India: To Poach Or Not To Poach – Potential Risks From A Competition Law Standpoint

In a free market, businesses compete to offer the best range of products at the most competitive prices. Similarly, competition among employers to recruit employees leads to better terms and increased opportunities for employees. A non-poaching agreement is an arrangement/ understanding/ agreement between employers which prevents them from hiring each other's employees.

Unlike general industry-wide contracts, where the employees are aware about non-compete or non-solicitation clauses, in a non-poaching agreement, the employees are unaware of the agreement between their current employer and potential employer whereby they have agreed not to hire or pursue each other's employees. Employers who compete to hire employees are deemed to be competitors in the relevant labor/ employment market.

Non-poaching agreements between companies have been under the scanner of various competition enforcement agencies such as the United States Department of Justice (DOJ), Turkish Competition Authority (TCA), French Competition Authority (FCA) and the Spanish Competition Authority (SCA), however certain authorities such as the European Commission (EC) and the Competition Commission of India (Commission/ CCI), have not yet opened any formal investigation into such agreements. However, it can be said that such agreements are becoming increasingly common.

While there maybe a debate as to whether such agreements can fall under the ambit of the Competition Act, 2002 (Act), many competition regulators have issued advisories/ bulletins for companies indulging in such agreements. This article summarizes the jurisprudence developed thus far and the position that the CCI may adopt with respect to such agreements.

Position in the United States of America

In USA v. Adobe and Ors.¹, the US District Court for the District of Columbia, by way of its judgement dated 17 March 2011, prohibited each party to the case (Adobe, Apple, Intel, Intuit and Pixar) from 'attempting to enter into, entering into, maintaining or enforcing any agreement with any other person to in any way refrain from, requesting that any person in any way refrain from, or pressuring any person in any way to refrain from soliciting, cold calling, recruiting, or otherwise competing for employees of the other person'. In fact, following a class action suit, initiated by approx. 64,466 claimants, the parties made an out of court settlement wherein these companies (collectively) paid damages of approx. USD 415 million² (INR. 3400 crores approx.) to the claimants.

In October 2016, the Federal Trade Commission (FTC) and the DOJ jointly issued 'Antitrust Guidance for Human Resource Professionals'³, which clearly observed that employers that compete to hire or retain employees are competitors in the employment marketplace, regardless of whether they make the same products or compete to provide the same services and that 'it is unlawful for competitors to expressly or implicitly agree not to compete with one another, even if they are motivated by a desire to reduce costs.'

The guidance also observed that, "Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws" and the DOJ could bring a criminal prosecution against individuals, the company, or both. An employee can also institute a case for up to three times the damages suffered. The guidance is intended to alert Human Resource (HR) professionals and others involved in hiring and compensation decisions to potential violations of antitrust laws.

In 2021, there were several cases where the DOJ indicted companies and individuals for entering into non- poaching agreements⁴. Thus, non- poaching agreements are viewed as violative of Section 1 of the Sherman Act which prohibits agreements in restraint of trade, including cartels.

Approach adopted by the EC and National Competition Authorities

The EC has not delved into this issue like the USA. However, this issue has been gaining importance. The European Union's Competition Commissioner, Margrethe Vestager, in her speech on 22 October 2021 at the Italian Antitrust Association's Annual Conference had indicated that the EC would start investigating into 'new' types of anti-competitive conduct such as no-poaching agreements. Thereby signalling an increase in surveillance activity.

The FCA in its decision dated 18 October 2017 had imposed a fine of EUR 302 million (approx. INR. 2500 crores) on PVC manufacturers Tarket, Forbo and Gerflor in respect of no-poaching agreements (as well as other anti- competitive agreements), wherein the manufacturers had admitted to the existence of a "gentleman['s] agreement" from 1996 to 2011 to not hire from each other's company. The manufacturers even went to the far extent of warranting head-hunters to avoid such recruitments⁵.

The approach of the competition regulators makes it clear that the focus is now moving towards newer types of cartel activities rather than traditional bid rigging, price fixing cases. This is an indication that the doors have been opened for anti-trust prosecution of non-poaching agreements.

Approach adopted by the Turkish Competition Authority

Although the TCA had an opportunity to deal with several non-poaching cases, it was not until 2021 in the case of private hospitals that the TCA was of the opinion that the case warrants investigation. In this regard, on 2 March 2022, TCA announced the "Final Decision Regarding the Investigation on some private healthcare institutions and enterprises unions Pursuant to Article 49 of Law No. 4054 on the Protection of Competition"⁶. By way of this announcement, TCA imposed a penalty of approx. 58 million Turkish Liras (INR 25 crores approx.) on private healthcare providers and healthcare institutions for limiting competition in labour market by price fixation in violation of Article 4⁷ of the Law on Protection of Competition. Thereafter, TCA has launched several investigations against anti-trust violation in the labour market.

Approach adopted by Hong Kong Competition Commission

On 09 April 2018, the Hong Kong Competition Commission (HKCC) issued an Advisory Bulletin⁸ on 'Competition concerns regarding certain practices in the employment marketplace in relation to hiring and terms and conditions of employment'. The Advisory Bulletin is expected to raise awareness of the potential competitive risks relating to employment practices. The Bulletin clearly states that an agreement in relation to solicitation, recruitment or hiring each other's employees or information exchange regarding their intentions, effectively amounts to allocation of sources of supply.

