Expect Continued Law Enforcement Focus on No-Poach Agreements in 2022January 26, 2022
DOJ and FTC Guidance
In 2016, the DOJ and FTC jointly issued “Antitrust Guidance for Human Resources Professionals,” authored by S&C’s Renata Hesse during her tenure as acting assistant attorney general. The guidance explains that “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.” As for so-called naked no-poach agreements that, for instance, are unrelated to collaborative joint venture activity, the DOJ and FTC explained that “Agreements among employers not to recruit certain employees or not to compete on terms of compensation are illegal,” including agreements “to refuse to solicit or hire that other company’s employees.” Moreover, “[n]aked . . . no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws. That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.” The guidance notes that it is irrelevant whether the alleged agreement is “informal or formal, written or unwritten, spoken or unspoken.”
The 2016 guidance also announced the DOJ’s intention to seek criminal penalties, stating, “Going forward, the DOJ intends to proceed criminally against naked . . . no-poaching agreements.” That intention was reaffirmed in September 2019 by the then-assistant attorney general of the Antitrust Division of the DOJ, Makan Delrahim, who said in a speech, “I want to reaffirm that criminal prosecution of naked no-poach . . . agreements remains a high priority for the Antitrust Division.”
The Sherman Act, which prohibits “every contract, combination, or conspiracy in restraint of trade,” imposes criminal penalties of up to $100 million for a corporation and $1 million for an individual, along with up to 10 years in prison.
The DOJ’s Recent Enforcement Activity
In 2021, the DOJ significantly increased its criminal enforcement activity in the labor and employment space by bringing a number of indictments based on no-poach agreements, including the following:
- United States v. Patel (D. Conn.). On December 15, 2021, the DOJ indicted six aerospace-industry executives and managers with engaging in a conspiracy to “suppress competition . . . by agreeing to restrict the hiring and recruiting of engineers and other skilled-labor employees.” A related press release noted, “The conspiracy affected thousands of engineers and other skilled workers in the aerospace industry who perform services in the design, manufacturing and servicing of aircraft components for both commercial and military purposes.” The DOJ also commented that it will “continue to hold individuals and companies accountable for criminal conduct aimed at depriving workers of the myriad benefits that flow from competition.” The case is pending in federal court in Connecticut.
- United States v. Hee (D. Nev.). On March 30, 2021, the DOJ indicted a company that provided nurse staffing services, VDA OC, LLC and its regional manager responsible for hiring and customer development, with engaging in a conspiracy with a competitor to “allocate nurses and fix the wages of those nurses.” The case is pending in federal court in Nevada.
- United States v. Surgical Care Affiliates, LLC, (N.D. Tex.). On January 5, 2021, the DOJ indicted Surgical Care Affiliates, LLC and SCAI Holdings, LLC, charging that that the entities, which owned and operated outpatient medical care facilities across the U.S. “entered into and engaged in a conspiracy to suppress competition [with certain competitors] for the services of senior-level employees by agreeing not to solicit each other’s senior-level employees” in violation of the Sherman Act. In a related press release, the DOJ noted its “continued commitment to criminally prosecute collusion in America’s labor markets.” The case is pending in federal court in Texas.
- United States v. DaVita, Inc., (D. Co.). On July 14, 2021, the DOJ indicted DaVita Inc., charging it and its CEO with being part of the Surgical Care Affiliates (see above) conspiracy to “suppress competition between them for the services of senior-level employees by agreeing not to solicit each other’s senior-level employees.” The case is pending in federal court in Colorado.
Follow-On Civil Litigation
Within the context of no-poach antitrust litigation, there is a potential for class action lawsuits particularly where a “no-poach” clause in a standard employment agreement affects a large number of employees. These actions are likely to follow criminal indictments and could increase exposure to potential penalties.
Private litigants have filed follow-on civil lawsuits piggybacking on DOJ’s indictments. A number of class action lawsuits filed against Surgical Care Affiliates and DaVita are pending in the Northern District of Illinois following indictments by DOJ. Lawsuits have also been brought against Raytheon Technologies and Agilis Engineering in the District of Connecticut following the Patel indictment.
Recently, courts have denied plaintiffs’ requests to certify classes in the franchise context, holding that, in considering the relevant market for both antitrust and the class certification process, the effects of no-poach agreements had to be geographically localized and thus were not nationally predominant. These decisions will likely make it more difficult for employees to bring nationwide class action lawsuits against employers, particularly in sectors where employees come from localized labor pools.
Executive Order and Workshop on Competition
In July 2021, President Biden issued a wide-ranging Executive Order on “Promoting Competition in the American Economy,” which, among other things, signaled the government’s willingness to use the antitrust laws to probe whether businesses are engaged in activity that illegally restricts workers’ wages. The July 2021 Executive Order specifically encouraged the FTC to use its “statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”
In December 2021, the FTC and DOJ held a “Workshop on Competition” that focused on restrictive covenants, including whether the FTC should create regulatory guidelines with respect to non-competition agreements and other agreements, such as no-poach agreements and non-disclosure agreements. The various panelists voiced conflicting viewpoints as to whether there should be an outright ban on non-competition agreements, and no consensus was reached. Notably, opening remarks by representatives of the FTC and DOJ Antitrust Division focused on the perceived lack of competition in the labor markets, and the stated goal of pursuing conduct that harms labor market competition through both criminal and civil litigation.
Encouraging a competitive labor market is clearly a priority for the FTC and DOJ under the Biden Administration. Given the activity and statements discussed above, we can expect those agencies to continue to investigate and prosecute employers that enter into no-poach agreements that are considered to be anticompetitive. Accordingly, employers may want to review any hiring-related agreements with competitors in the same labor market for compliance with the antitrust laws, and ensure that they have established antitrust policies and procedures to educate hiring managers about antirust considerations in the employment context. In our experience, these issues often arise in two different parts of organizations: (1) HR departments, which may not be attuned to the antitrust implications of these issues, and (2) the C-suite, where arrangements with a competitor may be viewed as a way to stop disruptive employee departures, again without recognition of the antitrust implications.
For further discussion on antitrust ramifications of no-poach agreements, see this S&C Memo.