The Court held that the no-hire contracts were an unreasonable restraint of trade in violation of public policy.
The Supreme Court’s decision continues the Pennsylvania appellate courts’ movement to limit employers’ restrictions on ex-employees’ ability to work. As the Pennsylvania Supreme Court held in Hess v. Gebhard & Co., 808 A.2d 912 (Pa. 2002), a restrictive employment covenant may not be used to prevent competition or to keep employees from earning a living. In 1995, the Superior Court refused to enforce a noncompete against an employee who was fired through no fault of his own (Insulation Corp. of America v. Brobston, 667 A.2d 729, 733 (Pa. Super. 1995)). Hess v. Gebhard followed in 2002, refusing to allow a purchaser of a business’ assets to enforce a noncompete where the asset seller did not assign the noncompete to the buyer. Socko v. Mid-Atlantic Systems of CPA, Inc., 126 A.3d 1266 (Pa. 2015), refused to enforce a noncompete when the employer offered the employee no consideration for the noncompete other than continued at-will employment.
In the Pittsburgh Logistics case, Pittsburgh Logistics engaged in the business of arranging for the shipping of goods. Beemac was a transporter of goods. The companies entered into a motor carriage contract in which Beemac would transport goods of shippers arranged by Pittsburgh Logistics. The contract provided that Beemac would not solicit or hire Pittsburgh Logistics’ employees during the contract term and for 2 years after the contract ended. Beemac hired four of Pittsburgh’s employees while the motor carriage contract was still in effect. Pittsburgh sued both Beemac and the departing Beemac employees. The trial court found that the non-hire contracts were void as against public policy. The Superior Court upheld the trial court, first in a panel decision and then in a decision of the court en banc.
The state Supreme Court accepted review to address the question of whether contractual no-hire provisions in a service contract between sophisticated business entities were enforceable under Pennsylvania law. The Court analyzed the law of other states since Pennsylvania had not addressed this issue. The Court found a division between the various states, but held that the trend in other states and at the federal level ran against enforcement of the agreement. The Court noted the Department of Justice’s interest in a case challenging no-poach agreements in the railway industry in the Western District of Pennsylvania (In re Railway Industry Employee No-Poach Antitrust Litigation, 395 F.Supp.3d 464 (W.D. Pa. 2019)). Farther afield, the Court referred to the class action challenge to no-poach agreements between the Duke University and University of North Carolina Medical Schools. See Seaman v. Duke University, 2019 WL 4674758, 2019 U.S. Dist. Lexis 163811 (M.D. N.C. Sept. 25, 2019) (approving class action settlement). Also important, but not noted by the Court, are the recent federal criminal indictments of businesses for wage fixing and no-poach agreements.
In rejecting the no-hire agreement, the Supreme Court employed the traditional reasonableness analysis for restrictive covenants. The Court found that the agreement was ancillary to a shipping contract and Pittsburgh Logistics had a legitimate interest in preventing poaching of employees. But the Court concluded that the no-hire clause was more than what PLS needed to protect this interest. The no-hire provision prevented Beemac from hiring any PLS employee, even those who had not worked with Beemac. The no-hire clause also created a harm to the public. The clause created potential harm to third parties by cutting off possible employment to PLS employees who were not parties to the contract. The restrictions deprived employees of the ability to earn their livelihoods and undermined free competition in the labor market. Finally, restrictive contracts of this sort contributed to slow wage growth and rising wage inequality. The Court noted that wages are 4-5% higher in states that do not enforce worker non-compete agreements.
Pittsburgh Logistics was a narrow ruling on a harsh restriction. The future will tell whether the state’s highest court’s public policy concerns will open the door to further erosion of post-employment restrictions in Pennsylvania.