Although the Department of Justice’s Antitrust Division has recently been in the news for the civil complaints that it has filed against several large technology companies, during 2020 it has quietly continued to ramp up civil and criminal antitrust enforcement in the labor market by targeting companies that agree on employees’ wages or not to hire each other’s employees.
The Department of Justice and Federal Trade Commission issued Antitrust Guidance for Human Resource Professionals in October 2016, which explicitly stated that naked no-poach agreements are a per se illegal violation of the antitrust laws and warned that wage-fixing and no-poach agreements between competitors made or continued after that date could face criminal prosecution. Although both DOJ and FTC subsequently brought civil actions, including recent actions by the FTC related to no-poach clauses in acquisition agreements, it was not until January 2021 that DOJ brought its first criminal no-poach indictment. That case was itself filed on the heels of DOJ’s first wage-fixing criminal case, which was indicted in December 2020. Although several years have passed since DOJ issued its antirust HR guidance, it now appears that the Antitrust Division has anticompetitive labor practices squarely in its sights.
What are no-poach or no-hire agreements?
A no-poach agreement (sometimes called a no-hire or non-solicit agreement) is a written or oral agreement with another company not to compete for each other’s employees, such as by agreeing not to solicit or hire another company’s employees. A wage-fixing agreement, in contrast, is an agreement with another company regarding the level of compensation paid to employees or contractors, either at a specific level or within a certain range. So-called “naked” no-poach agreements are agreements that are not reasonably ancillary to a separate, legitimate business agreement amongst the companies.
Where are no-poach agreements found?
No-poach and non-solicitation agreements can arise under a variety of circumstances but often arise in the context of corporate transactions. They may be found in a clause in an underlying acquisition agreement or a standalone agreement that is ancillary to the main transaction agreement. No-poach agreements can also occur pursuant to agreements between a manufacturer and distributor, franchisor and franchisee, licensor and licensee, or among parties to a joint venture.
What does the legal landscape look like now for no-poach agreements?
DOJ pursuit of no-poach agreements
In 2018, in a first-of-its-kind settlement, the Department of Justice filed a civil suit and simultaneous settlement against Knorr-Bremse AG and Westinghouse Air Brake Technologies Corp., alleging that these companies, along with a third company, engaged in a six-year conspiracy in which they agreed not to hire each other’s employees. Along with the settlement, the Antitrust Division has taken the unusual step of filing a competitive impact statement that detailed the government’s position that naked no-poach agreements are per se unlawful. The terms of the settlement included a seven-year injunction, a requirement to appoint an antitrust compliance officer, placement of advertisements in industry publications about the settlement, and a requirement that each company notify all its U.S. employees of the settlement and the companies’ obligations thereunder.
Since then, DOJ has filed civil enforcement actions along with statements of interest in numerous private no-hire cases to express its view that such agreements are per se illegal horizontal allocations of the labor market under the antitrust laws. See, e.g., Statement of Interest of the United States, In re Railway Industry Employee No-Poach Antitrust Litig., 2:18mc00798 (W.D. Pa. Feb. 8, 2019) (rail industry employees); Corrected Statement of Interest of the United States, Harris v. CJ Star, LLC, 2:18-cv-00247 (E.D. Wash. Mar. 8, 2019) (fast food franchise employees); Statement of Interest of the United States, Seaman, et al. v. Duke University, et al., 15-cv-00462 (M.D.N.C. March 7, 2019) (medical school faculty members).
Although these cases all sought only civil penalties, DOJ has continued to emphasize that it views naked no-hire agreements as criminal conduct. In an interview with The Wall Street Journal. in January 2020, Assistant Attorney General Makan Delrahim, the chief of the Justice Department’s antitrust section, said that the Antitrust Division expected to bring its first criminal case accusing employers of colluding not to hire each other’s workers in the first half of 2020. Perhaps delayed by the COVID-19 pandemic, the Justice Department indicted its first criminal wage-fixing case in December 2020 and its first criminal no-poach case in January 2021.
