Q: I heard that companies entering into commercial contracts in Pennsylvania can no longer restrict each other from hiring their employees. Is that true?
A: On April 29, the Supreme Court of Pennsylvania held in Pittsburgh Logistics Systems, Inc. v. Beemac Trucking LLC, et. al. that a no-hire provision (commonly referred to as a “no-poach” provision) in a service contract between two business entities was unenforceable as an impermissible restraint of trade because it was overbroad and created a likelihood of harm to nonparties to the contract (i.e., affected employees and the general public). This decision comes at a time where there has been considerable concern that no-poach agreements violate federal and state antitrust laws. In this case, however, the Court did not conclude that all no-hire provisions found in commercial contracts are void as a matter of state law.
Case Background and Ruling
Pittsburgh Logistics Systems, Inc. (PLS), a third-party logistics provider involved in arranging the shipment of its customers’ freight, entered into a motor carrier services contract with Beemac Trucking (Beemac), a shipping company engaged in business with PLS. The contract in relevant part prevented Beemac from “hir[ing], solicit[ing] for employment, induc[ing] or attempt[ing] to induce any employees of PLS to leave their employment with PLS” during the term of the contract and for two years after the contract’s termination. During that time, Beemac hired four PLS employees, and PLS later sued to enjoin Beemac from employing them.
As a case of first impression, the Supreme Court of Pennsylvania conducted an extensive review of various out-of-state decisions, including cases in California, Illinois, Texas, Virginia, and Wisconsin, regarding the enforceability of no-hire provisions in contracts between businesses. The Court evaluated whether the no-hire provision amounted to a restraint of trade by determining (1) whether the restraint on trade was “ancillary to an otherwise valid contract,” and if so, (2) whether the restraint (i.e., geographic scope, duration of time, etc.) was reasonable, which involves a balancing test that measures the parties’ protected interests against the harm to other contractual parties and to the public.
The Court had no trouble concluding that the no-hire provision between PLS and Beemac was ancillary to the main purpose of the service contract. Applying the reasonableness balancing test, the Court acknowledged that PLS had a legitimate interest in restricting its business partners from taking its employees who had specialized knowledge in the logistics industry. Despite this interest, the Court held that the no-hire provision exceeded that interest and also created a likelihood of harm to the public. The court found the provision to be overbroad because the duration of time extended to two years after the contract had ended, and it prevented Beemac from hiring or soliciting any of PLS’ employees, even if they did not work with Beemac during the contract term. In terms of the harm to the public, the Court noted that the provision halted PLS employees’ job opportunities and employment mobility without their consent or ability to negotiate for any consideration in exchange, as they were not parties to the contract. More broadly speaking, the no-hire provision created a probability of harm to the general public by impeding free competition in the job market for the shipping and logistics industry.
Thus, since the Court determined that the no-hire provision’s scope and likelihood of harm to the public exceeded PLS’ interest, it held that the provision was unenforceable.
Considerations for Employers
Although the Supreme Court of Pennsylvania made it clear that broad no-hire provisions in commercial contracts between two business entities likely will be considered unenforceable, it did not venture one step further to suggest (as the trial court did) that all no-hire provisions should be considered invalid. Employers with legitimate interests who want to ensure that these provisions in commercial contracts are enforceable under Pennsylvania law should make sure that the language does not exceed the scope of their interests. As the Court indicated, factors to consider in this assessment include the necessary geographic scope and duration of time, as well as the impact the provision will have on employees and free competition. Alternatively, employers may want to explore options other than no-hire provisions in commercial contracts to achieve the objective of protecting their business interests, such as providing employees with individualized noncompete agreements.
Pennsylvania employers considering whether to use no-hire provisions in commercial contracts or who have existing contracts with such provisions that need updating, should consult with counsel to ensure that they are placed in the best position in light of this recent decision. For more information, please click here to view our client advisory.