The Pennsylvania Supreme Court recently decided an issue of first impression regarding “no-hire” (or “no-poach”) provisions in commercial contracts between two companies. In such agreements, one company agrees not to solicit or hire the other’s employees for a certain period of time.  The question in Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC and Beemac Logistics, LLC, 2021 WL 1676399 (Pa. Apr. 29, 2021), was “whether no-hire, or ‘no-poach,’ provisions that are ancillary to a services contract between business entities are enforceable” under Pennsylvania law.  Sidestepping this broader question, the court held only that the no-hire provision in this case was overly broad and therefore unenforceable—leaving open the door for more narrowly tailored no-hire provisions to be held enforceable.  This decision highlights an important consideration for companies doing business in Pennsylvania: the Commonwealth strongly disfavors covenants in restraint of trade, and Pennsylvania courts will not enforce restrictive covenants that are broader than necessary to protect the legitimate interests of the party seeking enforcement.

Background

In Pittsburgh Logistics, Pittsburgh Logistics Systems (PLS), a third-party logistics provider that arranges for the shipping of its customers’ freight with selected trucking companies, entered into an agreement with Beemac Trucking, a shipping company, for Beemac to provide shipping services to PLS’s customers.  In addition to a non-solicitation provision prohibiting Beemac from soliciting PLS’s customers, the agreement included a no-hire provision prohibiting Beemac from directly or indirectly hiring, soliciting for employment, or inducing or attempting to induce any employee of PLS or any of its affiliates to leave their employment with PLS or the affiliate during the term of the agreement and for two years thereafter.  After four PLS employees left PLS and joined Beemac, PLS filed suit, seeking an injunction to enforce the no-hire provision.  The trial court refused to enforce the no-hire provision, denied PLS’s motion for injunctive relief in that regard, and held, in a sweeping decision, that no-hire provisions in commercial contracts between two companies violate public policy and are thus unenforceable as a matter of law.  On appeal, the Pennsylvania Superior Court, sitting en banc, affirmed the trial court’s denial of injunctive relief.  PLS appealed the Superior Court’s decision to the Pennsylvania Supreme Court.

Pennsylvania Supreme Court Decision

Recognizing this was a case of first impression, the Pennsylvania Supreme Court analyzed similar cases in other jurisdictions and adopted the familiar “rule of reason.”  Under the rule of reason analysis, a promise to refrain from competition that is ancillary to an otherwise lawful transaction or relationship is an unreasonable restraint of trade if (1) the restraint is greater than necessary to protect the promisee’s legitimate business interests, or (2) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.  In applying the rule of reason, the court affirmed the denial of injunctive relief and held that the no-hire provision between PLS and Beemac is unenforceable because it is broader than necessary to protect PLS’s interests, and it creates a probability of harm to the public.  The court found the no-hire provision overbroad because it precluded Beemac (and all of its agents or independent contractors) from hiring or soliciting any PLS employees during the term of the contract plus two years thereafter, regardless of whether the PLS employee had worked with Beemac during the term of the contract.  Regarding the public interest, the court held the no-hire provision creates a likelihood of harm to the public—namely, PLS’s employees—because it effectively foists a non-compete on PLS employees (who are not parties to the contract) without their knowledge or consent, and without providing consideration for this restraint.  Balancing PLS’s interest against the overbreadth of the no-hiring provision and the likelihood of harm to the public, the court concluded that the no-hire provision is an unreasonable restraint of trade and therefore unenforceable.

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.  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.