Pittsburgh Logistics Sys., Inc. v. Beemac Trucking, LLC

Intro: 0:16

The Supreme Court of Pennsylvania is the highest court in the Commonwealth and the oldest appellate court in the nation, an institution that shapes our practice our laws and our lives. This is a podcast by attorneys and for attorneys who argue before Pennsylvania's court of final appeal. Welcome to The Standard of Review by SCOPAblog.

Corrie Woods: 0:42

Hi, and welcome to The Standard of Review by SCOPAblog. I'm your host Corrie Woods, and I recently sat down with attorneys Dan McLane and Tom Sanchez, who successfully argued the recent case of Pittsburgh Logistic Systems versus Beemac Trucking, in which the Court answered a novel question of employment law, whether and to what degree companies are free to agree not to solicit or hire their contractors' employees. The Court held that the so called rule of reason applies. Such agreements must be necessary to protect the company's legitimate interests, that those interests cannot be outweighed by the likely harm to, among others, the public and workers generally. And depending on how you read its opinion, the court might have suggested that those interests are always outweighed by that harm. Let's listen. Our guests today are Dan McLane and Tom Sanchez, both members of Eckert Seamans, primarily located in its Pittsburgh Office. Dan and Tom are both trial and appellate attorneys with extensive experience representing businesses and complex commercial litigation. Dan, Tom, thanks for joining us today.

Dan McLane: 1:43

Thanks for having us.

Corrie Woods: 1:44

Before we get to today's case, I wonder if you could just each give me a little bit of background about why you became an attorney and how you came to your current practice.

Dan McLane: 1:53

Wow, that could take up the whole podcast. In my case, I grew up in a family of lawyers. Start with my grandfather, my uncles, my dad, my sister, my uncles, cousins. I, I was always attracted to the law. And that is something as a kid growing up in New York, I kind of idolized what my dad did for a living and I followed in his footsteps. Though he was a different type of lawyer, primarily in the business and corporate realm, I was more inclined to go into litigation, a path that I've been on for 25 years and really glad I chose that path.

Corrie Woods: 2:33

I'm gonna have to have you talk to my son. Tom?

Tom Sanchez: 2:35

Yeah, I'm the first one in my family to go to law school. And candidly, towards the end of college, I didn't really know what path I wanted to go on. But I knew I excelled with research, writing, analytical skills, and law school seemed like just as good of a decision as anything else. So I pursued that and landed opportunities to work with- for- some judges during law school, and then I clerked right out of law school. And that led me on the path of commercial litigation practice.

Corrie Woods: 3:03

Great. Well, thank you. So we're here today to talk about a pretty recent case, Pittsburgh Logistics Systems versus Beemac Trucking, and that was when the Pennsylvania Supreme Court adopted the Rule of Reason test for no hire slash no poach provisions between business entities and contractors. Before we get into the decision, can you explain sort of exactly what a no hire no poach provision is, and how that compares to say, a covenant by an employee not to compete with his employer.

Tom Sanchez: 3:33

Sure, in the traditional restrictive covenant of a non compete, an employee typically will sign or agree to that type of provision in his or her employment agreement at the inception of employment, although they can be added to subsequent employment agreements during the course of employment as long as consideration is exchanged and typically the employee agrees not to accept employment with a competitor of the current employer for a period of one to two years. So the employee has direct knowledge of that restraint, and is agreeing to it with consideration typically being the acceptance of- of the job itself. Conversely, our case involves a no hire no poach provision, which is an agreement between two companies, either reciprocal or one of them agreeing not to hire the employees of another company. So here we have an agreement between the appellant Pittsburgh Logistic Systems and the appellee Beemac Trucking, and the provision would restrict Beemac from hiring any PLS employees for the term of the agreement and two years thereafter. So it's restricting the employees of PLS from accepting employment with Beemac, although they are not parties to that agreement, and in our case, didn't even have knowledge of it.

Corrie Woods: 5:02

So in essence, sort of, why agree with the cows when you can just agree with the farmer?

Tom Sanchez: 5:06

Sure. Yeah, that's a good way to put it.

Corrie Woods: 5:08

So how did the case sort of come to your door and how did you decide to sort of ask for this change in the law?

