Antitrust enforcement of conduct in labor markets has continued to ramp up during the past decade, with particularly intense scrutiny on agreements between employers of different companies not to recruit or solicit employees of the other, often called ‘no-poach’ agreements.
President Biden signaled that competition in the labor market would be a priority for his administration, issuing an executive order in July 2021 entitled ‘Promoting Competition in the American Economy’, which includes 72 initiatives by more than a dozen federal agencies in an aim to address competition issues across the economy. In furtherance of one such initiative, the Department of Justice (DOJ) and the Department of Labor signed a memorandum of understanding on 10 March 2022, putting into writing commitments by both agencies to exchange information to assist with investigations into possible antitrust violations in labor markets.
Consistent with these priorities, we have seen a significant increase in the number of investigations, criminal indictments, and private litigation based on alleged no-poach agreements. Below, we summarize the legal landscape and recent developments and highlight key trends. Specifically, after an introduction to the legal standard and how antitrust laws apply to employment agreements, we discuss the DOJ’s recent criminal indictments, the DOJ’s latest statements on its position regarding the legal standard applied to franchisee/franchisor agreements, and the question of whether criminal prosecutions present a ‘due process’ issue.
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 generally subject to antitrust scrutiny in the labor context.
Agreements subject to antitrust scrutiny may be between employers of different companies or between an employer and its employees.
Agreements between employers typically raise more antitrust risk and include (1) wage-fixing agreements, which are a form of price-fixing and include agreements to set salaries at a certain level, within a certain range or according to certain guidelines, (2) no-poach or non-solicit agreements, which are agreements not to recruit another company’s employees, and (3) 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. Non-solicitation agreements also arise between employers and employees and limit the ability of an employee to solicit a company’s clients, customers or other employees after leaving the company.
The DOJ and the Federal Trade Commission (together, the Antitrust Agencies) 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’. Thus, the antitrust agencies argue that competition for employees is akin to competition for products and services, and should be protected and promoted.
Critically, 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. This broad definition of ‘competitor’ distinguishes the competitive analysis from the analysis applied in other antitrust contexts where the focus is 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 (e.g., entertainment and high-tech) 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 (the Sherman Act), which prohibits contracts that unreasonably restrain trade, and section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices.
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; 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.
The Supreme Court has stated that the rule of reason is ‘presumptively’ applied and there is a ‘reluctance’ to adopt the per se standard. Historically, agreements between competitors (i.e., horizontal agreements) to engage in hardcore conduct, such as price-fixing, market allocating or bid rigging, are treated as per se illegal, whereas other conduct, including vertical agreements, (i.e., between two firms at different levels in the chain of distribution) and ancillary restraints (i.e., those that are ‘reasonably necessary’ to a separate, legitimate, pro-competitive integration) are subject to the rule of reason.
Depending on the circumstances, no-poach agreements may be analyzed under either the per se or rule of reason standard. 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 non-solicitation provision is found to be ancillary to a larger agreement, then the factfinder will consider the business justifications for the restraint.
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. For civil matters, the DOJ or plaintiffs may seek treble damages against companies. 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.
Recent no-poach trends
Antitrust scrutiny of no-poach and other types of agreements in the employment context is not new; there has been civil enforcement and litigation going back nearly a decade and promoting competition in labor markets has been a focus for a number of years. However, until recently, enforcement was restricted to civil enforcement actions only and primarily against companies in the healthcare and technology industries. That changed in early 2021 when the DOJ announced its first criminal indictment relating to no-poach agreements, and the DOJ has continued to file lawsuits based on these agreements ever since.
Below we highlight three recent trends relating to no-poach agreements: (1) that criminal indictments alleging no-poach agreements are broadening beyond the healthcare industry; (2) the apparent reversal in position by the DOJ with respect to the legal standard applied to franchisee/franchisor no-poach agreements; and (3) whether the DOJ’s decision to prosecute no-poach agreements criminally presents a due process issue.
DOJ broadening criminal prosecutions beyond healthcare industry
The Antitrust Agencies first took the position that the DOJ would criminally prosecute no-poach agreements in 2016, when the Agencies issued joint guidance – Antitrust Guidance for Human Resource Professionals – regarding the application of federal antitrust laws to hiring practices and certain employment agreements. The Antitrust Agencies warned the business community: ‘Going forward, the DOJ intends to proceed criminally against naked wage-fixing or no-poaching agreements.’
