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Is a Business-to-Business Noncompete Agreement Enforceable?

When your key employees have access to valuable and sensitive business information, you can feel safer if you require them to sign a noncompete agreement. In essence, this prohibits executives, managers and others with access to your proprietary data from using it to compete with you, whether by starting their own business or by moving to a competing firm.

Noncompetes are usually legal if reasonable in scope, geographic reach and duration. For example, a prohibition on a chemical engineer not to engage in that line of work within a 90 mile radius of his former company for six months would likely be enforceable.

But there is a second type of noncompete: one in which two companies that do business with each other agree not to recruit each other’s valuable employees. No-hire clauses sometimes lurk in the fine print of business contracts. While they serve the same purposes as noncompetes, they have been treated far less charitably by the courts.

In Pittsburgh Logistics Systems Inc. v. Beemac Trucking LLC, a no-hire agreement was found to be an impermissible restraint on trade. The plaintiff, Pittsburgh Logistics Company, had a motor carriage services contract with two shipping companies, Beemac Trucking, LLC and Beemac Logistics, LLC, including a provision stating that during the term of the contract and for two years after its termination, Beemac could not hire, solicit or induce any employees of PLS to leave their employment. After four of its employees went to work at Beemac, PLS sued and sought an injunction.

The trial court found the no-hire agreement void as against public policy. The court’s main concern was that the clause was forced upon PLS employees without their knowledge and consent and without consideration. Unlike a noncompete between an employee and a company, there was no opportunity for the PLS workers to bargain for additional salary or benefits to compensate for the restriction. Moreover, every new contract struck between PLS and another company served to increase the field of prohibited employment, again without consideration.

On appeal, a state Superior Court panel agreed, citing existing law on employer-employee noncompetes. “If the … restriction, between companies, is allowed, then PLS would essentially be evading the requirement to pay additional consideration in exchange for additional restrictions,” the panel said.

Although the case is one of first impression in Pennsylvania, it follows nationwide trend. The lesson to be drawn is that business-to-business agreements like these will be held up to a spotlight by the courts and may be found threadbare. The better practice is to negotiate noncompetes directly with key employees to ward off their defection to competitors.

If you have questions regarding noncompete agreements and your business, call 412-301-7395 or contact us online to speak with one of the business services attorneys at Feldstein Grinberg Lang & McKee, P.C. in Pittsburgh.

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