Dan McLane: 5:15

We originally weren't even thinking that far of changing the law, we were rushed into an injunction setting with two cases that were consolidated. And frankly, I think the first part of the trial court's attention was how overbroad the direct non competes with the employees were, and when it became readily apparent that those were excessive. And the fallback option of the no hire was what was left, the court's attention was directed towards that issue. And the guidance in Pennsylvania was pretty sparse, but elsewhere in other states that had been addressed and deemed to be unenforceable in a number of other states. And that quickly became the focus of the court's attention. I think Tom and I've talked many times since the decision came out that when this really popped up on the scene, and we're handling it, no one saw this going that distance and making new law, at least on the short term, right, Tom?

Tom Sanchez: 6:17

Yeah, that's right. Just for a little more context. Initially, this lawsuit arose from PLS suing four of its former employees that had accepted employment with Beemac Trucking or another company named Hybrid. And initially, we had an injunction hearing scheduled solely to address their alleged violations of their employment agreements, their non compete provision and their non solicitation provision. And a week, 10 days later, PLS filed a separate lawsuit against Beemac itself, alleging in part a violation of this no hire provision in the contract between Beemac and PLS. So the court consolidated the injunction hearing to address both issues at the same time. And, you know, we were initially just dealing with a typical non compete case. And this got added into the mix. So I think the initial strategy was thinking, alright, if we defeat the non compete, how do we defeat the the no hire provision, then? Which, effectively would act as a backdoor non compete. So like Dan said it, it resulted in looking at case law from outside Pennsylvania on the no hire issue. But I think everything was colored by the fact that both provisions, the non competes, and the no hire were very overbroad, and that I think helped our arguments at every stage of this of this case to show there was a lot of overreaching here with respect to the provisions.

Corrie Woods: 7:56

You've mentioned sort of the extra jurisdictional research you did. To some extent, weren't you sort of the beneficiary of the particular time that this case arose? It's my understanding that not only those other jurisdictions, but also the Department of Justice had begun prosecuting these as essentially, antitrust violations.

Dan McLane: 8:14

Yes, from my perspective, that's true. And I think we'd be remiss if we also didn't recognize that the Pennsylvania Attorney General had a pretty instrumental role in defining what the public opinion is on these things and being adverse to them on a state level and really picking up the ball on the antitrust argument. Whether we're the beneficiary of the timing or not, you know, that remains to be seen. But these things are, in my opinion, on a- on a national basis, falling under pretty heavy scrutiny from all those three sources.

Corrie Woods: 8:49

So ultimately, how does the trial court come down at the preliminary injunction phase?

Tom Sanchez: 8:54

Sure. So the trial court enforced the non solicitation of customers provisions with respect to three of the four individual defendants. So the trial court enforced the non solicitation provision in their respective employment agreements with PLS with respect to a defined list of customers and PLS. In turn, the trial court enforced the same non solicitation not the same non solicitation provision, but a similar non solicitation provision that was in the contract between PLS and Beemac. So PLS did obtain some injunctive relief in the case with the defendants being prohibited from soliciting certain customers. The trial court, however, with respect to the non competes in the individuals' employment agreements, found them to be so overbroad, that enforcement just was not appropriate. The non competes would have prohibited the employees from working for a competitor located anywhere in the world. And the trial court said that is so overbroad, it's so onerous on the employees that PLS, you're coming to the court with unclean hands and it's not going to be enforced. PLS had attempted to argue that the provision should- the trial court should have limited the provision, basically blue lined it for PLS to enforce it in a more defined geographic area. And the trial court rejected that and said, under these circumstances, that equitable modification was not appropriate. Looking at the no hire provision, the trial court found it was void against public policy in the trial court's view, because it was essentially operating as this backdoor non compete without the employees having knowledge, without the employees giving their consent. And the trial court said, if you want to limit your employees' future job opportunities, that needs to be an agreement directly between employer and employee. Employee needs to know about it, needs to give consent, needs to receive some consideration for it. And none of that occurred here. So the trial court refused to enforce it on that basis.

Corrie Woods: 11:10

So how do you get before the Superior Court?

