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No-Poach Agreements: Out of the Frying Pan and Into the Proverbial Fire?

No-Poach Agreements: Out of the Frying Pan and Into the Proverbial Fire? Background Image

My colleagues and I have written much recently regarding governmental antitrust authorities’ review of no-poach conduct (for example, see here). But let us not forget the additional scrutiny such agreements can face in commercial litigation. A recent Pennsylvania Supreme Court case considered, for the first time in that state, whether such provisions are enforceable under Pennsylvania law when they are ancillary to a services contract between two businesses. See Pittsburgh Logistics Sys., Inc. v. Beemac Trucking, LLC., No. 31 WAP 2019, 2021 WL 1676399 (Pa. Apr. 29, 2021).

The case was brought by Pittsburgh Logistics Systems, Inc. (“PLS”), described as a logistics provider that arranged for the shipping of its customers’ freight with selected companies, against Beemac Trucking, LLC (“Beemac”), one of those selected companies. The Services Contract between the two companies apparently contained a one-year, no-poach provision, prohibiting Beemac from, among other things, hiring PLS’s employees during the term of the contract or for two years thereafter.

The enforceability of this provision came to a head after Beemac allegedly hired several PLS employees and PLS sought an injunction. While denying the injunction, the trial court issued a sweeping ruling suggesting that all no-poach agreements are “void against public policy because they essentially force a non-compete agreement on employees of companies without their consent, or even knowledge, in some cases.”

On appeal by PLS, Pennsylvania’s highest court reached a less sweeping conclusion. Namely, that when a no-poach agreement is not “naked,” and per se illegal, but rather is ancillary to the principal purpose of a contract (in this case a “shipping contract”), its enforceability depends on its reasonableness. Under the “reasonableness” test — the Court notes this is consistent with the Department of Justice’s approach to enforcing federal antitrust law — the Court examines both the interests sought to be protected by the provision, on the one hand, and the harm that the provision might cause to the public, on the other, to determine whether the provision is enforceable.

Applied to the case at hand, the Court concluded that PLS’s no-poach provision was overbroad in that it barred Beemac from hiring any of PLS’s employees, regardless of whether the employee had worked with Beemac during the term of the contract. Additionally, the Court found that the provision harmed the public by impairing employment opportunities for PLS employees who were not parties to the contract, and undermining free competition in the labor market.

While the Pennsylvania Supreme Court did not hold that all ancillary no-poach agreements violate public policy, its decision should impress upon employers the need for caution when entering into no-poach agreements. Employers must not treat such provisions as an afterthought, even if ancillary to a business contract, but rather must return to the principles of reasonableness to ensure that their agreements are reasonably tailored to protect their interests.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.