Supreme Court Opinion
The Supreme Court acknowledged that “Pennsylvania common law has treated restrictive covenants as restraints of trade that are void as against public policy unless they are ancillary to an otherwise valid contract.” If the restraint is ancillary, the court employs a balancing test to determine if the provision is reasonable, using the Restatement (Second) of Contracts test for evaluating the reasonableness of the provision. Specifically, the Restatement balancing test reads:
- A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if
- the restraint is greater than is needed to protect the promisee’s legitimate interest, or
- the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.
—Restatement (Second) of Contracts § 188(1)
Applying the Restatement test, the court found that the no-hire provision was an unreasonable restraint on trade because two commercial businesses used the provision to limit competition in the labor market “ancillary to the principal purposes of the shipping contract between PLS and Beemac.” The court recognized PLS’ legitimate interest in preventing its business partner from poaching its employees. However, the no-hire provision was “greater than needed to protect PLS’s interest and create[d] a probability of harm to the public.” The provision was overbroad because it precluded Beemac from hiring, soliciting, or inducing PLS employees for the one-year term of the contract plus an additional two years regardless of whether the PLS employee had worked with Beemac during the contract. Under the Restatement, the Court’s overbroad finding should have been enough to void the provision.
Nevertheless, the court went on to find that the no-hire provision created a likelihood of harm to the public in both specific and general ways. First, the provision specifically “impair[ed] the employment opportunities and job mobility of PLS employees” not party to the contract without their knowledge or consent. Under the facts of the case, this represented “real” rather than “hypothetical” harm because PLS sought the preliminary injunction to prevent Beemac from employing former PLS employees who had already taken a position with Beemac. Second, the court found that the provision generally undermined free competition in the labor market, creating a likelihood of harm to the general public. The court’s analysis did not explicitly weigh Beemac’s hardship and the public harm against PLS’ legitimate need except in a conclusory fashion in a statement at the end of the opinion.
The opinion is notable because it represents the first Pennsylvania state case to weigh in on the enforceability of a no-hire provision between two commercial businesses. The true import of the decision, however, will come only with time. One could argue, based on this decision, that any ancillary no-hire provision that impairs employment opportunity and mobility is unenforceable under Pennsylvania law. At the same time, the analysis used by the Pennsylvania Supreme Court indicates that every restraint on trade is subject to the balancing test under the Restatement and therefore, the outcome is based on the facts of each case. One wonders if the legal outcome would have been different had the no-hire provision been effective only for the life of the service contract and only applied to PLS employees who worked directly with Beemac.
The precedential value of the court’s analysis regarding harm to the public is also questionable. While the court found harm to the public in the record, it weighed that harm against PLS’ legitimate interest — an express requirement under the Restatement — only in a conclusory manner. This is significant because any no-hire or no-poach provision can be said to harm employee mobility in some regard. That is the purpose of the provision. On the other hand, one could argue that the court’s public harm analysis is merely dicta because the court had already determined that the restraint was overly broad. Put another way, once the court found the provision as overbroad, it did not need to also find that it harmed the public to be unenforceable. In the end, the court’s analysis here (while short) could have a significant impact on how employers in the state of Pennsylvania use no-hire provisions in their commercial contracts.