Tom Sanchez: 11:12

So PLS very soon after the trial court issued its decision on the preliminary injunction filed a notice of appeal to the Superior Court, which you can immediately appeal an injunction decision. And we did the appeal before a three judge panel of the Superior Court, the decision was affirmed two to one. PLS then sought reargument before the full Superior Court in an en banc proceeding which the Superior Court allowed. So we did another round of briefing and were affirmed there 7 to 2 that time.

Dan McLane: 11:47

Right.

Corrie Woods: 11:47

Yeah. So in that case, the matter goes before three judge panel, then the en banc panel comes out in your favor. What happens at the Supreme Court?

Dan McLane: 11:54

That's an interesting story. We were all ready to go and then this funny little event known as COVID-19 hit, and changed all of our lives. We were set to argue I think on April 22. And, Tom, I don't recall the exact date, but it was relatively short period of time before the argument was set to be conducted, that the Court announced because of the unique circumstances that matters like this had to be submitted.

Corrie Woods: 12:21

Oh, wow. So did you- did you go directly on the briefs? Or did they do a...

Dan McLane: 12:26

Yes, the Court- the Court took the matter, with all the other matters that were scheduled for argument at that time, on the briefs.

Corrie Woods: 12:35

Wow. So a lot of hours there to no- to no end.

Dan McLane: 12:39

Well, I wouldn't say to no end, because ultimately, the result was one we were very pleased with. So, I guess I would disagree with you there on that point. It was obviously though, obviously, very understandable. We were disappointed we didn't get a chance to have what would have been, I think a very interesting argument on law and policy and just so you, you know, the counsel for PLS is extremely qualified and very well known and reputable attorney, I think it would have been a vigorous and intellectually challenging argument with that Court. Yes, it's- it's unfortunate, we didn't get to do that. But because of the outcome, you know, we're happy with how it ultimately unraveled.

Corrie Woods: 13:25

And one thing I noticed about the opinion was, you know, this is a unanimous decision. And, you know, for our blog, I think we cover every published opinion out of the Supreme Court. I think I can count on two hands, how many issues that the entire Court agreed on in the last year. So I thought that was certainly a point of pride for your position.

Dan McLane: 13:42

You hit the nail on the head. That's exactly right. In fact, when- when it came out, I, the first thing I noticed was it was unanimous. And then as time has gone on those that have commented on it, in, you know, the scholarly literature or articles have also noted how rare that is. So we are particularly proud of that.

Corrie Woods: 14:02

So in terms of the test that sort of applies to these agreements now. It's, it's my understanding that, and this is a heck of a long list, right? The agreement must be ancillary to an employment relationship. It must be supported by consideration. It must be narrowly tailored, and the needs must be greater than the hardship to the other party, and the public. Now, in sort of traditional ways of looking at agreements like that, you know, that seems to suggest, well, hey, there's room for these in certain circumstances in the future. But one thing that I kind of took from the opinion was one of the things that they're relying on in terms of harm to the public is, well, hey, the labor market is going to be affected here. And economic statistics show that hey, wages tend to be 4 to 5% higher in states that refuse to enforce these provisions. So I guess my question is, and I'm speculating as much as anyone, as much as you will. Is there room for these agreements at all?

Tom Sanchez: 15:00

I think that the opinion- it certainly doesn't close the door on potential enforcement of this type of restriction in an appropriate agreement with the appropriate tailoring. I think here, as I mentioned before, the provisions not only the no hire, but in turn the non compete. Because I think the Court's decisions I think were, to some extent colored by that one as well, because this was in a consolidated hearing where PLS was basically trying to disallow certain individuals from working for Beemac or or Hybrid. And if the non compete failed, which it did, they had this no hire provision to rely on. And the no hire provision here would prohibit Beemac from hiring and employing any PLS employee, regardless of their job title, their job responsibilities, how long they worked for the company, whether they had any interaction with Beemac whatsoever, during the course of their tenure at PLS, regardless of the geographic area in which they'd work for Beemac, and had none of those restraints that are necessary to demonstrate to the court that this provision is somehow necessary to protect the legitimate business interests of PLS and is not unduly oppressive to the- to the employee. And I think a more narrowly tailored provision may be applicable to only a very small amount of employees who maybe have a particular skill set and that have worked for the other contracting party and maybe not worked for isn't the right terminology, but had interactions with the other contracting party during the course of their employment, maybe in a more limited circumstance like that, this type of provision could withstand scrutiny. I don't think the decision forecloses that, but I think it would be necessary to be very careful in in the drafting of any contractual provision like that, particularly where the employee doesn't have knowledge of it. That might be another thing that the employees need to be made aware of it and need to be given some consideration in exchange for it, even though it's technically not a non compete, that would certainly be a concern of mine, if I were reading a contract that had this type of provision in it.

