Analyzing Issue of First Impression, Penn. Supreme Court Invalidates No-Poach Provision Between Two Businesses in Service Contract

June 09, 2021

On April 29, 2021, the Pennsylvania Supreme Court delivered its long-anticipated decision in Pittsburgh Logistics Systems, Inc. v. Beemac Trucking LLC, et al., unanimously affirming that a no-hire agreement between a business entity and its service vendor was unenforceable because it constituted an unreasonable restraint on trade. The court’s ruling is illustrative of widespread resistance to enforce non-poaching agreements and highlights that Pennsylvania strongly disfavors such restrictions unless they are narrowly tailored.

Pittsburgh, Pa. (June 9, 2021) - On April 29, 2021, the Pennsylvania Supreme Court delivered its long-anticipated decision in Pittsburgh Logistics Systems, Inc. v. Beemac Trucking LLC, et al., No. 31 WAP 2019, 2021 Pa. LEXIS 1853 (Pa. Apr. 29, 2021), unanimously affirming that a no-hire agreement between a business entity and its service vendor was unenforceable because it constituted an unreasonable restraint on trade. The court’s ruling is illustrative of widespread resistance to enforce non-poaching agreements and highlights that Pennsylvania strongly disfavors such restrictions unless they are narrowly tailored.

Factual and Procedural Background

Pittsburgh Logistics Systems, Inc. is a third-party logistics provider that arranges for the shipping of its customers’ freight with designated trucking companies. Beemac Trucking, LLC is one of the trucking providers that Pittsburgh Logistics used. The two businesses entered into a service contract containing a provision that prohibited Beemac from hiring, soliciting, inducing or attempting to induce any employee of Pittsburgh Logistics to leave their employment during the term of the contract and for two years after termination. Beemac thereafter hired four of Pittsburgh Logistics’ employees in violation of the no-hire provision.

Pittsburgh Logistics responded by filing an action for injunctive relief in the Court of Common Pleas of Beaver County. After the preliminary injunction hearing, the trial court refused to enforce the no-hire provision, finding that it violated public policy. Pittsburgh Logistics appealed, and the Pennsylvania Superior Court affirmed the trial court’s decision.

Sitting en banc, 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 – namely Pittsburgh Logistics’ employees – from pursuing work in their chosen industry. The intermediate court further noted that each new services contract between Pittsburgh Logistics and a new carrier “results in a new restriction upon current employees.” In striking down the no-hire provision, the Superior Court reasoned that “f additional restrictions to the agreement between employer and employee are rendered unenforceable by a lack of additional consideration, [the employer] should not be entitled to circumvent that outcome through an agreement with a third party.”

Pennsylvania Supreme Court’s Analysis

Acknowledging that it was presented with an issue of first impression, the Pennsylvania Supreme Court reviewed similar cases from other jurisdictions and then applied the well-known balancing test used to determine the enforceability of restrictive covenants incident to employer-employee contracts and agreements relating to the sale of a business, under which courts evaluate whether the restraint on trade is ancillary to an otherwise valid contract and, if so, whether the restraint is reasonable, weighing the legitimate interest that the restraint is intended to protect against any harm that it might cause to other parties to the contract and the public.

While the court recognized Pittsburgh Logistics’ “legitimate interest in preventing business partners from poaching its employees, who had developed specialized knowledge and expertise,” it nonetheless found that the no-poaching provision was overly broad because it precluded Beemac, and any of its agents and independent contractors, from hiring or soliciting Pittsburgh Logistics’ employees during the term of the agreement, and for an additional two years, and because it was applicable regardless of whether an employee worked with Beemac during the contract. The court emphasized that the no-hire provision created a likelihood of harm to Pittsburgh Logistics’ employees because it “impair[ed] the employment opportunities and job mobility of [such] employees, who [were] not parties to the contract, without their knowledge or consent and without providing consideration in exchange for this impairment.”

Although the Pennsylvania Supreme Court invalidated this particular no-hire provision, it declined to adopt the trial court’s position that all no-hire provisions between companies are per se invalid as against public policy. The court therefore left open the possibility that a more narrowly tailored restrictive covenant could be enforceable under Pennsylvania law.

Implications for Employers

Pennsylvania employers should carefully examine any agreements attempting to preclude those with whom they do business from hiring or soliciting their employees. At bottom, any no-hire provisions should be narrowly crafted to protect a recognized business interest, such as the employer’s trade secrets, confidential information, customer relationships, and specialized training. Employers may also want to consider alternative methods to guard these legitimate interests without depending on the enforcement of no-hire restrictions.

Pennsylvania employers should consult with counsel to evaluate whether their restrictive covenants may implicate the concerns raised by the Pennsylvania Supreme Court and amend current no-hire provisions between businesses to improve the likelihood of enforceability. Employers in other states utilizing or contemplating no-poach provisions should likewise consult with counsel to ensure that their restrictive covenants are in compliance with federal and state laws.

For more information on this decision, contact the author of this alert. Visit our Labor & Employment Practice page for more alerts in this area.

Author:

Sunshine R. Fellows, Partner