PENNSYLVANIA’S NEW APPROACH TO NO-POACH: MORE PROTECTION FOR EMPLOYEES

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Andrew M. DeLucia, Jared R. Martin

May 28, 2021 Download as PDF

A no-poach agreement prevents one employer from hiring employees from another employer.  Such restrictions may be stand-alone agreements (“naked”) or appear as clauses within broader contracts (“ancillary”).[1]  With expanding antitrust enforcement in the “no-poach” arena, several states have applied a critical eye and expressed disfavor for limitations on employee mobility from the perspective of restrictive covenants through both legislation and litigation.

In 2019, the Pennsylvania Superior Court charted a new course, analyzing a no-poach agreement through a public policy lens under common law.[2]  In April 2021, the Supreme Court of Pennsylvania reviewed the issue as a matter of first impression.

The Supreme Court established a new test of reasonableness for ancillary no-poach clauses.[3]

Pittsburgh Logistics Systems (“PLS”), a third-party logistics provider, entered into a services contract with Beemac, a trucking company.  Beemac agreed not to hire any employees of PLS for two years after termination of the contract.  After Beemac nonetheless hired four former PLS employees, PLS sued to enforce the agreement and for injunctive relief.  The trial court denied the requested relief.  The Superior Court upheld that denial of injunctive relief.

After conducting a lengthy analysis of the Superior Court’s opinion (including the dissent by Judge Bowes), precedent from other jurisdictions, the parties’ arguments, and an Amicus Curiae brief submitted by the Pennsylvania Attorney General, the Supreme Court set forth its de novo resolution of “whether no-hire, or ‘no poach,’ provisions that are ancillary to a services contract between business entities are enforceable” in Pennsylvania.

A Reasonable Ancillary No-Poach Agreement May Be Enforceable
First, the Supreme Court acknowledged that “restrictive covenants as restraints on trade. . . are void as against public policy unless they are ancillary to an otherwise valid contract.”[4]  Rather than viewing no-poach clauses as per se unenforceable—as the PA Attorney General urged—the Supreme Court opted to apply a “reasonableness test.”[5]  The Court, nevertheless, was clear that a no-poach clause, even if ancillary to a proper contract, “is a restraint on trade because the two commercial entities agreed to limit competition in the labor market by promising to restrict” employee mobility.[6]

Analytical Framework
The Supreme Court established a three prong reasonableness test to assess whether an ancillary no-poach provision is enforceable: (1) whether the restriction protects a legitimate interest; (2) whether the restriction is no greater than necessary to protect that legitimate interest; and (3) balancing the protection against the likelihood of harm to the public.[7]

In the subject case, the first prong was satisfied because “PLS had a legitimate interest in preventing its business partners from poaching its employees, who had developed specialized knowledge and expertise in the logistics industry during their training at PLS.”[8]

However, the second two prongs were not satisfied.  The Supreme Court determined that the no-poach clause was overbroad because it applied to all PLS employees, regardless of their involvement with Beemac under the contract.  The Supreme Court also identified harm to the public, particularly the non-party PLS employees affected.  The employees were harmed because they were bound without their knowledge or consent and without consideration.  The no-poach clause further harmed the general public because it “undermines free competition in the labor market.”[9]

Cause for Concern
While the Supreme Court provided some clarity to employers, the Amicus Curiae brief submitted by Pennsylvania’s Attorney General, Josh Shapiro, is cause for concern for any employers using or intending to use any no-poach agreements.[10] Our Attorney General argued that any such restrictions are contrary to public policy and highlighted the negative practical impact on employees.

Attorney General Shapiro framed no-poach clauses as indirectly barring employees from competing where a direct non-compete clause would not be permissible: using the backdoor when the front door is locked.[11]

Therefore, Attorney General Shapiro takes the position that a no-poach clause must pass muster under the analysis for non-competition clauses.[12]   Attorney General Shapiro further argued that, as horizontal market restrictions between employers, no-poach provisions are “per se illegal under antitrust law.”[13]  Finally, Attorney General Shapiro reinforced his public policy argument by highlighting studies that demonstrate the negative impact of restrictive covenants on employee wages.

While the Supreme Court did not accept Attorney General Shapiro’s hard-line position, Pennsylvania employers should take notice of the strength of the Attorney General’s opposition to restrictions on employee mobility and the risk of a potential enforcement action.

Conclusion
Beemac provides direction for tailoring enforceable no-poach clauses.  First, the clause must be ancillary to a legitimate contract.  Second, the no-poach restriction should apply only to employees directly involved in the commercial relationship under the contract.  Third, those employees should be informed of, consent to, and/or be compensated for being bound by the restriction.

The Supreme Court, however, confirmed that Pennsylvania public policy opposes such restrictions.  Especially in light of the stated policy position of the Pennsylvania Attorney General and potentially significant exposure in the antitrust context, employers should carefully review agreements (employment and otherwise) that include employee no-poach provisions.[14]

 

 

[1] In the antitrust context, the appropriate standard of review continues to be litigated.  In the October 2016 joint agency Guidance for Human Resource Professionals issued by the Department of Justice Antitrust Division (“DOJ”) and the Federal Trade Commission, on which antitrust enforcement agencies have heavily relied, the government took the position that naked no poach agreements are per se unlawful.  The DOJ further explained in a January 25, 2019 filing with a U.S. District Court in Washington that ancillary no-poach clauses within legitimate contracts require deeper analysis under the antitrust Rule of Reason framework.

[2] See Pittsburgh Logistics Sys. v. BeeMac Trucking, LLC, 2019 PA Super 13 (2019). We published the Client Alert analyzing the Court’s decision at that time.

[3] See Pittsburgh Logistics Sys. v. BeeMac Trucking, LLC, No. 31 WAP 2019, 2021 Pa. LEXIS 1853, 2021 WL 1676399 (2021).

[4] Id. at 39.

[5] Id. at 39–41.

[6] Id. at 41.

[7] See, id. at 39–44.

[8] Id. at 41.

[9] Id. at 42–43.  In support of this conclusion, the Supreme Court cited studies suggesting that restrictions on employee mobility contribute to slow wage growth and rising inequality.

[10] Brief of Amicus Curiae Josh Shapiro, Attorney General of the Commonwealth of Pennsylvania in Support of Appellee, 2019 PA S. CT. Briefs Lexis 968 (2019).

[11] Id. at *9 (quoting Heyde Co. v. Dove Healthcare, LLC, 654 N.W.2d 830, 834 (Wis. 2002)).

[12] Id. (The restrictive covenant must be ancillary to an employment agreement, supported by consideration, reasonably limited in duration and geography, and protecting a legitimate interest.)

[13] Id. at *4.  Shapiro relies on the factual argument that the subject no-poach clause is a naked restriction because the intended purpose of the broader contract is already accomplished through the inclusion on non-solicitation clauses, rendering the no-poach clause unnecessary. Shapiro further argues that Pennsylvania common law provides for no such naked v. ancillary distinction, and all horizontal restrictions on trade are per se illegal. Id. at FN 7 (citing Phila. Cleaners & Dyers Ass’n, Inc., 19 Pa. D & C 327, 330 (Pa. Com. Pl. 1933)).

[14] As noted above, no-poach agreements can implicate anti-trust enforcement, which may lead to civil and criminal penalties, so regular review of agreements could help reduce potential exposure.

 
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