Pennsylvania Supreme Court Strikes Down No-Hire Agreement
In Pittsburgh Logistics Sys, Inc. v. Beemac Trucking, LLC, No. 31 WAP 2019, 2021 Pa. LEXIS 1853 (Apr. 29, 2021), the Pennsylvania’s Supreme Court concluded that a no-hire provision in an agreement between two companies was not per se unlawful; however, the Court ultimately concluded that this particular restriction was unenforceable as an unreasonable restraint on trade because it was too broad and because it would harm parties not to the contract.
The dispute centered on a contract between Pittsburgh Logistics Systems, Inc. (PLS), a logistics provider that arranges for the shipping of its customers’ freight, and Beemac Trucking (Beemac), a shipping company that did non-exclusive business with PLS. PLS and Beemac had entered into motor carriage services contract that included the following no-hire provision:
[Beemac] agrees that, during the term of this Contract and for a period of two (2) years after the termination of this Contract, neither [Beemac] nor any of its employees, agents, independent contractors or other persons performing services for or on behalf of [Beemac] … will, directly or indirectly, hire, solicit for employment, induce or attempt to induce any employee of PLS or any of its Affiliates to leave their employment with PLS or any Affiliate for any reason.
No-Hire Provision Breached; No Injunctive Relief
During the term of the agreement, Beemac hired four PLS employees. PLS thereafter filed suit against Beemac and sought an injunction.1 PLS argued that the agreement was reasonable because it had a legitimate business interest in preventing its business partners from poaching its employees. Nonetheless, the trial court denied PLS’ request for injunctive relief, finding that the agreement likely violated public policy and, therefore, PLS did not have a likelihood of success on the merits.
Case of First Impression
The Pennsylvania Supreme Court granted allowance of appeal to address the following question: “Are contractual no-hire provisions which are part of a services contract between sophisticated business entities enforceable under the laws of this Commonwealth?” The Court answered that question in the affirmative, but ultimately found that this particular agreement was not enforceable because it was unreasonable.
Reasonableness Test Applies
In reaching its conclusion, the Court initially observed that the no-hire provision amounted to a restraint on trade, which should be evaluated under “a balancing test to determine the reasonableness of the restraint in light of the parties interests that the restraint aims to protect and the harm to other contractual parties and the public [along with] the reasonableness of the restraint’s geographical scope as well as its duration of time.” (Emphasis added.)
No-Hire Provision Must Be No Broader Than Necessary
Applying this balancing test, the Court acknowledged that, “PLS had a legitimate interest in preventing its business partners from poaching its employees, who had developed specialized knowledge and expertise in the logistics industry during their training at PLS. … However, the no-hire provision is both greater than needed to protect PLS’s interest and creates a probability of harm to the public.”
The Court reasoned that the no-hire provision was “overbroad because it precludes Beemac, and any of its agents or independent contractors, from hiring, soliciting, or inducing any PLS employee or affiliate for the one-year term of the contract plus two years after the contract ends [and because it] precluded Beemac from hiring or soliciting all PLS employees, regardless of whether the PLS employees had worked with Beemac during the term of the contract.”
The Court also determined that the no-hire provision created a likelihood of harm to the public because it “impairs the employment opportunities and job mobility of PLS employees, who are not parties to the contract, without their knowledge or consent and without providing consideration in exchange for this impairment,” and it undermines free competition in the labor market in the shipping and logistics industry, which creates a likelihood of harm to the general public.
Accordingly, given the “overbreadth of the no-hire provision and the likelihood of harm to public,” the Court held the provision was unreasonable and unenforceable.
Companies Competing for Employees Is Encouraged
Based on this decision, employers should be mindful that no-hire provisions in agreements with other companies will not be enforceable unless they are narrowly drawn to protect the employer’s legitimate business interests. Employers also should also be mindful of the potential antitrust implications of such agreements. For example, the Court’s decision noted the submission of an amicus curiae brief from Pennsylvania Attorney General Josh Shapiro in support of Beemac that pointed out the recent focus of the Department of Justice, along with several state attorneys, on “no poach” agreements.
The take away is that employers should be cautious when considering agreements with another employer not to hire or solicit their employees. At a minimum, such provisions should be narrowly drawn to protect a legitimate business interest, such as protecting employer’s trade secrets, confidential information, customer relationships, and specialized training. In addition, even if the no-hire agreement may be enforceable under Pennsylvania law, employers should consider the potential impact of federal antitrust laws.
- PLS also filed suit against its former employees alleging that they had breached the non-competition and non-solicitation provisions of their employment agreements. The court denied enforcement of the non-competition provision because it was too broad (worldwide), but enjoined them from soliciting PLS’ customers.