No Hire Provision in Contract Between Two Companies Held Void as Against Public Policy
In a case of first impression, the Pennsylvania Superior Court, in Pittsburgh Logistics Sys. v. BeeMac Trucking, LLC, 202 A.3d 801 (2019), voided an agreement between two companies that prohibited the one company from hiring the employees of the other during the period of their contract and for two years after. More particularly, a shipping logistics company, which finds carriers [i.e. trucking companies] to transport the products of its clients [i.e. manufacturers] to market, tried to protect itself from the carriers’ soliciting or inducing its employees to leave the logistics company and enter employment with one of the carriers. So, the shipping logistics company required carriers to enter into an agreement that contained the following provision:
“neither Carrier nor any of its employees, agents, independent contractors or other persons performing services for or on behalf of CARRIER in connection with CARRIER's obligations under this Contract will, directly or indirectly, hire, solicit for employment, induce or attempt to induce any employees of [shipping logistics company] or any of its Affiliates to leave their employment with [shipping logistics company] or any Affiliate for any reason.” (emphasis added).
The trial court held this provision void because it, “essentially forced a non-compete agreement on employees of companies without their consent, or even knowledge, in some cases.” The trial court stated that the shipping logistics company should address its concerns about employees leaving and competing against it with covenants-not-to-compete agreements between itself and its employees directly, not between itself and a competing business. (As a side note the shipping logistics company did have covenants-not-to-compete with its employees, but the trial court held them to be unenforceable because they were overbroad in that they prohibited the employees from working for a competitor anywhere in the world. That part of the decision was not appealed).
The Pennsylvania Superior Court affirmed the trial court’s decision. The Superior Court quoted the reasoning and rationale of a United States District Court opinion out of New Mexico, which cited a Texas court’s decision stating, “It is one thing to uphold the restriction on an employee’s freedom where it results from an agreement freely entered into by the employee. But where the restriction on an employee’s freedom results from the employer’s agreement with another, the employee is deprived of his or her freedom without acquiescence and with no resulting benefit.”)
Two points of interest. First, the Pennsylvania Superior Court may have opened the door to the enforceability of more narrowly tailored inter-company no-hire provisions. For example, it might be possible for an inter-company no-hire provision to be enforceable if it applies only to the employees who work with the other company as opposed to all employees.
Second, there is a well-written and cogent dissent from Pennsylvania Superior Court judge Mary Jane Bowes that is joined by Judge Mary Murray. The dissent holds that the no-hire provision is enforceable under Pennsylvania law. The dissent explains how the no-hire provision is not a non-compete binding the protected company’s employees; it binds the other company and there is no basis in Pennsylvania law for treating a no-hire provision as a restrictive covenant between an employer and an employee. This dissent found particularly persuasive the reasoning of the United States District Court for the Middle District of Pennsylvania’s decision in GeoDecisions v. Data Transfer Solutions, LLC, 2010 U.S. Dist. LEXIS 128283 (M.D.Pa. December 3, 2010). In that case, the federal court upheld a no-hire provision under Pennsylvania law. It explained the purpose of the no-hire provision was not to restrict a company’s ability to hire the employees of its competitors; instead the purpose was to ensure a temporary productive relationship between the two companies. Further, the court held companies have a legitimate business interest in making sure they do not become employment agencies for their competitors to whom they have exposed themselves.
In short, the Pennsylvania Superior Court has held that inter-company no-hire provisions are void as against public policy while also opening the door for narrowly tailored provisions. Further, the dissent provides a path for companies to challenge the holding of the majority. If you have questions about employment law, covenants-not-to-compete or no-hire polices, do not hesitate to give me a call at 717-657-7770.