of telecommunications equipment does not
involve techniques that are proprietary to Appellant. Moreover, the record
reflects that Mr. Aliakhnovich, Appellant’s sole witness at the preliminary
injunction hearing, readily identified Appellant’s customers in open court
without a request to protect that information as confidential.3 For these
reasons, Appellant is not entitled to relief.
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2 In fact, the written agreement between the parties contains an integration
clause stating the written contract “supersedes all prior understandings and
agreements between the parties hereto regarding the subject matter hereof.”
Complaint, 2/13/18, at Exhibit A p. 22 para. 13.7.
3 Appellant notes that counsel objected before Mr. Aliakhnovich identified the
customers in open court. While this is technically correct, counsel’s objection
referred to the burden of listing Appellant’s customers, not the proprietary
nature of their identity.
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Order affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 1/11/19
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