Dan McLane: 17:30

Yeah, I would agree. I, if it's this type of boilerplate provision, or similar to it, where it applies to all employees, I think they're, they're dead on arrival in Pennsylvania. If it's for the reasons Tom did a good job articulating, specifically tailored perhaps a company[inaudible], two or three specific employees for a specific joint venture and the employees are informed of it and specifically limited to two or three or whatever discrete group and that that may be under what the courts outlined, something that can withstand scrutiny. But again, the boilerplate all employees, I think those are now clearly gone and unenforceable in Pennsylvania.

Corrie Woods: 18:19

So if you're advising, you know, companies who are concerned about poaching at this point, what's the advice? Is it hey, keep it narrow, or just pay the employees for it?

Dan McLane: 18:29

I'll tell you the counsel we've been giving. And I counsel actively that you shouldn't seek any form of anti poach agreement, not only because of how our PA Supreme Court ruled, but because as you alluded to, the heightened scrutiny of the Department of Justice on a federal level, that's a whole another animal. So my counsel has been, do not seek these you should be dealing directly with your employees with enforceable, reasonable, non competes. The no poach avenue, even if you could come up with something that maybe withstands a PA Supreme Court's thought process and analysis, you're still exposing yourself to antitrust violations on a federal level. That isn't worth it.

Corrie Woods: 19:17

To say the least. Anything else about the opinion, about the case that you think is particularly noteworthy?

Dan McLane: 19:23

That could take a long time. Tom, go ahead first, if you'd like.

Tom Sanchez: 19:26

I think the Court's focus on consideration leads me to definitely agree with Dan. I think that, at a minimum in Pennsylvania, any type of provision here if an employer is dead set on having some sort of no hire agreement in his contract with another company, I think the employees need to know about it at a minimum. The Court referenced, you know, consideration being crucial, and it didn't articulate any type of bright line test where these things might withstand scrutiny. So I think that that's my big takeaway. You can't leave the impacted third parties in the dark on these and that was definitely the case in the situation in our case.

Dan McLane: 20:12

Yeah, I agree with how you put that, Tom. I think as we discussed earlier, there is a nationwide trend both on the state and federal level, to look at restrictive covenants, and obviously they're- they're clearly seem to be disfavored. I don't know whether this decision is going to stand as unique in Pennsylvania or whether we're going to see a broader wave of state legislatures and/or courts issuing more and more rulings that restrict the impact of these types of provisions, either no poach provisions, which are indirectly restraints on labor, or, you know, looking again, at the scope of who should really be subject to a non compete or a non solicit. It's clearly a hot topic, and we think this is part of that.

Corrie Woods: 21:06

Well, Dan, Tom, thank you so much for joining us today on The Standard of Review, and we appreciate your time and your work on this case. Good work.

Dan McLane: 21:13

Thank you. We really enjoyed it.

Corrie Woods: 21:16

That's all for this episode of The Standard of Review. If you like what you've heard, and you want to hear more, you can subscribe for new episodes in your pod catcher of choice. If you'd like to reach out with a topic or a guest for a new episode, you can find us on the web at WoodsLawOffices.com or just search for Woods Law Offices on Facebook, Twitter, or LinkedIn. Thanks so much for listening, and we'll see you next time on The Standard of Review.

Outro: 21:42

Thanks for listening to The Standard of Review by SCOPAblog. This episode has been brought to you by Woods Law Offices, Raising the Bar for Pennsylvania Appeals. Check them out at www.WoodsLawOffices.com.