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No Hire Clause Called into Question

Written by Joanne Murray Tuesday, August 06 2019 18:05

Many companies use restrictive covenant agreements with key employees to guard against economic harm to the company by an employee who takes a job with the company’s competitor and/or tries to persuade the company’s customers to stop doing business with the company. These are particularly common with sales staff. In Pennsylvania, these covenants will generally be upheld if they are narrowly drawn to protect the employer’s legitimate business interests and if the employee has been given meaningful consideration in exchange for agreeing to be bound by the covenants. To learn more about Noncompetes, visit our Navigating Noncompetes blog series  in the AMM Employment Law Blog.

Companies recognize that merely doing business with other firms can also be risky when it comes to protecting their interests in employees and customers. Consequently, it has become customary to include “no hire” provisions in contracts to prohibit a party from hiring away the other party’s staff. These clauses are particularly common in agreements in the technology field and in non-disclosure agreements that parties often enter into when evaluating whether or not to begin a business relationship. The viability of these provisions is in doubt in Pennsylvania, where the Pennsylvania Superior Court struck down a no-hire clause in a service agreement earlier this year. The Pennsylvania Supreme Court has agreed to hear the case.

In Pittsburgh Logistics Systems, Inc. v. BeeMac Trucking, LLC, the trial court held that the no-hire clause was unenforceable because it prevented individuals from seeking employment with certain companies even though those individuals had not agreed to or been compensated for the restriction. It is important to note that in a separate action, Pittsburgh Logistics Systems (“PLS”), the company attempting to enforce the restrictions against BeeMac, was unsuccessful in its efforts to enforce the restrictive covenants contained in four employees’ employment agreements, each of whom left to work at BeeMac. The trial court concluded that the covenant not to compete was oppressive and overly broad since it had an unlimited geographic scope. The court viewed PLS as having “unclean hands” and refused to enforce the restriction at all.

The Superior Court agreed with the trial court and held that the no-hire clause was unenforceable as a matter of law. The Superior Court was influenced by the lower court’s holding that the non-compete covenants in the employment agreements were not enforceable, noting that it would be unfair for PLS to achieve the same result by using a contractual no-hire provision in its contracts with other companies.

Two Superior Court judges dissented, drawing a distinction between a no-hire provision in a contract between two companies and a non-compete clause binding employees. They reasoned that the no-hire clause did not restrict the employees’ actions; rather, the clause was a bargained-for restriction in recognition of the fact that BeeMac would have access to PLS employees and know-how. The dissenting opinion suggests that the correct analysis is whether the no-hire clause was a reasonable restraint on trade. Using that test, the dissenting judges would have enforced the clause and granted the injunctive relief requested by PLS to prevent BeeMac from “enjoy[ing] the benefit of its purported breach” and “leverag[ing] the specialized knowledge that PLS’s former employees acquired while under its employment.”

It will be interesting to see how the Pennsylvania Supreme Court views these issues when it hears this case. Stay tuned for further developments.

 

As commercial litigators, we frequently field calls from counsel in other states seeking to enforce judgments entered in a state other than Pennsylvania against assets of the judgment debtor which may be identified within the Commonwealth.  Under Pennsylvania Law, a judgement creditor may effectively transfer a judgment in two ways; the traditional approach of a civil action to enforce judgment at common law or pursuant to the terms of the Uniform Enforcement of Judgments Act.  The Uniform Act prescribes the mechanism for transfer of the judgment and the procedures which follow thereafter. 

The effectiveness of a foreign judgment is based upon the full faith and credit clause of the United States Constitution and grounded in principles of comity among the several states.  Pennsylvania, like many other states, has adopted the Uniform Enforcement of Judgment Act in an effort to streamline the process of transferring a judgment from a “foreign” – meaning a different state – court.  The Act merely requires that a certified copy of the judgment and relevant docket entries be filed with the Prothonotary together with an affidavit of last known address of the judgment debtor.   That transferred judgment then becomes a lien against the debtor’s real property within the county.  Of course, not all arguments are resolved by the simple process outlined by the Act; frequently, the transfer signifies the beginning of a new litigation cycle.

