So yesterday I discussed some background related to anti-poaching and non-compete law. Today, I explain why the decision in Pittsburgh Logistics Systems provides a helpful analogue to franchising.
The case involves a no poach clause sought to be enforced by the current employer, Pittsburgh Logistic Systems (“Systems”), against four employees of Beemac Trucking, doing business with Systems. The four employees all left Systems to work at Beemac, and Systems sought to enforce the non-compete clause in the employment agreements with the employees. A temporary injunction was initially entered against the employees, but ultimately the injunction was vacated as being unreasonable.
Systems then sought to enforce the no poach clause against Beemac, which would prevent Bee mac from employing the four employees who’s non-compete agreements could not be enforced. As the case wound it way through the courts, the judges and counsel astutely identified the dilemma of indirectly restricting the activities of the employees that they did not agree to make for themselves. In attempting to address the issues, the Supreme Court of Pennsylvania did review the law in several states and noted that while California and Wisconsin held no poach clauses per se unenforceable, Texas, Virginia and Illinois do enforce the clauses. In fact, the Attorney General of Pennsylvania filed an amicus brief in the case urging a blanket rule against the enforcement of no poach agreements.
The Pennsylvania Supreme Court weighed the legitimate business interest of Systems in preventing its business partners from raiding its trained employees against the public harm that the restriction caused. The Court determined that the no-hire provision at issue was overbroad because it was not limited to System employees who had worked with Beemac. The Court concluded that the no poach provision was likely to impair the employment opportunities and job mobility of all System employees. The Court also found that the restriction undermined free competition in the shipping and logistics industry labor market and thus harmed the public. The Court refused to apply a per se rule, and applied the existing reasonableness analysis applied to non-compete agreements in Pennsylvania to affirm the lower court’s decision not to enforce the no poach clause.
The Pennsylvania analysis will likely guide courts in other states regarding the interplay of no poach, no hire, no solicitation and non-compete enforcement in other states. The lessons learned from the decision tell us that:
- Activity restrictions in existing franchise agreements need to be re-evaluated in light of changing jurisprudence.
- No poach agreements in many instances will be difficult to enforce, and even the inclusion of such a provision in a franchise agreement may lead a court to conclude that the franchisor is overreaching in other aspects of the franchise relationship.
- Franchisors with legitimate business interests requiring activity restrictions should be able to link the provisions to protection of confidential information and to tailor the provisions as narrowly to demonstrate reasonableness.
- Geographic reasonableness and non-solicitation should be reviewed and tailored in light of social networking and technological advancements.
Activity restrictions in franchise agreement protect the branding, the uniqueness, the competitive advantages through innovation, and the secrets of success of the franchisor. Now is the time to reappraise the tools being used to protect these most important assets.