Pennsylvania appeals court rules no-hire clause invalid

Image: Jim Allen/FreightWaves

Image: Jim Allen/FreightWaves

The third-party logistics provider (“3PL”) in this case had a clause in its Motor Carriage Services Contract with a non-exclusive trucking company. The clause prevented the trucking company (“carrier”) from hiring or trying to hire any of the 3PL’s employees while the two companies were still in business or within two years after they stopped doing business.  The 3PL sued the carrier, its affiliated brokerage company, and four former employees who went to work for these companies in Pennsylvania state court.

Background

The carrier in this case did non-exclusive business with the 3PL, and therefore was required to enter into a Motor Carriage Services Contract (“Contract”) with the 3PL.  The Contract had a no-hire provision which prohibited the carrier from hiring or soliciting for hire any employee of the 3PL or its affiliates, or inducing any of the employees to leave their employment with the 3PL or its affiliates.  The Contract’s prohibition was to be in place for the duration of the Contract and for two years after expiration of the Contract. The Contract also had a restrictive clause which prohibited the carrier from soliciting any of the 3PL’s customers.  

This lawsuit arose because the 3PL contended that the carrier was not honoring the terms of the Contract. Specifically, the 3PL sued the carrier and the former employees to stop the carrier from employing former employees and to prevent the carrier from soliciting business directly from other parties who had done business with the 3PL.  

Lower Court’s Decision

The trial court’s decision came in two parts.  First, the trial court ruled in favor of the 3PL and prohibited the carrier from soliciting listed customers of the 3PL for the length of the Contract plus one year as provided in the Contract by finding that the restrictive clause was valid and enforceable.  Second, the trial court ruled against the 3PL and refused to enforce the no-hire clause of the Contract to prevent the employment relationship between the former employees and the carrier. The 3PL appealed the decision regarding the no-hire clause.

Appellate Court’s Decision

Noting that this was the first time that the court had seen such an issue, the Pennsylvania Superior Court compared the no-hire clause in the Contract to traditional non-compete clauses.  In doing so, the court noted that, although not necessarily favored, traditional non-compete clauses have been upheld because there is a voluntary agreement between the employer and employee and the employee gets some type of consideration.  In a no-hire clause, the agreement is between two companies and prevents employees from seeking employment with certain companies. Here, noting the characteristics of the no-hire clause, the court found that the clause not only prevented individuals from seeking employment with certain companies, but also did not provide additional consideration.  Furthermore, the employees rarely had any input or even knowledge of the clause. As such, the court struck down the no-hire clause in the Contract as a violation of public policy due to its restraints on trade. The court also found the no-hire clause to be overly broad because the Contract already protected the 3PL from the loss of its clients, which is the purpose of such no-hire restrictions.  

Takeaway

It is an important business tactic to protect an employer’s legitimate business interests, especially against unfair competition. However, sometimes these restrictions can go too far.  As this case demonstrates, courts are willing to strike down contracts that a court thinks are unfair and against public policy. Furthermore, such clauses have begun to pick up considerable federal and state scrutiny around the country, particularly in blue states, as a violation of anti-trust laws.  Known as “no-poach agreements” in the anti-trust area, these agreements face additional heightened scrutiny within franchise organizations. It is important to consult with experienced legal counsel to make sure that any restrictions in business and employment contracts are drafted in a way to minimize the risk of an unfavorable outcome in a lawsuit while maximizing the protection of business interests.

R. Eddie Wayland is a partner with the law firm of King & Ballow.  You may reach Mr. Wayland at (615) 726-5430 or at rew@kingballow.com.  The foregoing materials, discussion and comments have been abridged from laws, court decisions, and administrative rulings and should not be construed as legal advice on specific situations or subjects.