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Avoiding the Antitrust Pitfalls of No-Poach Agreements: Frequently Asked Questions and Answers

Posted  April 10, 2019
By J. Wyatt Fore

As federal antitrust enforcers have targeted so-called “no-poach” agreements in recent years, it has become increasingly important for employers in all industries to learn about the risks of entering into agreements that limit their competition for employees.  Here are the answers to some of the frequently asked questions about the exposure of such no-poach agreements to antitrust enforcement.

We have prepared the following FAQs for informational purposes only.  Constantine Cannon does not dispense legal advice through any of its blogs and this post should not be construed to provide such advice.  To the extent anyone reading this has any questions or may need legal advice on these topics please contact us at our website or contact your legal counsel.

Q.  What is a no-poach agreement?

A.  A no-poach agreement is essentially an agreement between two companies not to compete for each other’s employees, such as by not soliciting or hiring them. Agreements between companies that limit or otherwise fix the terms of employment for current or potential employees may violate the antitrust laws if the agreement constrains the company’s independent decision-making with respect to wages, salaries, benefits, terms of employment, or job opportunities.  An agreement or understanding between two companies not to compete for prospective employees is a classic no-poach agreement.

No-poach agreements can include everything from broad no-hire agreements to less restrictive understandings, such as promises not to cold call (or work with headhunters who solicit) each other’s employees, or even allocation of job fairs among competing employers.

Q.  Can no-poach agreements violate the law?

A.  YESAgreements between companies not to compete for the same set of employees can easily violate federal and state antitrust laws, and may be criminally prosecuted as felonies.  The U.S. antitrust agencies, the Federal Trade Commission and the U.S. Department of Justice, have issued a joint Antitrust Guidance for Human Resource Professionals to bring greater attention to the government’s enforcement policies in this area.  As the agencies stated:

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.  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.

Illegal no-poach agreements do not have to be written or formal.  Informal oral discussions at conferences, in emails or texts, unwritten “gentlemen’s agreements,” and the knowing “wink and nod” have all been held sufficient to violate the antitrust laws.  Evidence that competitors have discussed limiting employee compensation or recruitment (even through third-party intermediaries), combined with evidence of parallel conduct limiting such employee compensation or recruitment, may allow a judge or jury to infer the existence of an illegal agreement.

Q.  Who is at risk for entering into no-poach agreements?

A.   Entering into a no-poach agreement raises both criminal and civil antitrust risks for the companies and individuals involved. For example, an HR professional who asks her counterpart at another company to stop cold calling her employees may expose herself, her superiors, and her company to criminal and civil antitrust liability.  Likewise, an HR professional who refrains from cold calling another company’s employees, because his company has a no-poaching policy, is equally at risk of criminal and civil prosecution.

Q.  What are the sanctions for entering into illegal no-poach agreements?

A.   Violations of the antitrust laws are punished severely. If the government decides to prosecute criminally, a company may be fined up to $100 million, while individuals face fines up to $1 million and imprisonment of up to 10 years.[1]  The maximum fines may be increased to amounts reflecting twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.  Even if the government decides not to prosecute criminally, private plaintiffs can sue and recover up to three times the damages that resulted from the violation.[2]

Q.  Are there legal defenses to no-poach agreements?

A.   In some cases, yes. For example, if a no-poach agreement is part of a separate, legitimate business transaction, or other pro-competitive collaboration, courts will examine whether the no-poach agreement is reasonably necessary to “make the main transaction more effective in accomplishing its purpose.”[3] Such “ancillary” no-poach agreements may be permissible, for example, if necessary to further an otherwise pro-competitive merger or to make a R&D joint venture more effective.  Even in these cases, however, antitrust law requires no-poach agreements to be tailored both in terms of scope and duration.  No-poach agreements that apply to entry level or junior employees are unlikely to pass antitrust scrutiny.  The same is true for no-poach agreements that are not reasonably limited in term.

Q.  How do I really know if a no-poach agreement is truly “ancillary” to legitimate business conduct?

A.   The legality of each no-poach agreement must be evaluated based on the specific and often unique facts of each situation. Do not assume that because a no-poach agreement was deemed “ancillary” in one case that it will likewise be deemed ancillary in different circumstances.  These analyses are best entrusted to experienced antitrust counsel.