While the full faith and credit clause as implicated by the Act is a very powerful vehicle available to a judgment creditor, the application is not unlimited.  Review by a Pennsylvania trial court is for the most part limited to issues of jurisdiction and due process in the issuing court; if the issuing court did not have jurisdiction, or if due process has not been served therein, then Pennsylvania may decline to enforce the foreign judgment.  The judgment debtor bears the burden to establish the absence of jurisdiction and due process.   A judgment debtor should be expected to file a Motion to Strike the transferred judgment arguing the inapplicability of the full faith and credit clause.   

Significantly, the application of the full faith and credit clause extends to the determination of jurisdiction and due process.  In other words, if the parties “fully litigated” the issue of jurisdiction in issuing court and the issuing court, even incorrectly, concludes jurisdictional requirements are satisfied, that decision in and of itself is subject to full faith and credit regardless of whether that decision was correct by application of fact and law.   A judgment debtor that has not appeared in the foreign action certainly retains the right to challenge jurisdiction and due process if the creditor subsequently transfers the judgment to Pennsylvania, but certainly runs the risk of the entry of judgment by default in the foreign court.  Conversely, a judgment debtor that appears in a foreign court where jurisdiction and due process are in any way addressed by such court runs a substantial risk of deference to that court upon transfer to Pennsylvania. 

 

Thousands of businesses across the United States fall within the definition of what is commonly referred to as “small business”.   Many of these small business are formed by two “friends” with compatible skill sets and both possessing knowledge of a particular industry.  Business owners commonly refer to their co-owners as “partners”.  As the business and its’ complexity grows, deficiencies in performance or capacity on the part of one partner may be exposed. Alternatively, the absence of immediate success can cause a less patient partner to seek other opportunities and abandon the work that is necessary for the collective good.  What starts as a promising partnership can quickly turn sour.  Here are a few tips on moving forward:

1. Agree on material issues ahead of time.  It goes without saying that a written agreement which contemplates and addresses material issues benefits everyone.   Terms frequently addressed in such agreements include the relative duties of the parties, corporate officers, duties of directors and financial matters. If shareholders/partners/members are required to devote substantially all of their time to the venture, the agreement must so state.   Similarly, if shareholders/partners/members can be required to contribute capital to the business, the prevailing agreement must so state.  Agreed upon rights and remedies upon abandonment of functions within the business by a shareholder/partner/member can provide the road map for resolution and expedite transition.         

2. Change terms of employment.  An option which may be available to a shareholder/partner/member is the exercise of corporate power to change terms of employment with respect to the non-performing shareholder/partner/member.  While a founding  shareholder/partner/member may arguably have certain rights to continued employment, such guarantees are limited and may not preclude a change in terms when faced with non-performance or abandonment. Exercise of corporate power does not come without risk and any change in employment terms is almost always alleged as part of a minority shareholder oppression claim.

3. Offer a buy-out.  Certainly the cleanest and most efficient means to end an unproductive arrangement quickly is to acquire the non-performing shareholder/partner/member’s interest in the business by the payment of money.  Of course, such an agreement is not always financially available.  Moreover, a voluntary transfer necessarily implicates that that non-performing  shareholder/partner/member agree.  Issues of valuation, income streams, indemnification and restrictions against competition can complicate any potential buy-out.

4. Sell the business.  Often the solution to a disagreement on partner performance is a sale of the business with a corresponding post sale employment agreement for the performing shareholder/partner/member.  Money is a powerful motivator.  A sale generates money in a lump sum which can induce a shareholder/partner/member to forego the ongoing income stream that results from future operations.  Certainly, control over the sale process, including the legal right to effectuate a sale by virtue of agreement or corporate control, are essential factors for evaluation.  

