No-poach contract clauses ruled ‘unreasonable’ by Pennsylvania Supreme Court
The Pennsylvania Supreme Court recently ruled that no-poach contracts are not enforceable in a dispute between two shipping companies.
On April 29, Pennsylvania’s high court affirmed two lower courts’ decision that essentially prohibits no-hire, also known has no-poaching, provisions in contracts between businesses. The case stems from a contract between Pittsburgh Logistics Systems and Beemac Trucking that contains a provision that prohibits Beemac Trucking from hiring a Pittsburgh Logistics employee during the contract period and two years after termination of the contract.
According to the Supreme Court opinion, Beemac Trucking entered into a one-year contract with Pittsburgh Logistic in August 2010. That contract renewed on a year-to-year basis until either party terminated it. Within the contract were two provisions. A nonsolicitation provision prohibits Beemac Trucking from seeking a contract with any Pittsburgh Logistics client without its involvement during the contract and a year after termination. Another no-poach provision prohibits the trucking company from hiring Pittsburgh Logistics employees up to two years after termination of the contract.
Despite the no-poach provision, Beemac Trucking hired four Pittsburgh Logistics employees during the contract period. Consequently, Pittsburgh Logistics filed a lawsuit against the trucking company in November 2016 alleging breach of contract. In December 2016, Beemac Trucking was prohibited from employing those former Pittsburgh Logistics workers until the matter was resolved in the courts.
A separate lawsuit was filed by Pittsburgh Logistics against the four employees for breaching the noncompetition and nonsolicitation provisions in their employment contracts. Similarly, the court prohibited them from working at the trucking company pending a hearing.
Just a few days after the orders, the court lifted the injunction for the employees.
The court found that the clauses were “unduly oppressive and cannot be subject to equitable modification.”
The trial court ruled that the four employees are still prohibited from soliciting Pittsburgh Logistics clients, but they are allowed to work for Beemac Trucking.
Although the trial court easily determined that Pittsburgh Logistics’ no-soliciting provision was just, there is a lack of case law in Pennsylvania regarding no-poach clauses. Some states allow it, while others do not. The trial court decided to prohibit such clauses.
“We believe these types of no-hire contracts should be void against public policy because they essentially force a noncompete agreement on employees of companies without their consent, or even knowledge, in some cases,” the trial court ruled. “We believe that if an employer wishes to limit its employees from future competition, this matter should be addressed directly between the employer and employee, not between competing businesses.”
The court went on to say that as long as former Pittsburgh Logistics employees do not contact former customers of Pittsburgh Logistics within one year of leaving, there is no need to enforce the no-poach provision. An appellate court agreed, stating that each time Pittsburgh Logistics enters into a contract with a new carrier it results in news restrictions on current employees that did not exist at the time of hiring and signing the employment contract.
Pittsburgh Logistics petitioned the state Supreme Court to hear its case, which it agreed to.
In its opinion, the Pennsylvania Supreme Court agreed with the lower courts’ assessment that the no-poach clause likely harms nonparties to the contract – i.e., Pittsburgh Logistics employees.
“The no-hire provision impairs the employment opportunities and job mobility of Pittsburgh Logistics employees, who are not parties to the contract, without their knowledge or consent and without providing consideration in exchange for this impairment,” the high court stated. “Further, the injury to PLS employees is not hypothetical. In this case, (Pittsburgh Logistics) enforced the no-hire provision by seeking to enjoin Beemac from employing the former (Pittsburgh Logistics) employees who had already left Pittsburgh Logistics and obtained employment with Beemac. If (Pittsburgh Logistics) was successful, the effect of its enforcement of the no-hire provision would have deprived its former employees of their current jobs and livelihoods.”
Additionally, the Supreme Court cited a similar case that finds the high percentage of workers subject to no-poach clauses contribute to slow wage growth and rising inequality. That case cited studies that suggest wages are up to 5% higher in states that do not recognize or enforce worker noncompete restraints. LL
Other no-poach lawsuits:
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