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Employment Covenants: A trend away from enforceability?

Pennsylvania businesses have long relied upon restrictive covenants in a variety of agreements to protect their most valuable assets, especially their employee relationships and information about their customers and products.  The ability to assure that protection in an agreement, however, may be eroding.  A significant erosion occurred as a result of the April 29, 2021, decision of the Pennsylvania Supreme Court in Pittsburgh Logistics Systems vs. Beemac Trucking, LLC (hereafter “PLS”).  In that decision, the Commonwealth’s highest court unanimously held a “no hire” or “no poaching” provision in an agreement between two businesses to be unenforceable.  In the past Pennsylvania courts have upheld the right of a business or employer to enter into a contract to prevent the disclosure of confidential information and the solicitation and hiring of its employees by others.  But in the PLS case the Supreme Court held that a provision in an agreement between businesses, in which one agreed not to hire the employees of the other, was against public policy and therefore unenforceable.

The case arose from a services contract between PLS, a third-party logistics provider, and Beemac, a trucking company, which established the terms of their business arrangement and included non-solicitation and no-hire provisions.  Despite the agreement, Beemac hired four PLS employees.  PLS sought to enforce the terms of the agreement prohibiting such hiring, but the court refused.[1]  Beemac’s hiring could stand.

The Supreme Court acknowledged that the purpose of a “no hire” or “no poach” provision was to protect a business’s most valuable assets, its employees, who have the knowledge, information and contacts, developed through years of effort, that are vital to the business’s success.  And the court acknowledged that the two parties to the contract were sophisticated business entities with legitimate business interests to protect.  Nonetheless, the court found that “no hire” provisions that are intended to prevent poaching of a competitor’s employees were limits on competition in the labor market and impaired the mobility of employees.

Before reaching its conclusion, the court reviewed the case law in other states, which are split on the issue.  Some find such clauses unenforceable (California, Wisconsin and Texas) and others find them a legitimate protection of a business asset (Virginia and Illinois).  The court also noted two recent developments which appeared to influence their decision.  In a footnote the court mentioned that the U.S. Department of Justice, together with the Federal Trade Commission, in 2016 issued guidance that stand alone no-poaching agreements (not ancillary to a transaction) were per se illegal.  Also, in the body of the opinion, the court discussed the 2019 fourteen-state settlement agreement, led by Pennsylvania Attorney General Josh Shapiro, in which the states extracted from four national franchises an agreement to cease using “no poaching” agreements.   Although the facts and contractual language in PLS were quite different, the court appears to believe those government actions bolster its decision to refuse to enforce the no-hire clause against Beemac.

Do the PLS decision, the pronouncements of the U.S. Department of Justice and the FTC, and the actions by Attorneys General from Pennsylvania and elsewhere, indicate a growing trend of challenges to restrictive covenants involving businesses?  Probably so.  In a more recent development the Biden Administration on July 9, 2021, issued an Executive Order asking the FTC to ban or limit all non-competes, asserting they weaken workers’ rights.[2]  Certainly there can be overreach at times by employers attempting to prevent employees from being hired elsewhere.  But in an age of growing competitiveness, accelerating technology, and a limited skilled workforce, these agreements are vital to protecting the intellectual property and resources developed by a business.One legal commentator noted that while it will take time to know the full impact of the PLS decision on similar restrictive covenants, “one could argue that any ancillary no-hire provision that impairs employment opportunity and mobility is unenforceable…”[3] [emphasis in original].

In light of these developments, our advice to clients is twofold. 

  1. Be aware that the courts and federal and state regulators are taking a dim view of restraints on free mobility of the workforce.  This will likely lead to more successful challenges against such restraints and will limit the deterrent effect these provisions have on businesses and employees.  The number of employers and employees willing to make hiring decisions in spite of no-hire, non-solicitation and non-compete agreements will increase.
  2. When a restrictive covenant is to be implemented, it must be drawn as narrowly as possible.  It will be wise to develop in such agreements a strong and detailed factual basis that supports the necessity of the restriction.  Restrictive covenants that are specific to a few employees who possess highly confidential information unique to the employer, rather than a prohibition affecting a broad swath of employees, will stand a better chance of being upheld.   And those that are limited in time, size and geography have a better chance of surviving attacks.  The bottom line is, what businesses once took for granted as a reliable means of protecting their information and employees may no longer be assured.

For advice on how you can adapt to these trends affecting your business contact the Stock and Leader Business and Employment Group.

[1] The non-solicitation provision was held to be unenforceable by the lower court and that decision was not appealed.  The four employees each has non-compete provisions in their employment agreements but for a variety of reasons the lower court declined to enjoin Beemac’s hiring of the four employees, notwithstanding those non-compete clauses.

[2] See Attorney Sarah Doyle’s article, President Biden Urges Federal Trade Commission to Restrict Non-Competes.

[3] Robyn English-Mezzino, Jan Levine, Christopher J. Morgan and A. Christopher Young “Pennsylvania Supreme Court Finds “No-Hire” Provision Unenforceable” ABA Business Law Today,  July 9, 2021.

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