In the wage-fixing indictment, United States v. Jindal, No. 4:20-CR-00358 (E.D. Tex. Dec. 9, 2020), the defendant was the owner of a physical therapy staffing company that employed physical therapists (PTs) and physical therapist assistants (PTAs) to provide in-home care to patients. The physical therapy staffing companies in the region competed with each other to hire or contract with PTs and PTAs, who decided which companies to work for based on pay, among other factors. The government claims that the defendant entered into a conspiracy with other owners of physical therapy staffing companies to exchange non-public information about rates paid to PTs and PTAs and to implement rate decreases for wages paid to PTs and PTAs in their employ.
The indictment points out that the cost of home health care, including physical therapy, is often covered by Medicare, the federal health care program providing benefits to persons who are over 65 or disabled. The government’s discussion of Medicare reimbursement in the context of the wage-fixing indictment is noteworthy because it was not directly relevant to the facts of that case. Tellingly, however, the day after the indictment was filed, the Eastern District of Texas, where the wage-fixing case was indicted, announced that it was joining the Procurement Collusion Strike Force, which is a partnership between the Department of Justice, multiple U.S. Attorneys’ offices around the country, and nearly 30 member agencies. The strike force is tasked with anti-competitive activity in connection with public procurement, so it possible that many early wage-fixing or no-poach criminal cases will involve Medicare, Medicaid, defense, or other government spending.
Thereafter, on January 5, 2021, a federal grand jury in the Northern District of Texas returned an indictment alleging a criminal antitrust violation relating to an agreement between three companies to not solicit senior-level employees of the other companies. Although the indictment alleged that agreement prohibited only proactive solicitation of employees, as opposed to an unqualified agreement not to hire, the indictment nonetheless alleges that this type of agreement is per se unlawful under the antitrust laws.
FTC pursues no-poach and noncompete claims after merger review
DOJ is not the only agency concerned with the anticompetitive effects of no-poach agreements. The FTC issued an administrative complaint in January 2020 challenging a consummated May 2018 acquisition not reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Act) by Axon Enterprise, Inc. of its competitor VieVu, LLC. Before the acquisition, the two companies competed to provide body-worn camera systems to large, metropolitan police departments across the United States. The complaint challenges the acquisition, alleging that the acquisition reduced competition in an already concentrated market and VieVu’s parent company, Safariland LLC, entered into ancillary anticompetitive non-compete and non-solicitation agreements with Axon when Axon acquired the VieVu body-worn camera division, which substantially lessened competition. Among other things, Axon and Safariland agreed “not to hire or solicit any of [the other’s] employees, or encourage any employees to leave [the other], or hire certain former employees of [the other], except pursuant to a general solicitation” for a period of 10 years. The FTC claims these non-solicitation provisions “eliminate a form of competition to attract skilled labor and deny employees and former employees … access to better job opportunities” as well as restrict worker mobility and deprive workers of competitive information that they could use to negotiate better employment terms. Although Safariland and Axon agreed to rescind the provisions the FTC alleged were anticompetitive within weeks of the complaint being filed, the FTC pursued the action. Safariland entered into a consent agreement in June 2020 requiring it to submit any agreements with Axon that restrict competition between the two companies to the FTC for review and prior approval and to comply with certain antitrust compliance and reporting requirements. Axon is challenging the proceedings on the merits and constitutional grounds and recently sought and obtained a stay of the October 2020 administrative trial.
This enforcement action follows a blog post in which the FTC provided guidance on the use of such restrictions in mergers and acquisitions. The FTC challenge, along with changes in reporting instructions under the HSR Act that require filers to submit all noncompete agreements between the parties of a reportable transaction, shows that acquisition agreements are ripe for scrutiny by antitrust authorities. The Axon enforcement action underscores the need for companies evaluating mergers and acquisitions to carefully consider the need, scope and duration of ancillary no-poach or non-solicitation provisions in transaction agreements, whether the transaction is reportable under the HSR Act or not.