5. Dissolve and start something new.  As a matter of last resort, dissolution of the entity may be the only way to gain freedom from a non-performing shareholder/partner/member.  The Business Corporations Law provides a mechanism for dissolution.  Provided the requirements can be met, a shareholders/partners/member may seek judicial dissolution of the entity essentially forcing a judicial sale.  An important aspect of dissolution is relief from fiduciary duties owed to the business and minority owners.  Dissolution can be a complicated and expensive proposition and very disruptive to ongoing business operations but remains a viable strategy when business owners can no longer work together but also cannot agree on separation.

 

Reprinted with permission from the June 21st edition of The Legal Intelligencer. (c) 2019 ALM Media Properties. Further duplication without permission is prohibited.

In Fort Bend County v. Davis, 587 U.S. ___ (2019), the Court held that the requirement that a plaintiff in an employment discrimination case brought under Title VII, 42 U.S.C. § 2000e, et seq, file a charge of discrimination with the Equal Employment Opportunity Commission (“EEOC”) prior to filing a complaint in court is a procedural and not a jurisdiction requirement.  Therefore, an employer’s failure to assert the absence of an appropriate charge of discrimination in a motion to dismiss results in a waiver of the defense.  The Supreme Court’s decision resolves a split in the circuits regarding whether the requirement is jurisdictional, and highlighted the importance of the charge of discrimination and the motion to dismiss in employment discrimination cases.

 

On July 1, 2019 arbitration agreements in Pennsylvania will be governed by the Revised Uniform Arbitration Act (RUAA). RUAA revises the Uniform Arbitration Act which has been in force in Pennsylvania since 1980. What should non-litigators know about RUAA?

1. Application
 RUAA applies on a mandatory basis to all agreements to arbitrate signed after July 1, 2019. In addition, the parties to an arbitration agreement executed before July 1, 2019 can agree that RUAA’s provisions govern.

2. Common Law Arbitration     
Since 1980, Pennsylvania has had in effect two options for arbitration. Parties could specify that their arbitration was governed by the terms of RUAA’s predecessor, the Uniform Arbitration Act. If they did not do so, governance of the arbitration defaulted to common law arbitration rules. Both the Uniform Arbitration Act and common law arbitration (despite its name) were codified in Pennsylvania’s Judicial Code. RUAA abolishes common law arbitration in Pennsylvania.

3. Impartiality of Arbitrators
RUAA includes disclosure requirements not previously found in the law. Under RUAA an arbitrator must make a reasonable inquiry to determine the existence of any facts which a reasonable person would consider likely to affect an arbitrator’s impartiality. These include a personal or financial interest in the outcome of the case, past or present relationships with the parties, their attorneys or representatives, witnesses or other appointed arbitrators. Disclosure of any such facts must be made. Failure to do so may constitute grounds to vacate any award. To preserve the right to claim partiality after disclosure, timely objection must be made and if the arbitration agreement or rules of the arbitration organization provide rules to challenge the appointment, such rules must be followed.

4. Immunity of Arbitrators
Arbitrators are afforded immunity under RUAA to the same extent that a judge, sitting in a civil action would be immune.

5. Consolidation
RUAA provides that under certain circumstances a court may order consolidation of multiple pending arbitration matters, unless the agreement prohibits such consolidation.

6. Interim Remedies
Before an arbitrator is appointed, RUAA permits the Court to enter a provisional or interim order to protect the effectiveness of the arbitration proceeding. Once appointed, an arbitrator can modify the Court’s provisional order or enter a provisional order his own. Such orders include temporary restraining orders as well as the issuance of liens and preliminary injunctions.

7. Discovery
Before RUAA, there was no guidance on the conduct of discovery other than the power granted to the arbitrator to issue subpoenas and to take testimony of witnesses who could not attend the hearing by deposition. Typically, limited discovery was conducted by agreement of the parties. RUAA makes it clear that the arbitrator can order discovery as appropriate in the circumstances and sanction a party who fails to comply with discovery requests.

