Antitrust enforcement of conduct in labor markets has continued to ramp up substantially during the past decade, with particularly intense scrutiny on agreements between employers of different companies not to recruit or solicit employees of another, often called 'no-poach' agreements.
Although these agreements have been subject to review for many years, the US antitrust agencies – the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) (together, the Antitrust Agencies) – first issued formal guidance indicating that the DOJ would criminally prosecute no-poach agreements and other forms of collusion in the labor market in 2016. Until that point, enforcement had been mostly focused on the healthcare and technology markets and only in the civil context, analyzed under the rule of reason.
In their 2016 guidance, however, the Antitrust Agencies made clear that naked wage-fixing and no-poach agreements are per se illegal, not justifiable for any reason, and promised future criminal enforcement action. This led to reinvigorated agency investigations and settlements, new waves of private litigation, including class actions, and, just in the past six months, criminal enforcement.
Following the Antitrust Agencies' dramatic shift in approach, there remains a fair amount of uncertainty regarding how no-poach agreements will be analyzed by state regulators, the federal antitrust authorities, and the courts, depending on the context in which they arise. For example, although the DOJ has advised that not all no-poach agreements are 'naked' and provided some guidance on which agreements are subject to per se treatment, state regulators and courts have often disagreed with the DOJ's approach.
Below, we summarize the legal landscape and current developments to illuminate these issues. Specifically, we summarize the applicable laws, standards of review, and theories of harm, and provide a brief history of the enforcement of no-poach agreements by both the Antitrust Agencies and the courts.
We conclude with a discussion of the recent enforcement trends, including recent DOJ criminal indictments for no-poach agreements and the Biden administration's aggressive stance with respect to such agreements, which strongly suggests antitrust scrutiny of no-poach agreements will continue to increase in the near future.
Antitrust issues associated with no-poach agreements
Overview of agreements subject to enforcement in the employment context
This chapter is focused on no-poach agreements, but we start by providing an overview of the types of agreements that are subject to antitrust scrutiny in the employment context generally.
Agreements subject to antitrust scrutiny may be between employers of different companies or between an employer and its employees, and often relate to an employee's salary or his or her mobility (or both).
Generally agreements between employers raise more antitrust risk and include (1) wage-fixing agreements, which are a form of price-fixing, and include agreements to fix salaries, set salaries at a certain level, within a certain range, or according to certain guidelines, or increase, maintain or lower salaries by an agreed percentage, (2) no-poach or non-solicit agreements, which are agreements not to recruit another company's employees, and (3) no-switching or no-hire agreements, which are agreements not to hire another company's employees.
An agreement between an employer and its employees that may raise antitrust risk is a non-compete agreement, which limits the ability of an employee to join or start a competing firm after a job separation.
Another category of agreements between employers that may raise antitrust risk is information-sharing agreements, which include agreements to exchange competitively sensitive information with competitors (e.g., salary, bonus, or benefits information).
The Antitrust Agencies and the courts have focused on these agreements, asserting that competition in the labor market provides actual and potential employees with higher wages, better benefits, and more varied types of employment – all of which ultimately benefit consumers because 'a more competitive workforce may create more or better goods and services.' 1 Thus, the Antitrust Agencies argue that competition for employees is akin to competition for products and services, and should be protected and promoted.
Importantly, however, in analyzing agreements under the antitrust laws, the term 'competitor' includes any firm that competes to hire the same employees, regardless of whether the firm makes similar products or provides similar services.2 This broad definition of 'competitor' distinguishes the competitive analysis from the analysis applied in other antitrust contexts, which focuses more on current, future, or potential competition for goods sold and services offered. As a result, firms may be subject to antitrust liability for entering into certain agreements with firms in different industries, if the agreement concerns the same types of employees (e.g., software engineers).
