The Pennsylvania Supreme Court Strikes Down a No-Hire Agreement as an Unreasonable Restraint on Trade

Recently, in Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC, No. 31 WAP 2019, — A.3d –, 2021 WL 1676399 (Apr. 29, 2021), the Pennsylvania Supreme Court found that a no-hire provision that was ancillary to a services contract between two businesses was an unreasonable restraint on trade and was therefore not enforceable. In ruling on this matter of first impression, the Court identified several important factors that employers should consider before entering into a no-hire provision that places restrictions on the movement of their employees.

Background on Case:

Pittsburgh Logistics Systems, Inc. (“PLS”) is a third-party logistics provider that arranges for the shipping of its customers’ freight with selected trucking companies. PLS contracted with Beemac Trucking (“Beemac”) to provide such shipping services, and the two entered into an agreement that contained the following non-solicitation and no-hire provisions:

14.6 CARRIER [Beemac] agrees that, during the term of this Contract and for a period of two (2) years after the termination of this Contract, neither CARRIER nor any of its employees, agents, independent contractors or other persons performing services for or on behalf of CARRIER in connection with CARRIER’S obligations under this Contract will, directly or indirectly, hire, solicit for employment, induce or attempt to induce any employees of PLS or any of its Affiliates to leave their employment with PLS or any Affiliate for any reason.

During the pendency of this agreement, Beemac hired four PLS employees. PLS then sued Beemac for breach of contract, among other claims. PLS also brought an action against the four former employees for breach of contract, alleging they had breached the non-competition and non-solicitation provisions of their employment contracts.

The case eventually made its way to the Pennsylvania Supreme Court. There, the Court balanced the fact PLS had a legitimate business interest in preventing its business partners from poaching employees who had acquired particular training and expertise by virtue of their PLS employment against the public harm that the restriction caused. Ultimately, the latter interest won out, as the Court determined that the no-hire provision at issue—which was not limited to PLS employees who had worked with Beemac—was simply too broad. As such, the no-hire provision was likely to impair the employment opportunities and job mobility of all PLS employees, the vast majority of whom had no knowledge of (and thus had never consented to) such restrictions. The Court also found that the restriction undermined free competition in the shipping and logistics industry labor market and thus harmed the general public.

In the course of reaching its conclusion, the Court examined the divided views of jurisdictions around the county on the enforceability of no-hire provisions between companies, which themselves are helpful in understanding the state of the law on the issue. The Court noted that the courts in Wisconsin and California had rejected similar no-hire provisions as unreasonable, while courts in Texas, Virginia and Illinois had approved no-hire arrangements.

Takeaways:

The Pittsburgh Logistics decision, including its survey of similar cases from other states, highlights the fact-intensive nature of any analysis of an employee no-hire provision. It is fair to say that, even after Pittsburgh Logistics, Pennsylvania employers are not per se prohibited from entering into a contract containing a no-hire agreement or enforcing such an agreement. However, such agreements are likely to be impermissible in many or most situations, and employers who nevertheless seek to enter into such agreements should consider the following factors:

  1. Is the no-hire provision ancillary to the principal purpose of the contract?
  2. Does the employer have a legitimate interest in preventing its business partners from poaching its employees, such as preventing employees from using their specialized knowledge and skills in competition with the employer?
  3. Is the no-hire provision narrowly tailored to achieve its purpose to protect the employer’s interest? Here, employers should consider the smallest set of employees, the shortest amount of time, and the narrowest geographic scope possible to achieve its purpose.
  4. To what extent does the no-hire provision impair the employment opportunities and job mobility of employees who are not parties to the contract, without their knowledge or consent and without providing consideration in exchange for this impairment?
  5. Would a non-solicitation agreement that does not impair employment mobility accomplish the employer’s goals?
  6. Finally, the reasonableness of a no-hire provision is a fact-intensive inquiry. Courts will look to balance the employer’s legitimate interest in protecting its workforce with the likelihood of harm to the public, in determining whether the no-hire provision is unreasonable in restraint on trade and therefore unenforceable.

Lastly, it is worth noting that this issue is not unique to Pennsylvania. In fact, the trend towards scrutinizing different types of “no poach” agreements is similarly hot at the federal level. The focus there arguably started in October 2016 with the Department of Justice and Federal Trade Commission’s publication of “Antitrust Guidance for Human Resource Professionals.” Since then, the DOJ (and some state Attorneys General) have been pursuing civil claims targeting agreements between competitors and franchisees not to solicit each other’s employees and, most recently, the DOJ has filed criminal actions. Thus, employers would be wise to tread very carefully in pursuing any sort of agreement not to hire or solicit another employer’s employees, and should do so only in narrow, targeted situations and only after consulting with employment and antitrust counsel.