The first wave of criminal indictments focused on the healthcare industry, but recent indictments show the DOJ is not limiting its criminal enforcement to healthcare and will be probing hiring practices in other labor markets. Attorney General Merrick Garland recently said: ‘We continue to aggressively prosecute antitrust violations that undermine competition in labor markets or otherwise harm workers – no matter the industry, no matter the company, no matter the individual.’
For example, in December 2021, the DOJ indicted six aerospace-industry executives and managers for allegedly engaging in a conspiracy to ‘suppress competition . . . by agreeing to restrict the hiring and recruiting of engineers and other skilled-labor employees’. The individuals worked for Pratt & Whitney, part of Raytheon Technologies Corp, QuEST Global Services NA Inc, Belcan Engineering Group, Cyient Inc and Parametric Solutions Inc, all aerospace companies.
To support its allegations of the conspiracy not to poach each other’s employees, the DOJ’s indictment includes several examples of communications among the executives and managers regarding the alleged agreement:
- One participant emailed Company A’s hiring contact, explaining: ‘I checked with [Company B], They absolutely do not want to release [the employee]. Please do not extend offer to him. [Company A] has committed to [Company B] that we will not hire any more of their employees this year.’
- Upon hearing that one of the companies had made an employment offer to one of its engineers, a participant stated by email: ‘[Company C] is not allowed to poach any of our employees and I will plan to block this immediately.’
- The participant then emailed another participant: ‘I am very concerned that [Company C] believes they can hire any of our employees . . . Could you please stop this person from being hired by [Company C]?’
- One participant wrote an email to a manager participant at another company: ‘We must not poach each other[’s] partner[’s] employee[s]. Please communicate to [Company C] HR not to hire or interview or hire active employees working on [Company A] work.’
Within days of the DOJ announcing its December 2021 indictment, two class action lawsuits were filed against Raytheon, Belcan, Cyient, Parametric and QuEST, alleging a conspiracy among the aerospace engineering firms to not solicit, recruit, hire without prior approval, or otherwise compete for employees of the other firms, including engineers. The complaints mirror many of the allegations in the DOJ’s indictments, and both cases are pending.
The goal of protecting labor markets has manifested in the merger space, too, most recently in the book publishing industry. The DOJ filed a complaint in federal court to block Penguin Random House’s proposed $2.2 billion acquisition of Simon & Schuster, alleging in part that the combination of the world’s largest book publisher with the fourth-largest US book publisher would ‘likely result in authors earning less for their books [and] likely lead to fewer authors being able to make a living from writing’.
Per se or rule of reason? DOJ’s position on franchise agreements
The change in administration has prompted the DOJ to seemingly change its view on the appropriate legal standard to apply in evaluating no-poach agreements in the franchise context.
A few years ago, state Attorneys General conducted investigations concerning no-poach agreements in the franchise industry, including, for example, a 2018 investigation into the use of no-poach agreements by many national fast-food franchises. As a result of this investigation and later settlement, several major fast-food chains agreed to stop using no-poach agreements.
As follow-on civil litigation brought by former employees proceeded against these companies, the DOJ filed statements of interest in March 2019, clarifying that no-poach agreements between a franchisor and franchisee typically merit the rule of reason analysis because, even though they compete for labor, the vertical relationship between the parties and the potential that franchise-based no-poach agreements are ancillary to legitimate business interests.
In response, the Washington Attorney General filed its own statement of interest, asserting: ‘to the extent a franchise agreement restricts solicitation and hiring among franchisees and a corporate-owned store – which is indisputably a horizontal competitor of a franchisee for labor – the agreement must properly be analyzed as a per se restraint’.
It appears the DOJ is now trying to move away from its prior stance and to adopt a stricter view of no-poach restraints used by franchises. In February 2022, in Deslandes v McDonald’s USA, LLC, the DOJ sought to file a statement of interest in a lawsuit by former McDonald’s managers about the company’s prior policy, which restricted the hiring or soliciting of employees from other franchises. McDonald’s, in its motion for summary judgment, cited one of the DOJ’s earlier statements of interest that ‘most franchisor-franchisee restraints are subject to the rule of reason’. In the DOJ’s motion for leave to file its statement of interest, the DOJ claimed that the ‘Statement of Interest in Stigar, however, does not fully and accurately reflect the United States’ current views’. The motion did not provide details about the government’s current views.
