Labor & Employment Law Daily No-poach provision ancillary to businesses’ services contract unenforceable
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Wednesday, May 5, 2021

No-poach provision ancillary to businesses’ services contract unenforceable

By Brandi O. Brown, J.D.

When a shipping company poached employees from a third-party logistics provider, the provider responded by suing both the shipping company and its former employees.

Weighing in on a question of first impression and an issue that has divided courts, the Pennsylvania Supreme Court applied a reasonability test for ancillary restraints on trade to conclude that a no-hire provision between two business entities was unenforceable. The appeal stemmed from lawsuits brought by a third-party logistics provider after the shipping company with which it worked hired four of its employees. The Superior Court affirmed a trial court decision vacating an injunction prohibiting the shipping company from hiring former employees of the logistics provider. That order was affirmed (Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC, April 29, 2021, Mundy, S.).

No poach provision. In 2010, a third-party logistics provider (PLS) and a shipping company (Beemac) entered into a Motor Carriage Services Contract that contained both a non-solicitation provision and a no-hire provision. The latter provided that the Beemac would not hire away or induce any of PLS’s employees to leave. Nevertheless, while the contract was still in force the Beemac hired four of PLS’s employees. PLS filed suit against Beemac, as well as a related suit against the poached employees, and sought injunctive relief.

Initially the court issued an order enjoining Beemac from employing former PLS employees. Soon thereafter, however, the court held a hearing and vacated the injunction with respect to the no-hire provision, stating that although the case law in Pennsylvania on the issue was lacking, it believed these types of contracts should be void against public policy.

Public policy violation. PLS appealed to the Superior Court, which issued an en banc opinion affirming the trial court. The Superior Court, with one judge dissenting, agreed that the provision violated public policy by preventing non-signatories, in this case the PLS employees, from exploring other work opportunities in a similar business. PLS sought allowance to appeal, which the Supreme Court granted in order to address the question: “Are contractual no-hire provisions which are part of a services contract between sophisticated business entities enforceable under the law of this Commonwealth?”

Other courts. Noting the dearth of Pennsylvania case law governing no-hire provisions, the Pennsylvania Supreme Court found it helpful to review decisions from other jurisdictions. First, it reviewed courts and their decisions finding such provisions unenforceable, including appellate-level courts in Wisconsin, California, and Texas. Then it reviewed courts and their decisions finding that similar no-hire agreements, even though they were in restraint of trade, were permitted, including appellate-level courts in Virginia and Illinois, as well as a decision from a U.S. district court in Pennsylvania.

Then the court considered the arguments of the parties. Not surprisingly, PLS took issue with the decisions from other jurisdictions that the Superior Court had relied upon in reaching its conclusion and argued that the weight of authority from other courts supported the enforcement of reasonable no-hire provisions that are incidental to business entities’ commercial agreements. By contrast, Beemac argued that the Superior Court had correctly applied Pennsylvania law, that the Commonwealth has a “long history of disfavoring restrictive covenants,” that the DOJ and various states’ attorney generals stood against such restrictions, and that “governmental practice, ethical and moral standards, and persuasive decision(s) of other jurisdictions all weigh against the enforcement of no-hire restrictions.”

GeoDecisions decision. One bone of contention between the parties was the unpublished decision from the U.S. district court in Pennsylvania, GeoDecisions v. Data Transfer Solutions, LLC, 2010 WL 5014514 (M.D. Pa. Dec. 3, 2010). In that decision, the federal district court had also considered a no-hire provision between direct competitors in the information technology field. The court ultimately entered a preliminary injunction prohibiting further poaching. It recognized that such agreements were construed as contracts in restraint of trade and opined that the no-hire provision would be void under Pennsylvania law unless it was ancillary, necessary to protect a party’s legitimate interest, supported by adequate consideration, and reasonably limited with regards to time and territory. It evaluated the agreement under those requirements and found that the provision was not unreasonable.

PLS faulted the Superior Court for not following that decision, which it argued had a comparable no-hire provision. For its part, Beemac asserted that the court in GeoDecisions had erred in concluding that Pennsylvania courts would have liberally construed the ancillary rule to enforce a restraint of trade in this context.

On balance, not reasonable. The court came down on the side of Beemac. In order to determine the enforceability of a provision in restraint of trade that is ancillary to a contract’s principle purpose, it explained, it would use a balancing test to determine the restraint’s reasonableness. Factors included would be the parties’ interests that the restraint aimed to protect, the harm to other contractual parties, the harm to the public, and the reasonableness of the restraint’s geographic scope and time duration. The no-hire provision in this case was ancillary and it was a restraint on trade, the court explained.

PLS had a legitimate interest in preventing business partners from poaching its employees. However, the provision was greater than necessary to protect PLS’s interest and it created a probability of harm to the public. It was overbroad because it precluded Beemac from hiring PLS employees during the one-year term of the contract and two years after and it did not distinguish between those employees who had worked with Beemac during the contract’s term.

It also created a likelihood of harm to the public because it impaired employment opportunities and job mobility of PLS employees, who were not parties to the contract, without their knowledge, consent, or consideration. The injury to them was not hypothetical—PLS enforced the no-hire provision and the effect of its enforcement would have deprived its former employees of their current jobs and livelihood. It also undermined free competition in the labor market. Balancing PLS’s interest against the overbreadth of the provision and the likelihood of harm, the court concluded that the provision was unreasonably in restraint of trade and was unenforceable.

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