The state Supreme Court agreed with the Superior Court's determination, concluding that the no-hire provision at issue "is unreasonably in restraint of trade and therefore unenforceable."
In its April 29, 2021, opinion, Pittsburgh Logistics Systems v. Beemac Trucking,?A.3d?, No. 31 WAP 2019, 2021 WL 1676399 (Pa. Apr. 29, 2021), the Supreme Court of Pennsylvania weighed in on whether no-hire, or "no-poach," provisions that are ancillary to a services contract between business entities are enforceable under Pennsylvania law. The court declined to hold such provisions per se unenforceable. Its answer for the clause at issue, however, was a resounding "no." Now, more than ever, it is critical for Pennsylvania companies and employers to consult with legal counsel to evaluate any no-poach provisions in commercial and employment agreements to increase the chances that these provisions will be upheld.
In the underlying case, Pittsburgh Logistics Systems (PLS), a third-party logistics provider, entered into an agreement to provide logistics services to Beemac Trucking and Beemac Logistics. The agreement included a no-poach provision prohibiting Beemac-during the one-year term of the agreement and for two years thereafter-from directly or indirectly hiring, soliciting for employment, inducing or attempting to induce any employees of PLS or its affiliates to leave their employment with PLS or the affiliate.
During the term of the services contract, Beemac hired four PLS employees. PLS brought separate suits against Beemac and the employees. In the case against Beemac, PLS sought an injunction to enforce, among other things, the no-hire provision. The trial court-noting that no reported Pennsylvania decision had yet addressed this issue-refused to enforce the no-hire provision, citing cases in other jurisdictions where similar provisions were held to be unenforceable. PLS appealed the trial court's denial of its preliminary injunction motion seeking to enforce the no-hire provision in its contract with Beemac.
On January 11, 2019, the Pennsylvania Superior Court, sitting en banc, affirmed the trial court's decision. See Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC & Beemac Logistics, LLC, 202 A.3d 801 (Pa. Super. Ct. 2019). The Superior Court agreed with the trial court's reasoning that the no-hire provision violated public policy because it prevented nonsignatories to the contract-i.e., PLS employees-from pursuing work in their chosen field. Id. at 808. The Superior Court also noted that each new services contract between PLS and a new carrier "results in a new restriction upon current employees." Id. In striking down the no-hire covenant, the Superior Court reasoned, "If additional restrictions to the agreement between employer and employee are rendered unenforceable by a lack of additional consideration, PLS should not be entitled to circumvent that outcome through an agreement with a third party." Id. at 810.
The Supreme Court of Pennsylvania granted PLS's appeal petition on July 24, 2019, to address the following issue: "Are contractual no hire provisions which are part of a services contract between sophisticated business entities enforceable under the law of this Commonwealth?" Pittsburgh Logistics Sys., Inc. v. Beemac Trucking, LLC & Beemac Logistics, LLC, 216 A.3d 1032 (Pa. 2019) (per curiam). The state Supreme Court agreed with the Superior Court's determination, concluding that the no-hire provision at issue "is unreasonably in restraint of trade and therefore unenforceable." Pittsburgh Logistics Systems, 2021 WL 1676399, at *15.
Acknowledging the lack of Pennsylvania case law governing no-hire provisions, the Supreme Court of Pennsylvania conducted a review of the decisions from other jurisdictions on which the parties and the lower courts relied. See id. at *4-9. In so ruling, however, the court applied the familiar balancing test Pennsylvania courts have employed for years to determine the enforceability of restrictive covenants ancillary to employer-employee contracts and contracts relating to the sale of a business. Under this test, courts must determine (1) whether the restraint on trade is ancillary to an otherwise valid contract and, if so, (2) whether the restraint is reasonable, weighing a party's legitimate interest that the restraint aims to protect against any harm that the restraint might cause to other contractual parties and the public. See id. at 14 (citing Hess v. Gebhard & Co. Inc., 808 A.2d 912 (Pa. 2002); Restatement (Second) of Contracts § 188(1)).
After applying the balancing test, the court found that PLS had a legitimate business interest in preventing its business partner, Beemac, from poaching PLS's employees who had developed specialized knowledge and expertise in the industry as a result of PLS's training. Id. at *14. The court affirmed the finding that the no-hire provision was unenforceable in this case, finding that the provision was "both greater than needed to protect PLS's interest" and that it created a "probability of harm to the public." Id. The court found that the no-hire provision in the contract between PLS and Beemac failed the reasonableness test because:
- It precluded the solicitation and hiring of all PLS employees, regardless of whether the employee actually worked with Beemac during the term of the services contract;
- It precluded Beemac (and any of its agents or contractors) from hiring, soliciting or inducing any PLS employee or affiliate for the one-year term of the contract, plus two additional years after the contract's termination;
- It impaired the job mobility of PLS employees who had not consented to (or were not even aware of) the restrictions and who were not provided any consideration for additional restrictions through their own employment arrangements with PLS; and
- It undermined "free competition in the labor market in the shipping and logistics industry, which creates a likelihood of harm to the general public."
Id. at *14-15.
What This Means for Employers
In light of this decision, Pennsylvania companies and employers should consult legal counsel to:
- Modify similar no-poach provisions in their commercial contracts with other businesses or customers, to increase the likelihood of enforceability under Pennsylvania law.
- Determine whether the restrictive covenants in their employment contracts may implicate the concerns raised by the state Supreme Court.
For More Information
If you have any questions about this Alert, please contact Shannon Hampton Sutherland, Lawrence H. Pockers, Emily Kowey Roth, Thomas G. Servodidio, any of the attorneys in our Non-Compete and Trade Secrets Group, any of the attorneys in our Employment Law and Management Labor Relations Group or the attorney in the firm with whom you are regularly in contact.
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