In response, McDonald’s argued the DOJ’s motion was ‘untimely’, coming ‘four-and-a-half years after this case began’. The judge agreed, denying the DOJ’s motion, though did ‘note that there’s a change in [DOJ’s] position’. While the case remains pending, it appears the DOJ may no longer believe the rule of reason standard should be used in evaluating no-poach agreements in the franchise industry.
The parties in Deslandes also debated the meaning of the Supreme Court’s June 2021 decision in NCAA v Alston, where current and former student-athletes filed a lawsuit challenging the restrictions on compensation and benefits imposed by the National Collegiate Athletic Association (NCAA) as illegal under the Sherman Act.
After a lengthy trial, the district court kept in place the NCAA’s rules that limit athletic scholarships and compensation in respect of athletic performance but enjoined certain NCAA rules that limit education-related benefits that schools offer to their student-athletes. Both sides appealed, the Ninth Circuit affirmed in full and the NCAA petitioned the Supreme Court for review. The Supreme Court granted certiorari, and in its briefing papers to the Court, the NCAA argued in part that the district court improperly used the rule of reason analysis in analyzing the NCAA’s restraints, as opposed to ‘an abbreviated deferential view’ or a ‘quick look’. The Supreme Court affirmed, holding that the district court properly applied the rule of reason rather than using the ‘quick look’ standard, in part because the rule of reason applies to all but the most ‘obvious’ antitrust claims.
McDonald’s argued that the Alston opinion makes clear that ‘the Sherman Act “presumptively” calls for . . . “rule of reason analysis”’ and that ‘Plaintiffs bear the burden of persuading the Court to apply the per se or quick look analyses’. In Alston, McDonald’s asserted, the parties agreed on market definition, market power and competitive effects; the only point of disagreement was the appropriate framework for antitrust review. McDonald’s argued that because in the present case the plaintiffs fail to offer common proof of market definition, market power, and anticompetitive effects, and because the restraints involve vertical agreements, the rule of reason standard applies.
By contrast, the plaintiffs argued that Alston confirms the ‘quick look’ test was appropriate in their case because the alleged no-poach provision’s ‘purpose was to prevent bidding wars . . . for employees’ and the effect was to ‘suppress wages’. Thus, according to the plaintiffs, a full rule of reason analysis was not required ‘given the predictable anticompetitive effects that ensue from an explicit agreement between employers to refrain from competing for workers, a market allocation’.
The judge ultimately sided with McDonald’s, holding that the rule of reason analysis applied to the evaluation of no-hire provisions of franchise agreements. As the plaintiffs had made ‘no attempt to identify a relevant market’, which ‘in the case of vertical restraints . . . must always be defined’, the court also denied class certification. One plaintiff’s individual claim against McDonald’s – alleging the former policy caused her to not be hired by another McDonald’s franchise that paid more – remains pending.
Due process concerns with criminal prosecutions
The recent wave of criminal indictments for alleged no-poach agreements has prompted defendants to raise a due process question: can the DOJ prosecute no-poach agreements criminally in the absence of federal precedent by the courts? As noted, historically, per se treatment and criminal prosecutions under the Sherman Act have been limited to ‘hard core’ cartel conduct – price-fixing, market allocation and bid rigging: virtually all other conduct is subject to the rule of reason standard. And, before 2016, there was no indication that the DOJ aimed to treat ‘naked’ no-poach agreements criminally.
The due process issue was raised in the DOJ’s first no-poach criminal indictment, in United States v Surgical Care Affiliates (SCA). In the criminal indictment filed in January 2021, the DOJ alleged that SCA and others ‘engaged in a conspiracy to suppress competition between them for the services of senior-level employees by agreeing not to solicit each other’s senior-level employees’, which the DOJ characterized as ‘per se unlawful’.
