Pennsylvania Supreme Court Voids Certain “No Poaching” Agreements

by | Jun 29, 2021 | Business Law

The Pennsylvania Supreme Court, in a case of first impression, held that a “no poaching” agreement that was a part of a contract between two business entities was an unreasonable restraint of trade and therefore unenforceable.

A “no poaching” agreement is an agreement between two employers that neither will solicit or hire employees of the other.

This issue arose in the recent decision in Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC, et al.  Pittsburgh Logistics Systems (“Logistics”) is a company that acts as a middle man between shippers and transportation companies. Beemac Trucking (“Beemac”) is a trucking company that does business with Logistics, as well as others. Pursuant to the written agreement between them, Logistics referred its clients who needed shipping services to Beemac.

One of the provisions of that contract prohibited Beemac from soliciting any clients of Logistics or shippers whom Logistics had introduced to Beemac during the contract term and for a period of one year thereafter. Another provision prohibited Beemac from soliciting or hiring any employees of Logistics or any of its affiliates during the life of the agreement, which was annual with automatic renewals unless terminated, for a period of two years thereafter. Logistics’ contracts with its employees contained world wide non-competition and non-solicitation clauses, effective for two years following termination of employment.

Beemac hired four of Logistics’ employees. Logistics sued the employees for breach of their non-competition clauses, and separately sued Beemac both for breach of the no-poaching agreement, and for other alleged torts.

The court of common pleas, in the action against the employees, invalidated the non-compete clauses as being unduly oppressive, but found the non-solicitation clauses to be reasonable. It therefore enjoined the employees from soliciting any of Logistics’ clients on behalf of Beemac during the protective period.

The lower court, in the action against Beemac, refused to enforce the no-hire provision as void against public policy because it imposed a non-compete agreement on Logistics’ employees without their consent and because it was broader than necessary to protect Logistics’ protected interests in its clients. Accordingly, it refused to enjoin Beemac from employing those four former employees of Logistics.

The denial of the injunction was appealed to the Superior Court, which affirmed the lower court. The Supreme Court agreed to hear the further appeal to resolve this issue: “Are contractual no-hire provisions which are part of a services agreement between sophisticated business entities enforceable under the law of this Commonwealth?”

Because this issue had not been decided in Pennsylvania before, the Supreme Court looked at the law of other jurisdictions before focusing on Pennsylvania law. It then began its analysis of Pennsylvania law by observing that Pennsylvania has a long history of disfavoring restrictive employment agreements. These agreements are enforceable only if they are part of an employment relationship, are supported by adequate consideration, are limited in duration and geography and are designed to protect a legitimate interest of the employer. They are also enforceable if a part of the purchase and sale of a business.

Where a restrictive covenant supplements the principal purpose of a contract, the court will balance the interests to be protected against the harm to other contractual parties and the public in general, as well as the geographic extent and the duration.

Applying these tests, the court found that the clause was overly broad because it precluded Beemac and its agents or independent contractors from hiring any employee of Logistics during the tem of the contract and for two additional years, even if the employees had nothing to do with Beemac. The court found harm not only to the employees of Logistics, who were restricted in their future employment without their knowledge, consent or consideration, but to the public, because the provision undermined free competition in the labor market.

Accordingly, the court found that this particular provision was an unreasonable restraint of trade and therefore unenforceable.

Please be sure to consult with an attorney before you sign any contract. Because contracts are essential for successful business endeavors, you want to be sure that your interests are protected and that the promises are enforceable, Please call us at (610) 397-1820 to schedule a free consultation.