8. Is a Hearing Required?
No. The arbitrator can determine that the case does not require an evidentiary hearing and if so, make a decision without holding one.

9. Attorney’s Fees, Costs and Punitive Damages
Attorney’s fees and punitive damages can be awarded to the extent that these remedies are permitted under the law in a civil action. RUAA carries forward the power granted to arbitrators under prior law to apportion the cost of the proceeding, including the fees of the arbitrators between the parties.

10. Modification and Waiver
RUAA permits waiver or modification of its provisions except for eleven provisions which cannot be waived or modified at all, and nine provisions which can be waived or modified but only after a controversy subject to arbitration arises. Examples of the former are the RUAA provisions regarding its applicability and regarding immunity of the arbitrators. Examples of the latter are the rights to seek provisional relief and the arbitrator’s disclosure provisions.

RUAA is a welcome update to Pennsylvania law. Its provisions will bring some order to a forum that, in some circumstances, was the Wild West.

 

Reprinted with permission from the April 19th edition of The Legal Intelligencer. (c) 2019 ALM Media Properties. Further duplication without permission is prohibited.

On April 12, 2019, in the United States District Court for the Western District of Pennsylvania, a jury returned a verdict that serves as a reminder to employment law practitioners of the importance of treating mental health issues with sensitivity and consistent with the Americans with Disabilities Act (“ADA”) and taking a practical approach to reasonable accommodations.  The jury in Schirnhofer v. Premier Comp Solutions LLC, Western District of Pennsylvania docket number 2:16-CV-00462, found that the employer, Premier Comp Solutions LLC (“Premier”), had discriminated against the Plaintiff, Ms. Schirnhofer, on the basis of her mental health disability, and in violation of the ADA.  The jury awarded Ms. Schirnhofer $285,000 in damages:  $35,000 in backpay, and $250,000 in non-economic damages.

This summary of the facts of the case is drawn from the Court’s opinion on Premier’s summary judgment motion, issued on March 28, 2018.  Ms. Schirnhofer began her employment at Premier in 2009, and was terminated on February 5, 2014.  She was employed as a billing assistant in the billing department.  During the course of her employment, she had good performance reviews.  Ms. Schirnhofer was diagnosed with anxiety and other mental health issues prior to her employment with Premier.  Her condition was exacerbated in 2012 when her newborn grandchild died, and a co-worker with whom she was close left Premier.  What followed was a series of interpersonal problems, and conflicts with and complaints about co-workers.  Premier’s president and Ms. Schirnhofer’s co-workers had referred to her as “Sybil” (referencing a character in the movie Sybil who suffered from mental health issues).  The human resources representative noted that she should seek “medical attention.”  Ms. Schirnhofer eventually asked for a reasonable accommodation in the form of two additional ten-minute breaks.  She provided a letter from her physician regarding the need for such breaks to accommodate her Post Traumatic Stress Disorder and her Generalized Anxiety Disorder.  On January 28, 2019 Premier denied the request, despite the advice of its human resources professional to provide the accommodation.  Instead, Premier offered to move her work area.  On a particularly bad day in February, 2014, Ms. Schirnhofer took to Facebook to vent her anxiety.  She was terminated on February 5, 2014 for her Facebook posts in violation of Premier’s Social Media policy.   Ms. Schirnhofer sued, alleging that Premier had terminated her in retaliation for her request for an accommodation, that Premier had discriminated against her in violation of the ADA, and that Premier had failed to provide a reasonable accommodation.   The jury returned a verdict in her favor on the issue of discrimination, but found that Premier had not retaliated against Ms. Schirnhofer.

The lessons for employment law practitioners in this verdict are many, among them:  mental health issues and accommodations are subtle, and require sensitivity; requests for reasonable accommodations provide an excellent opportunity for risk management; and, it is quite expensive to be wrong.

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