Antitrust laws applied to agreements in the employment context
The relevant antitrust laws that apply to no-poach and other employment agreements are section 1 of the Sherman Antitrust Act, which prohibits contracts that unreasonably restrain trade,3 and section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices.4
Under the Sherman Act, there are two fundamental standards of review: (1) the per se standard, which applies to certain acts or agreements that are deemed so harmful to competition with no significant countervailing pro-competitive benefit that illegality is presumed without further analysis; and (2) the 'rule of reason,' which applies to all other conduct and agreements, and pursuant to which the factfinder weighs the pro-competitive benefits of the restraint against its potential harm to competition to determine the overall competitive effect. There is a third standard of review, called the 'quick look,' which is a truncated rule of reason analysis and may be applied when 'the great likelihood of anticompetitive effects can easily be ascertained.' 5 It is not clear when courts will apply the full rule of reason analysis versus the 'quick look' analysis, and the Supreme Court has indicated, 'there is generally no categorical line to be drawn between restraints that give rise to an intuitively obvious inference of anticompetitive effect and those that call for more detailed treatment. What is required, rather, is an enquiry meet for the case, looking to the circumstances, details, and logic of a restraint.' 6
The Supreme Court has stated that the rule of reason is 'presumptively' applied and there is a 'reluctance' to adopt the per se standard.7 Agreements between competitors (i.e., horizontal agreements) to fix prices and allocate markets or customers are treated as per se illegal, whereas vertical agreements (i.e., between two firms at different levels in the chain of distribution) are generally subject to the rule of reason. Indeed, courts generally recognize that horizontal restraints have a much greater potential than vertical restraints to produce anticompetitive harm, and so are much more lenient in analyzing vertical restraints.8 Moreover, ancillary restraints (i.e., those that are 'reasonably necessary' to a separate, legitimate, pro-competitive integration) are also subject to the rule of reason.9
Whether the per se or rule of reason standard applies has significant implications for the outcome of an enforcement action or litigation. If an agreement is found to be a 'naked' no-poach agreement, meaning there is no purpose for the agreement other than to restrict competition, the per se standard applies. As such, neither the court nor the Antitrust Agencies will consider any proposed justifications for the agreement; it is illegal on its face. If, however, the rule of reason standard applies, such as if a nonsolicitation provision is found to be ancillary to a larger agreement, then the factfinder will consider the business justifications for the restraint. As we discuss below, there is no uniform approach among the Antitrust Agencies, state Attorneys General, and the courts on which standard applies to no-poach agreements.
For example, there are some contexts in which the use of no-poach or nonsolicitation agreements are generally found to raise less risk, if, for instance, the parties to the agreement are in a vertical relationship (e.g., a manufacturer and a retailer), as opposed to horizontal competitors (i.e., are in the same level of the supply chain such that they could or do compete against each other). In this circumstance, as well as if the agreement is found to be ancillary, the rule of reason standard of review is more likely to apply, meaning the court will consider the proposed justifications for the no-poach provision.
It is also permissible for companies to make independent decisions about restrictions or limitations on the company's own hiring practices, as long as any decisions are indeed made unilaterally. The use of no-poach provisions may also be permissible in the context of mergers or acquisitions, joint ventures,10 investments, or divestitures,11 as long as such clauses are reasonable, narrowly tailored, and tied to legitimate business justifications, such as protecting trade secrets or the investment in employee training and education. Similarly, no-poach provisions may be acceptable in contracts with consultants, auditors, vendors, and recruiting agencies, and to resolve legal disputes, if narrowly and carefully crafted.
The penalties for violating the antitrust laws are severe and apply at both the company and the individual level. For per se criminal violations, companies face a maximum fine of up to $100 million, or twice the gross gain or gross loss suffered, and an individual may be fined up to $1 million or face a 10-year prison sentence.12 For civil matters, the DOJ or plaintiffs may seek treble damages against companies.13 This is in addition to reputational damage, the potential for required changes to business practices and oversight monitoring as a result of a government consent decree, and significant time and effort to defend against an investigation or lawsuit.
1 Dep't of Justice [DOJ] and Fed. Trade Comm'n [FTC], 'Antitrust Guidance for Human Resource Professionals' (Oct. 2016), https://www.justice.gov/atr/file/903511/download; see also In re Papa John's Emp. & Franchisee Emp. Antitrust Litig., No. 3:18-CV-00825, 2019 WL 5386484, *9 (W.D. Ky. Oct. 21, 2019) ('Plaintiffs also sufficiently plead antitrust injury. Plaintiffs contend that the No-Hire provision is an agreement not to compete for labor and that the agreement had the purpose and effect of depressing wages and diminishing employment opportunities.').
2 Id. at 2 ('From an antitrust perspective, firms that compete to hire or retain employees are competitors in the employment marketplace, regardless of whether the firms make the same products or compete to provide the same services.').
3 15 U.S.C. § 1. 'Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.'
4 15 U.S.C. § 45(a)(1). 'Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.'
5 California Dental Ass'n v. FTC, 526 U.S. 756, 770, 779 (1999).
6 Id. at 780–81.
7 State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).
8 Leegin Creative Leather Prods. v. PSKS, Inc., 551 U.S. 877, 888 (2007) (noting that '[o]ur recent cases formulate antitrust principles in accordance with the appreciated differences in economic effect between vertical and horizontal agreements').
9 NCAA v. Bd. of Regents, 468 U.S. 85, 100–03 (1984).
10 In their joint 2016 guidance, the DOJ and FTC explicitly noted: 'Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.' 'Antitrust Guidance for Human Resource Professionals', at 3 (Oct. 2016), https://www.justice.gov/atr/file/903511/download.
11 See, e.g., U.S. v. Adobe Sys., Inc., No. 1:10-cv-01629, 2011 WL 10883994 (D.D.C. Mar. 18, 2011).
12 18 U.S.C. § 3571(d).
13 15 U.S.C. § 15(a) ('any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue . . . and shall recover threefold the damages by him sustained').
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Originally published by GCR, July 2021
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