The Bulletin sets out examples of practices that would amount to anti- competitive conduct. For instance, agreements between enterprises in relation to compensation or solicitation or hiring of employees, including fixing of benefits and allowances such as insurance benefits, housing allowances, severance payments.

The Bulletin advises enterprises to independently determine their policies and that they should avoid communicating such policies to other employers. This Bulletin clearly sets out the mindset of the regulator and how it perceives such agreements between employers as anti- competitive.

Approach adopted by the Japan Fair Trade Commission

The Japan Fair Trade Commission (JFTC), on 15 February 2018, published a "Report of the Study Group on Human Resource and Competition Policy"⁹ which sheds light on the application of the Anti-Monopoly Act application to labour markets.

The study indicates that a joint, artificial decision on terms of trade, which should have been determined in the market for human resources, is illegal in principle because it is intended to restrict competition and, as a result, has a very severe negative impact on competition. The study further suggests that an arrangements made jointly by multiple employers regarding the price/ compensation paid to employees of certain services prevent and avoid competition for acquiring human resources among the employers in the market for human resources.

The study states that since 'price' is the most important competitive means in securing human resources, such an act [coordination between employers] substantially restrains competition in the market for human resources, and in principle, it becomes a problem under the Anti-monopoly Act.

The study takes the same stand with respect to an agreement between employers which restricts switching of jobs between employees. It has been observed that such conduct could make new entry to the market more difficult because parties who intend to start offering new goods or services in the markets for goods and services might not be able to secure the service providers that they need to supply goods and services. In such case, there could be a problem under the Anti- monopoly Act when competition to supply goods and services to those markets is prevented.

The JFTC's study also makes it abundantly clear that anti- poaching agreements are considered a problem and might amount to a per- se violation of the Anti- Monopoly Act.

India's stand on "Non-Poaching Agreement"

The CCI is yet to test such agreements and no formal guidance has been issued by the CCI thus far. However, the law in India (from a Contract Act standpoint) is that "Negative Covenants between employer and employee contracts pertaining to the period post termination and restricting an employee's right to seek employment and/or to do business in the same field as the employer would be in restraint of trade and, therefore, a stipulation to this effect in the contract would be void"¹⁰.

The definition of "agreement" under the Act is of much wider import than the definition under the Contract Act, where "an agreement enforceable by law is a contract" and "an agreement not enforceable by law is said to be void". For an agreement to come within the purview of the CCI, even an oral agreement between employers is enough to bring it within the definition of agreement. Moreover, it seems to be clear that such agreements do have an adverse effect on competition in the labour market.

Looking at the developments worldwide, time is not far when the CCI does catch on to such agreements and proceeds with a full-fledged inquiry. In the interregnum, while this issue is percolating, companies should implement a robust competition compliance policy including scrutinization and review of non-poaching clauses of current agreements (if any) with a view to mitigate their competition risk and to try to keep out of CCI's radar.

Footnotes

1. https://www.justice.gov/atr/case-document/file/483426/download

2. https://www.cand.uscourts.gov/filelibrary/1636/Doc-1111-ORDER-GRANTING-PLAINTIFFS.pdf

3. https://www.justice.gov/atr/file/903511/download

4. USA v. Surgical Care Affiliates, LLC, Case No. 3:21-CR-00011(N.D. Tex. Jan 05,2021) [available at - https://www.justice.gov/atr/case/us-v-surgical-care-affiliates-llc-and-scai-holdings-llc]; USA v DaVita, Case No. 1:21-CR-00029-RBJ dated 14.07.2021 [available at - https://www.justice.gov/opa/pr/davita-inc-and-former-ceo-indicted-ongoing-investigation-labor-market-collusion-health-care]; USA v. Hee, No. 2:21-cr-00098-RFB-BNW (D. Nev. Mar. 26, 2021) [available at https://www.justice.gov/usao-nv/pr/health-care-staffing-company-and-executive-indicted-colluding-suppress-wages-school]; USA v. Patel, No. 3:21-cr-00220-VAB (D. Conn. Dec. 15, 2021) [available at https://www.justice.gov/atr/case-document/file/1472741/download]

5. Decision No. 17-D-20 of October 18,2017 [available at – https://www.autoritedelaconcurrence.fr/sites/default/files/commitments/17d20.pdf ]

6. https://www.rekabet.gov.tr/Dosya/geneldosya/ozel_hastaneler_nihai_karar-pdf

7. Article 4 - Agreements and concerted practices between undertakings, and decisions and practices of associations of undertakings which have as their object or effect or likely effect the prevention, distortion or restriction of competition directly or indirectly in a particular market for goods or services are illegal and prohibited [available at https://www.rekabet.gov.tr/en/Sayfa/Legislation/act-no-4054 ]

8. Advisory Bulletin on Competition concerns regarding certain practices in the employment marketplace in relation to hiring and terms and conditions of employment dated 9 April 2018 [available at - https://www.compcomm.hk/en/media/press/files/20180409_Competition_Commission_Advisory_Bulletin_Eng.pdf ]

9. https://www.jftc.go.jp/en/pressreleases/yearly-2018/February/180215_files/180215_3.pdf

10. FL Smidth Pvt Ltd v Secan Invescast (India) Pvt Ltd 2013 (1) CTC 886 dated 1.02.2013 para 38 (2)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.