In response, SCA filed a motion to dismiss the indictment, arguing in part that because there is no federal precedent that no-poach agreements are inherently illegal, ‘[f]undamental principles of due process and fair notice bar this prosecution’. SCA asserted that the plain language of the Sherman Act does not provide the necessary notice because it ‘does not, in clear and categorical terms, precisely identify the conduct which it proscribes’. In that case, ‘established judicial construction may supply the fair notice that the text lacks. But imposing criminal liability in the absence of judicial decisions plainly marking out conduct as categorically forbidden cannot be squared with due process’. It is thus the courts, and not the Antitrust Agencies, that typically define per se illegal conduct, according to SCA, and the ‘government cannot just announce a per se prohibition on a new category of market practices’.
In response, the DOJ argued that:
the Supreme Court has long made clear that the Sherman Act applies equally to all industries and markets . . . [t]hus, agreements among buyers in a labor market not to solicit each other’s employees are treated no differently than agreements among sellers in a product market not to solicit each other’s customers.
The DOJ also argued that the text of section 1 of the Sherman Act makes clear that violators may be charged criminally, and ‘judicial interpretations provide fair notice of the conduct that is prohibited’.
While the case against SCA remains pending, the DOJ has secured a significant win in a related case that may make the due process argument moot. In United States v DaVita Inc, the DOJ alleges that SCA, DaVita and one other as-yet-unnamed company (all owners of outpatient medical facilities) engaged in a per se unlawful conspiracy by agreeing not to solicit each other’s employees.
On 28 January 2022, in considering the DaVita defendants’ motion to dismiss, Colorado District Court Judge Jackson ruled that naked horizontal non-solicitation agreements that allocate the market (i.e., those that are not ancillary to a legitimate pro-competitive business purpose and have ‘no purpose except stifling competition’) are per se violations of the Sherman Act. Judge Jackson found that naked no-poach agreements belong to an existing category of per se treatment – market allocation – because, as alleged, the defendants agreed to ‘allocate senior-level employees by not soliciting each other’s senior level employees’. These allegations, Judge Jackson ruled, made clear that ‘the agreement entered was a horizontal market allocation agreement carried out by non-solicitation’. As a result, Judge Jackson found that the defendants had ‘ample notice’ that entering into a naked agreement to allocate the market of employees would subject them to criminal liability.
However, Judge Jackson made clear that his holding is ‘much more limited than the government’s argument [that all non-solicitation agreements and all no-hire agreements are horizontal market allocation agreements and thus per se unreasonable]’; instead, ‘if naked non-solicitation agreements allocate the market, they are per se unreasonable’. Thus, rather than holding that all no-poach agreements are per se illegal, Judge Jackson found that, in this particular case, the DOJ had sufficiently alleged that the defendants allocated the market via the no-poach agreements, which is a per se violation of the Sherman Act.
The DOJ has since filed notices of supplemental authority about Judge Jackson’s ruling in other pending cases, asserting that with Judge Jackson’s opinion, ‘the argument that no federal court has held a no-poach agreement to be a per se criminal violation under the Sherman Act is foreclosed’.
The defendants have noted that it is rare for a motion to dismiss an indictment to be granted, downplaying Judge Jackson’s ruling. It is also possible another court could come out differently on the due process issue or on how to characterize no-poach agreements under the Sherman Act. Moreover, on 15 April 2022, the jury voted to acquit the defendants on all counts, and this acquittal came only one day after another acquittal relating to alleged wage-fixing in a case in Texas. Although the recent acquittals are clear setbacks for the DOJ, Assistant Attorney General Jonathan Kanter, head of DOJ’s Antitrust Division, said: ‘We’re going to continue to bring the cases – we’re not backing down.’ With other cases pending, including one case set for trial in July 2022 and another in January 2023, it remains to be seen how other courts will treat the due process issue, and whether juries will continue to side with the defense.
More than a year has passed since the DOJ announced its first criminal indictment relating to no-poach agreements. Since that time, grand juries across several states have returned additional criminal indictments, private class action litigation has been initiated relating to such indictments, the DOJ has defeated a motion to dismiss, and President Biden and other administration officials have emphasized the importance of preserving competition in America’s labor markets.
In short, antitrust scrutiny of no-poach agreements has intensified and will continue to do so, and businesses should expect more criminal enforcement and aggressive treatment of employment agreements under the antitrust laws. Companies should implement a robust antitrust compliance policy, including antitrust training for employees, and engage antitrust counsel to review current non-solicitation provisions and non-compete clauses to help mitigate their antitrust risk and to try to keep out of the Antitrust Agencies’ crosshairs.