State attorneys general step in
Even more than DOJ and FTC, several state attorneys general have become crusaders against no-poach agreements, particularly the attorney general of Washington state. While the Justice Department takes a reasonably nuanced view of which no-poach agreements should be subject to per se treatment, the Washington attorney general’s office feels itself unencumbered by such fine distinctions: instead, it takes the view that all no-poach agreements are unlawful in Washington, characterizing DOJ’s case-by-case approach as “somewhat misguided.” Although Washington has focused on franchise systems thus far, there is no indication that its analysis is limited to the franchise context. Notably, the state will not resolve any investigation unless no-poach clauses are removed from contracts nationwide, not just in Washington.
The attorney general’s views have not been tested in court, but since Washington began investigation of no-poach clauses in 2017, it has entered into settlement agreements with over 200 companies (representing nearly 200,000 locations) to end no-poach clauses nationwide. Although the Washington attorney general may be the most fervent enforcer, he is not alone amongst the state attorneys general: in 2018, a coalition of 10 states (including New York and California) and the District of Columbia sent a letter to eight leading fast-food franchisors that requested documents and information relating to the companies’ practices involving no-poach agreements. In 2019, a coalition of 13 attorneys general entered into a multi-state settlement with three companies that ended the use of no-poach clauses contained in franchise agreements.
Private no-poach litigation
In addition to DOJ and FTC pursuit of no-poach agreements, private litigants have brought Sherman Act claims alleging that agreements between competitors not to solicit or hire each other’s employees are per se violation of Section 1 of the Sherman Act, 15 U.S.C. § 1. Some courts have denied motions to dismiss, noting that discovery is needed to determine whether per se, quick look or rule of reason analysis should apply to a given case. See, e.g., In re Papa John’s Employee & Franchisee Employee Antitrust Litig., 2019 WL 5386484 (W.D. Ky. Oct. 21, 2019) (denying restaurant franchisor’s motion to dismiss and declining to require plaintiffs to allege a relevant product or geographic market as direct evidence of anticompetitive effects in terms of suppressed wages and decreased job mobility was sufficient to plead a claim that could be unlawful under a per se, quick look or rule of reason analysis); In re Ry. Indus. Emple. No-Poach Antitrust Litig., 395 F. Supp. 3d 464, 481 (W.D. Pa. 2019) (denying motion to dismiss antitrust claim where plaintiffs alleged a naked no-poach agreement between competitors because such agreements are per se unlawful); Hunter v. Booz Allen Hamilton, Inc., 418 F. Supp. 3d 214, 223 (S.D. Ohio 2019) (denying defendants’ motion to dismiss suit brought by employees of three defense contractors challenging no-poach agreements under all three modes of antitrust analysis without deciding which mode should apply). Given the possibility that such claims will survive a motion to dismiss and proceed to discovery, any no-poach or no-hire provisions should be analyzed to assess the risk of civil litigation or agency enforcement.
Practice Tips for No-Poach Clauses
No-poach agreements can serve to protect legitimate business interests, but they also can serve as a restraint on the ability of employees to compete in the labor market for jobs and wages. A company considering using a no-poach clause in an agreement should consult with antitrust counsel to ensure it is in accordance with federal and state antitrust laws.
To survive antitrust scrutiny, a no-poach agreement must be reasonably ancillary or necessary to achieve an otherwise legitimate business interest such as a merger, asset purchase, joint venture or other type of combination or collaboration, and narrowly tailored to achieve that interest. The restriction must be closely related to the purpose of the underlying agreement and limited in scope and duration. Parties to the restrictive clause should consider what they are trying to protect, why the protection is needed, the scope of protection actually needed and be able to articulate how the restriction accomplishes the benefits of the transaction. The specific facts and circumstances surrounding the transaction and the restrictive clause will be key determinants of enforceability and whether such a clause survives antitrust scrutiny.