HARRISBURG – In what was believed to be an issue of first impression, the Supreme Court of Pennsylvania recently issued a unanimous ruling which declared an expansive no-hire provision between two companies null and void under state law – while at the same time not ruling on the legality of such provisions in general.
On April 29, the state Supreme Court released its ruling in the case of Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC Et.Al, which held that a contractual no-hire provision in a services contract specifically between these two companies was not enforceable under Pennsylvania law.
In doing so, this finding echoed an earlier ruling from the Superior Court of Pennsylvania, which decided that such a no-hire clause was an unreasonable restriction on free trade.
However, the state Supreme Court’s ruling may leave the door open for more specific no-hire clauses to be enforced in the future.
On Aug. 30, 2010, plaintiff PLS, a third-party logistics provides which provides for the shipping of its’ customers’ freight with selected trucking companies, entered into a written agreement with defendant Beemac, a shipping company which transacted non-exclusive business with PLS.
That agreement contained both non-solicitation and no-hire provisions, which were to be in force not only during the term of the contract, but for an additional two years afterwards. During the contract, Beemac hired four PLS employees, who were not parties to the agreement between the two companies.
In response, PLS filed suit, seeking an injunction to enforce the no-hire provision. However, the Beaver County Court of Common Pleas refused to enforce that provision, denied PLS’s motion for injunctive relief with respect to the same, and further ruled that no-hire provisions in commercial contracts between two companies violate public policy, and are thus unenforceable as a matter of law.
In an en banc ruling on appeal, the Superior Court, upheld the trial court’s denial of injunctive relief.
PLS then appealed the Superior Court’s decision to the state Supreme Court.
As the above case was an issue of first impression, the Supreme Court looked to how other jurisdictions had decided similar cases for guidance.
State Supreme Court Justice Sallie Updyke Mundy authored the Court’s opinion, which found the no-hire provision to be “overbroad” and “restrictive.”
“The no-hire provision is a restraint on trade because the two commercial entities agreed to limit competition in the labor market by promising to restrict the employment mobility of PLS employees. PLS had a legitimate interest in preventing its business partners from poaching its employees, who had developed specialized knowledge and expertise in the logistics industry during their training at PLS,” Mundy said.
“However, the no-hire provision is both greater than needed to protect PLS’s interest and creates a probability of harm to the public. It is overbroad because it precludes Beemac, and any of its agents or independent contractors, from hiring, soliciting, or inducing any PLS employee or affiliate for the one-year term of the contract plus two years after the contract ends.”
According to Mundy and her colleagues, the no-hire provision prevented Beemac from hiring or soliciting all PLS employees, regardless of whether the PLS employees had worked with Beemac during the term of the contract.
Mundy pointed out that the Superior Court noted, “By the plain reading of the language of this restrictive provision, it was meant to have effect in the broadest possible terms.”
“Further, the no-hire provision creates a likelihood of harm to the public, i.e., non-parties to the contract. The no-hire provision impairs the employment opportunities and job mobility of PLS employees, who are not parties to the contract, without their knowledge or consent and without providing consideration in exchange for this impairment,” Mundy said.
“Further, the injury to PLS employees is not hypothetical. In this case, PLS enforced the no-hire provision by seeking to enjoin Beemac from employing the former PLS employees who had already left PLS and obtained employment with Beemac. If PLS was successful, the effect of its enforcement of the no-hire provision would have deprived its former employees of their current jobs and livelihoods.”
Mundy added that the no-hire provision undermines free trade and competition.
“The no-hire provision undermines free competition in the labor market in the shipping and logistics industry, which creates a likelihood of harm to the general public. Balancing PLS’s interest against the overbreadth of the no-hire provision and the likelihood of harm to the public, we conclude that the no-hire provision is unreasonably in restraint of trade and therefore unenforceable,” Mundy said.
Some attorneys feel that while the ruling declared this particular no-hire provision unenforceable, it did not necessarily prohibit the entire concept of such provisions in general.
“Perhaps most significant is what the Pennsylvania Supreme Court did not conclude. The court conspicuously sidestepped the more far-reaching issue of first impression and did not expressly adopt (or reject) the trial court’s sweeping conclusion that no-hire provisions between employers are void as against public policy and thus unenforceable as a matter of law,” Jonathan Shaw of Littler Mendelson said.
“Although the court’s decision dealt a major blow to inter-company no-hire agreements, it arguably left open the possibility that a more narrowly tailored no-hire agreement may be enforceable under Pennsylvania law. Employers in Pennsylvania should consult with counsel to ensure their restrictive covenant agreements contain the most up-to-date provisions for enforceability.”
Supreme Court of Pennsylvania case 31 WAP 2019
Superior Court of Pennsylvania case 134 WDA 2017
Beaver County Court of Common Pleas case 11571 of 2016
From the Pennsylvania Record: Reach Courts Reporter Nicholas Malfitano at nick.malfitano@therecordinc.com