PA Court Finds No-Hire Clause Between Businesses Invalid
Posted on Jan 17, 2019 on Employment-at-Will / Restrictive Covenants, Legal Updates by
In a precedent-setting move late last week, the Superior Court of Pennsylvania held a no-hire provision appearing in a contract between a Pittsburgh logistics company and a trucking company invalid as an unfair restriction on trade. Lately, antitrust suits – especially those targeting businesses with no-poach/no-hire agreements – have become more and more prevalent as the U.S. Department of Justice and the Federal Trade Commission pledge to crack down on violators. Even more troubling is the private plaintiff’s bar has its own interests in pursuing these cases: guaranteed attorney’s fees and treble damages. That’s right, even the most minimal of cases can result in paid attorney’s fees and triple the computed damages. A number of franchises have already been hit by these suits including Papa Johns, Burger King, and Cinnabon.
Now that we have your attention, let’s talk about the latest precedent-setting case finding a no-hire provision too broad and thus in violation of antitrust laws.
Pittsburgh Logistics Systems Inc.
Pittsburgh Logistics Systems Inc. (“Logistics”), connects companies with transportation firms to assist with the transportation of their goods. The contract Logistics had with one of these transportation firms, BeeMac Trucking LLC (“BeeMac”), included a no-hire provision which prohibits BeeMac from hiring or soliciting any employees of Logistics. Also included in the contract was a no-solicitation provision, prohibiting BeeMac from poaching Logistics’ customer which had the effect of prohibiting employees of Logistics from taking clients with them when they leave.
After BeeMac hired four ex-Logistics employees, Logistics filed suit, seeking a preliminary injunction against the transportation firm. The injunction was denied by the trial court. The trial court gave several reasons why it found the no-hire clause unenforceable: (1) Logistics’ employees faced hiring restrictions to which they never agreed; (2) Logistics’ employees received no consideration for being a party to the non-hire clause – something usually required by such a clause; and (3) the scope of the no-hire clause was unreasonable and unnecessary to protect the legitimate business interests of Logistics. On appeal, the Superior Court of Pennsylvania agreed.
It its decision, the Superior Court agreed the no-hire provision was too broad and too restrictive. Since the valid no-solicitation provision already prevented BeeMac from stealing Logistics’ customers and, in practice, prevented employees from taking clients with them upon departure from Logistics – there was nothing more Logistics needed to protect. The Court reasoned “the ultimate purpose of all the relevant restrictions” was to protect Logistics “from the loss of its clients.” The company did that already by virtue of its valid no-solicitation provision. The more restrictive clause on hiring was found to be an unfair restriction on trade, considering it could narrow employees’ employment prospects without their knowledge (since they weren’t party to the contract).
In a dissent by Judge Mary Jane Bowes and joined by Judge Mary P. Murray, Judge Bowes insisted BeeMac knew the implications of the no-hiring clause when it signed the contract and received business from Logistics’ clients. The dissent goes on to assert the majority wrongfully treated the no-hire provision with BeeMac and the non-compete clause with employees as one in the same. Judge Bowes stated there is “no basis in Pennsylvania law for treating a no-hire provision as a restrictive covenant between an employer and an employee.”
Apparently, in an earlier suit, the court had already struck down a restrictive covenant in the contract Logistics had with its employees for being “oppressive” and “an attempt to foster a monopoly, thereby demonstrating unclean hands on the part of [Logistics].” Since Logistics was trying to achieve the same result with this provision, the majority held it would have been “incongruous to strike the employees’ restrictive covenant, finding [Logistics] to have had unclean hands, yet allow [Logistics] to achieve the same result via the contract between companies.”
To this point, the dissenting Judge claimed the two clauses are distinct in scope and application. She argued the no-hire provision does not prevent Logistics employees from working for any customer of Logistics, it “prevents only the hire of [Logistics] employees by BeeMac, and thus is far narrower in scope than the noncompete agreements included in the employees’ contracts.”
While this case is only binding in Pennsylvania, it shows there is such a thing as trying to protect “too much” of your business’s interests. The two biggest concerns here are (1) vulnerability and (2) costs. A clause that is too broad or too restrictive may be found to be an unfair restriction on trade and struck down altogether. This could leave your business out in the open without any semblance of the protection you originally sought. Add to this vulnerability the fact that your business could have to pay treble damages to the plaintiff and attorney’s fees to cover the cost of the suit.
Antitrust suits are a dream for plaintiff’s attorneys – even in cases without significant damages since their attorney’s fees come straight out of your wallet! Protect your interests (and your bottom line) and consult with competent labor and employment counsel before you put any clause like this into your contracts. It will save you from the headache Logistics is now feeling.
Brody and Associates regularly advises management on complying with state and federal employment laws. If we can be of assistance in this area in any of the states where we are licensed, please contact us at email@example.com or 203.454.0560.