Until a few years ago, employment restrictions such as noncompetes and no-hire clauses were regularly enforced (a notable exception being in California). That changed in 2016, when the Department of Justice Antitrust Division announced that “no poach/no-hire” agreements between companies would be considered for criminal prosecution. This January, for the first time, the DOJ criminally prosecuted a company for allegedly entering no-poach agreements with others in the health-care industry.
This policy and related prosecutions were undertaken pursuant to the Sherman Act under federal law, but the Pennsylvania Supreme Court recently made clear that the same principle could be carried through to state law cases, regardless of the size of the employers. In a case of first impression, the Pennsylvania Supreme Court unanimously held in Pittsburgh Logistics Sys. Inc. v. Beemac Trucking LLC, that a “no hire,” or “no poach” provision, not ancillary to the sale of a business, is unenforceable.
Trial Court Rules Clauses Unenforceable
Pittsburgh Logistics Systems Inc. (PLS), a third-party logistics provider that arranges customers’ freight shipments with selected trucking companies, and BeeMac Trucking LLC (BeeMac), a shipping company, entered into a motor carriage services contract. The contract contained non-solicitation and no-hire provisions.
Under the no-hire provision, BeeMac agreed that during the term of the contract, BeeMac, and others performing services on its behalf, would not “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 term of the contract, BeeMac hired four PLS employees. PLS filed an action in state court, along with a motion for preliminary injunction, to enforce the no-hire and non-solicitation provisions. It also filed a companion case against the four employees, and sought an injunction based upon those employees’ alleged breach of the noncompete and non-solicitation provisions of their employment contracts.
Following a hearing on the injunction motions, the trial court held that the noncompete clauses were unenforceable as to the individuals and should not be modified by the court, citing the provisions’ worldwide scope (and found that the contract of one employee was void in its entirety). The court did enforce the non-solicitation clause against the company and three of the employees.
The court then moved on to the no-hire provision and found it void against public policy:
“We believe these types of no-hire contracts should be void against public policy because they essentially force a non-compete agreement on employees of companies without their consent, or even knowledge, in some cases. We believe that if an employer wishes to limit its employees from future competition, this matter should be addressed directly between the employer and employee, not between competing businesses.”
The trial court also found the legitimate business interests of PLS were adequately protected by the enforcement of the non-solicitation provisions. A divided superior court affirmed, as did the superior court en banc.
Broad Rejection of Clauses on Appeal
The Pennsylvania Supreme Court granted 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 law of this Commonwealth?”
The court began its analysis by recognizing Pennsylvania’s “long history of disfavoring restrictive covenants,” except for valid covenants not to compete and contractual restraints as part of the sale of a business. It also recognized the DOJ’s recent strong opposition to no-hire restrictions.
Of note, the Pennsylvania attorney general filed an amicus brief in the PLS case, stating its position that “no poach” clauses are a violation not only of public policy but also a per se violation of state and federal antitrust law. The supreme court utilized the DOJ’s test of reasonableness to evaluate the enforceability of a no-hire provision. This test finds an ancillary restraint on competition unreasonable if either of the following two factors are present:
- the restraint is greater than necessary to protect the promisee’s legitimate interest; or
- the promisee’s need is outweighed by the hardship to the promisor and likely injury to the public.
The court found that PLS had a legitimate interest in avoiding poaching of its employees, who possess expertise in logistics. Despite that, it concluded that “the no-hire provision is both greater than needed to protect PLS’s interest and creates a probability of harm to the public.”
The terms of the no-poach clause prohibited BeeMac from hiring or soliciting even those PLS employees who had not worked with BeeMac; impaired the job prospects and mobility of PLS employees, who were not parties to the contract, without their knowledge or consent; and, did so without providing them consideration.
The invalidation of the “no-poach” agreement in this case was a broad rejection of the continuing viability of such provisions. The Pennsylvania Supreme Court adopted the perspective and analytical framework employed in a typical federal antitrust claim.
At a minimum, companies need to assess any employment restriction both in terms of time and scope and ensure that restrictions are reasonably necessary to adequately protect the employer’s legitimate business interest.
In assessing collaborations or joint ventures with other companies, each company should consider whether the collaboration provides adequate value even in the absence of a clause that limits employees’ movement as between the parties, and avoid inclusion of unnecessary, and potentially unenforceable, no-poach provisions.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
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Paul D. Steinman is a business litigator with Cozen O’Connor in Pittsburgh. He has successfully defended public and private corporations at trial and against appeal, including a 2018 precedential decision in Third Circuit protecting the corporate veil, and, most recently, as lead counsel representing BeeMac in this case at trial and appeal.
David Reichenberg is co-chair of Cozen O’Connor’s Antitrust practice and is based in New York City. He frequently litigates and advises Fortune 500 companies on antitrust matters.