At the end of April, the Pennsylvania Supreme Court decided whether no-hire, or “no-poach,” provisions that are ancillary to a services contract between business entities are enforceable under the laws of this Commonwealth. It held that they are not.[1]

Pittsburgh Logistics Systems, Inc. (“PLS”) is a third-party logistics provider that arranges for the shipping of freight with selected trucking companies. Beemac Trucking (“Beemac”) is a shipping company that conducts non-exclusive business with PLS.

In 2010, PLS and Beemac entered into a Motor Carriage Services Contract. It contained both a non-solicitation provision and the no-hire provision. While the contract was in force, Beemac hired four PLS employees. On November 29, 2016, PLS filed an action in the Court of Common Pleas of Beaver County against Beemac alleging breach of contract, tortious interference with contract, violation of the Pennsylvania Uniform Trade Secrets Act, and civil conspiracy.

The lower court opined that 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. The lower court felt that if an employer wants to limit its employees from future competition, the matter should be addressed directly between the employer and employee, not between competing businesses. The Superior Court affirmed, with a dissent,[2] and the issue was ultimately heard by the Pennsylvania Supreme Court.

PLS argued before the Court that arm’s-length contracts between sophisticated entities are presumptively enforceable and should not be ignored by the courts. Beemac argued that the Superior Court correctly applied Pennsylvania law regarding restraints of trade in holding that the no-hire provision violates public policy. It argued that PLS failed to explain why a company, already in a superior bargaining position when hiring and negotiating with employees, should be free to contract away the rights of its employees by way of contracts to which they are not parties and for which they receive no consideration.

The Court applied the reasonableness test that applies to ancillary restraints on trade. In so doing, the Court concluded that the no-hire provision was ancillary to the principal purpose of the shipping contract between PLS and Beemac and that it was 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. It further concluded that 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. However, it determined that the no-hire provision was both greater than needed to protect PLS’s interest and created a probability of harm to the public.

The Court deemed it overbroad because it precluded 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 ended. The no-hire provision precluded Beemac from hiring or soliciting all PLS employees, regardless of whether the PLS employees had worked with Beemac during the term of the contract. Further, the no-hire provision created a likelihood of harm to the public, i.e., non-parties to the contract. The no-hire provision impaired the employment opportunities and job mobility of PLS employees, who were not parties to the contract, without their knowledge or consent and without providing consideration in exchange for the impairment. Balancing PLS’s interest against the overbreadth of the no-hire provision and the likelihood of harm to the public, the Court held that the no-hire provision was unreasonably in restraint of trade and therefore unenforceable.

This is a major development in the law and significantly impacts the enforceability of no-hire provisions, and potentially non-solicitation provisions as well.

Practice Note:

In practice, no-hire and non-solicitation provisions are often contained in Master Service Agreements or Consulting Agreements between companies, as well as certain Confidentiality Agreements between companies looking to enter into a transaction(s). The goal historically was to prevent the loss of workforce or the direct hire of employees to protect against the curtailment of services which were the subject of the underlying arrangement. The forgoing decision now puts into serious question the enforceability of such contractual provisions between companies in Pennsylvania.

[1] Pittsburgh Logistics Sys., Inc. v. Beemac Trucking, LLC, No. 31 WAP 2019, 2021 WL 1676399, at *15 (Pa. Apr. 29, 2021).

[2] Pittsburgh Logistics Sys., Inc. v. BeeMac Trucking, LLC, 2019 PA Super 13, 202 A.3d 801, appeal granted, 216 A.3d 1032 (Pa. 2019), and aff’d, No. 31 WAP 2019, 2021 WL 1676399 (Pa. Apr. 29, 2021).