Q:  Have companies been sued for no-poach agreements?

A:  Yes.  For example, in 2007, DOJ sued the Arizona Hospital and Healthcare Association for unlawfully implementing a uniform rate schedule for temporary nurses for AzHHA member hospitals.  In 2010, DOJ settled with Adobe, Apple, Google, Intel, Intuit and Pixar for illegally adopting no-poach agreements.  Follow-on private class action lawsuits settled for over $600 million.

More recently, cases have been filed against universities (e.g., Duke and UNC medical schools), fast food restaurants (e.g., McDonalds, Burger King, IHOP, Dunkin’ Donuts, Pizza Hut, Carl’s Jr., Jimmy John’s), and manufacturers (e.g., Knorr-Bremse, Wabtec, Faiveley).

There is reason to believe that there will be more enforcement actions in the future, including criminal prosecutions.  A senior DOJ official recently remarked that “[j]ust after I joined the division . . . I said I was surprised at how many no-poach investigations we had pending.  Now I can say that we have a lot more.  A lot more.  I’m really surprised at how prevalent the practice is.”[4]

Q.  How can I protect myself?

A.   Do not do any of the following without consulting with counsel:

  1.  Discuss salary or benefit information with anyone at another company, including by providing salary ranges for particular classes of employees. For example, even where wage growth appears to be out of control, the antitrust agencies caution that companies may not establish a reasonable pay scale for employees.
  2. Discuss with someone from another company refraining from soliciting or hiring employees of that company. For example, even where companies spend a lot of time and money to recruit and train new employees, the agencies have stated that this investment does not justify entering into an agreement (or even a so-called gentleman’s understanding) not to recruit or hire each other’s employees.
  3. Discuss limiting employee compensation or recruitment with anyone from another company. For example, the agencies warn that even HR professionals at non-profit organizations may not agree to cap wage increases for even certain key employee groups, even if doing so is necessary for the non-profits to survive.
  4. Exchange salary or benefit information at trade associations or in the context of industry surveys. If you attend a trade association or other industry meeting where salary or benefit information is discussed, notify your in-house counsel and/or compliance officers immediately.

If you have engaged in any of this conduct (or similar conduct) it is importance to seek legal guidance immediately from your internal compliance officers, in-house counsel, and/or external antitrust counsel.  Through the government’s leniency program, corporations can avoid criminal conviction and fines, while individuals can avoid conviction, imprisonment and fines, in exchange for fully cooperating with the government’s investigation and meeting other specified conditions.

Q.  What are the best practices regarding no-poach agreements?

As antitrust risk is inherently fact specific, it is critical to consult with experienced counsel to review any action that may raise no-poaching or no-hiring concerns.  In doing so, companies should consider the following issues within the context of the specific facts and circumstances they face:

  • How broad is the scope of the no-poach or no-hire agreement? In general, these agreements should not cover non-critical employees (such as low-level administrative staff), former employees, or consultants.
  • How long will the no-poach or no-hire agreement endure? In general, agreements that last for more than a few years will draw antitrust scrutiny.  Evergreen or otherwise lengthy agreements should be avoided and entered into only after taking advice from experienced antitrust counsel.
  • Is a less-restrictive agreement acceptable? No-hire agreements will tend to draw the greatest scrutiny, since they are an absolute prohibition on cross-company hiring.  No-poach agreements can be less restrictive, for example prohibiting only direct solicitation of employees.  Companies should also consider whether other exceptions can be made, for example for employees who leave the company before being approached.

In all cases, companies should avoid entering into any agreements or understandings with other companies concerning their current or potential employees without first obtaining the advice of experienced antitrust counsel.

Edited by Gary J. Malone

 

[1] See U.S. Sentencing Guidelines Part R (Antitrust Offenses).

[2] See 15 U.S.C. § 15.

[3] Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 224-27 (D.C. Cir. 1986).

[4] Leah Nylen, Number of no-poach agreements uncovered by DOJ ‘shocking,’ official says, MLex Market Insight, May 17, 2018.

Tagged in: Antitrust Enforcement,

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