How Non-Solicit Agreements Impact the Economy

The intricate relationship between labour markets and antitrust law has become a topic of growing significance in recent years. As businesses all over the world seek to safeguard their proprietary information and maintain a competitive edge, especially in the technology and healthcare sectors, they have increasingly resorted to non-solicitation agreements with competitors. Since some well-established players in the information technology sector have reportedly accused a competitor of "unethical solicitation", non-solicit agreements have become a topic of serious discussion in India as well.

In India, such arrangements have typically been seen in connection with contracts with vendors/service providers or during the setting up of joint ventures, and have historically been examined largely from an Indian contract law perspective. However, with greater awareness and enforcement, the issues raised by such agreements under antitrust law also need to be evaluated carefully going forward. By limiting employee mobility and employment opportunities, non-solicit agreements may lead to fewer choices for both employees and prospective employers. This could possibly create a vacuum in the employment market, affect the competitive abilities of organisations, and lead to wage suppression – which, in turn, can hinder market efficiency, consumer welfare, and innovation.

Can Non-Solicit Agreements be Covered Under Both Contract Law and Antitrust Law?

The Indian Position

Indian contract law holds a clear position on non-solicit arrangements. Unlike non-compete clauses that have predominantly been considered void and unenforceable post termination of employment, Indian courts have historically looked at non-solicit clauses between two organisations liberally, with the view that non-solicit clauses exist to merely protect the interests of the employer and do not endanger an employee's constitutional right to earn a livelihood or prohibit a former employee from joining a competing business.

From an Indian antitrust perspective, the CCI has yet to clearly outline its position on such clauses. The parent legislation does not include any specific references to how non-solicit agreements/arrangements should be treated under the Indian antitrust regime. However, such arrangements between competing entities could potentially fall foul of cartel-related restrictions that prohibit agreements between competitors to limit or control production, supply, markets, technical development, or provision of services, among other things. This is because competitors in any industry agreeing not to hire each other's employees (whether those with specific skill sets or in general) could have an adverse impact on the economy by limiting or controlling labour markets or affecting the production or supply of goods, provision of services, or development of technology.

However, non-solicit restraints in joint venture arrangements may be viewed more favourably. This is because the Indian antitrust regime has a carve-out from cartel-related restrictions for efficiency-enhancing joint ventures between competitors. Such carve-out could potentially cover non-solicit covenants ancillary to a joint venture arrangement.

Positions Adopted by Other Jurisdictions

Antitrust regulators around the world are increasingly starting to scrutinize non-solicit agreements:

  • United States: Such agreements are considered per se illegal under the antitrust laws of the United States and can expose parties to both civil enforcement action as well as criminal proceedings. In their 'Antitrust Guidance for Human Resource Professionals' issued in October 2016, the Department of Justice and the Federal Trade Commission equated the effect of such agreements on elimination of competition to those that fix product prices or allocate customers, which have traditionally been considered as hardcore cartels. Canada also has a similar approach to non-solicit agreements.
  • The European Union: The European Commission does not appear to have commenced with any enforcement of non-solicit agreements (though, similar to India, the law appears to be wide enough to capture such agreements). However, several national antitrust authorities within the European Union – such as those of Belgium, Hungary, Portugal, Romania, Spain, Croatia, and the Netherlands – have conducted investigations and scrutinized such agreements from an antitrust perspective.
  • Other Nations: Antitrust authorities of some nations, such as the United Kingdom and Hong Kong, have issued guidance/advisories addressing antitrust concerns arising out of such agreements. These advisories primarily outline the types of practices that could be considered anti-competitive in labour markets (which includes non-solicit agreements) and encourage reporting of such conduct to the relevant authority.

Overall, it appears that the more mature antitrust regulators lean towards preservation of competitive forces in labour markets to create a fair and competitive environment for businesses and employees alike. Thus, one can no longer view the functioning of labour markets only from the perspective of contract law.

The Road Ahead

While it is important for every economy, especially a growing economy like India, to ensure that labour markets foster innovation and promote competition as well as employee welfare, we believe there are currently two threshold questions to consider:

  • Would the CCI be interested in assessing the impact of such non-solicit agreements on competition in India? Contract law holds a settled position on this matter, as discussed above, and while the remit of the two legislations is completely different, the area is not entirely unlegislated at the moment.
    By way of analogy, the CCI used to assess non-compete provisions on an ex-ante basis as part of merger control filings. However, in 2020, this ex-ante review provision was eliminated given the CCI's comfort that any antitrust concerns arising from non-compete restrictions can be examined under the antitrust enforcement regime that operates on an ex-post basis.
  • Even if the question in (i) above is answered in the affirmative, is now the right time for a young regulator such as the CCI, which has recently entered its second decade of enforcement, to delve into such esoteric topics, especially when jurisprudence on some of its core areas of responsibility is yet to be finally settled?

The Touchstone Take

The global hunt for talent, especially in high technology industries, has often led to competing employers in various geographies reportedly contemplating arrangements not to solicit each other's employees. Such arrangements may likely attract the attention of the Indian antitrust regulator for potential violations of cartel-related restrictions.

The Competition Commission of India (the CCI) will need to assess whether its current priorities include enforcement of non-solicits between competitors or other more pressing matters , such as the development of settled jurisprudence and ironing out the jurisdictional and administrative issues that have hampered its enforcement drive in its first decade of operation.

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