No-Poach Provision Found Unenforceable by Pennsylvania Supreme Court
Antitrust Law Update
Date: May 03, 2021
The Pennsylvania Supreme Court recently barred enforcement of a no-hire provision ancillary to a services contract between freight broker Pittsburgh Logistics and transportation company Beemac Trucking, holding the provision was invalid under state law as an unreasonable restraint of trade. (Pittsburgh Logistics Systems, Inc. v. Beemac Trucking LLC et al., Case No. 31 WAP 2019). The decision from the Pennsylvania court continues a nationwide trend of enhanced antitrust scrutiny of no-poach agreements and related business arrangements.
A no-poach agreement is a written or oral agreement between two companies not to compete for each other’s employees, typically by agreeing not to solicit or hire the other company’s employees. Pittsburgh Logistics and Beemac entered into a services agreement in 2010 that auto-renewed on an annual basis and contained non-solicit and no-hire provisions, the latter prohibiting Beeman from hiring, soliciting, inducing or attempting to induce any employee of Pittsburgh Logistics to leave their employment during the term of the contract and for two years after termination of the contract. Beemac hired four Pittsburgh Logistics employees while the contract was in force, and Pittsburgh Logistics filed suit against Beemac, alleging breach of contract, tortious interference, trade secret misappropriation and conspiracy and seeking injunctive relief. The trial court, noting the lack of case law in Pennsylvania on the issue of no-poach covenants between contracting companies and conflicting case law in other jurisdictions, held that the no-poach provision was an unreasonable restraint of trade. The trial court’s decision was affirmed on appeal and Pittsburgh Logistics appealed to the Supreme Court of Pennsylvania.
In analyzing this issue of first impression, the Pennsylvania Supreme Court reviewed cases from a variety of jurisdictions and took note of the fact that the Pennsylvania Attorney General, who filed an amicus brief in this case, and several other attorneys general as well as the Department of Justice have “actively focused on no-hire restrictions.” The unanimous court applied the same balancing test used to assess the reasonableness of ancillary restraints of trade in employment agreements and agreements related to the sale of a business to evaluate the no-poach provision. The court noted that the no-poach provision is a “restraint on trade because the two commercial entities agreed to limit competition in the labor market” by promising to restrict mobility of Pittsburgh Logistics employees. Although Pittsburgh Logistics has a “legitimate interest in preventing its business partners from poaching its employees” who developed specialized expertise and knowledge, the no‑poach provision is greater than needed to protect that interest and creates a probability of harm to the public. The court found the provision overbroad due to its duration, the fact that it precludes solicitation of any Pittsburgh Logistics employees regardless of whether those employees worked with Beemac during the term of the contract, and the impairment to employment opportunities and job mobility of employees who were not parties to the contract but were bound by the restriction without the ability to negotiate in exchange for any consideration. The public interest in free competition in the labor market in the shipping and logistics industries was also undermined by the provision. Balancing the interest of Pittsburgh Logistics against the overbreadth of the no-hire provision, the court found the provision an unreasonable restraint of trade and therefore unenforceable.
What does the legal landscape look like nationwide for no‑poach agreements?
The Department of Justice and Federal Trade Commission issued Antitrust Guidance for Human Resource Professionals in October 2016, which explicitly stated that naked no‑poach agreements are a per se illegal violation of the antitrust laws and warned that wage-fixing and no-poach agreements between competitors made or continued after that date could face criminal prosecution. DOJ and FTC subsequently brought civil actions, including recent actions by the FTC related to no-poach clauses in merger and acquisition agreements and civil enforcement actions by DOJ. DOJ also has taken the unusual step of filing statements of interest in numerous private no-hire cases to express its view that such agreements are per se illegal horizontal allocations of the labor market under the antitrust laws. As promised, the Justice Department indicted its first criminal wage-fixing case in December 2020 and its first criminal no-poach case in January 2021.
State attorneys general have been even more active than DOJ and FTC, with the Washington Attorney General taking the untested view that all no-poach agreements are unlawful in Washington and refusing to resolve any investigation unless no-poach clauses are removed from contracts nationwide, not just in Washington. Coalitions of attorneys general opened investigations into the practices of fast-food franchisors and 14 states entered into settlement agreements with seven national franchisors in the last two years that end the use of no-poach clauses in franchise agreements. Thus, while no-poach agreements ancillary to a legitimate business arrangement are subject to a balancing test in Pennsylvania, other states have been more aggressive by imposing blanket prohibitions on similar clauses.
In addition to DOJ and FTC’s pursuit of no-poach agreements, private litigants have brought Sherman Act claims alleging that agreements between competitors not to solicit or hire each other’s employees are per se violations of Section 1 of the Sherman Act, 15 U.S.C. § 1. Some courts have denied motions to dismiss, noting that discovery is needed to determine whether per se, quick look or rule of reason analysis should apply to a given case. Given the possibility that such claims will survive a motion to dismiss and proceed to discovery, any no-poach or no‑hire provisions should be analyzed to assess the risk of civil litigation or agency enforcement.
Practice Tips for No-Poach Clauses
No-poach agreements can serve to protect legitimate business interests, but they also can be a restraint on the ability of employees to compete in the labor market for jobs and wages. To reduce antitrust risks, a no-poach agreement should be reasonably ancillary or necessary to achieve an otherwise legitimate business interest such as a merger, asset purchase, joint venture or other type of combination or collaboration, and narrowly tailored to achieve that interest. A company considering using a no-poach clause in an agreement should consult with antitrust counsel to ensure it is in accordance with federal and state antitrust laws.
FOR MORE INFORMATION
For more information, please contact:
Jennifer S. Roach
Matthew David Ridings, CCEP
Caitlin R. Thomas
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