What is a No-Poach Agreement?
No-poach agreements are simply agreements between employers where companies either agree not to recruit or hire one another’s employees or they agree not to compete for each other’s employees that are currently employed by one or the other companies. These agreements can work in multiple ways. One example is a no-hire agreement, whereby competitors agree not to hire each other’s employees. A no-solicitation agreement is another variation. In this type of agreement, parties may agree not to solicit employees from one another. It is not uncommon for pleadings to be involved when one company believes the other is recruiting or hiring away employees. Another example is an anti-raiding agreement. In this type of agreement, the parties will agree not to raid each other’s employees, sometimes in exchange for compensation or fees .
No-poach agreements are most commonly found in industries where employers depend on a talent pool of highly skilled workers. For example, it is not uncommon for major media companies to have such agreements in place. No-poach agreements also exist in several other industries, such as healthcare, technology, and professional services.
No-poach agreements are geared towards protecting the company’s current talent pool. That is, these agreements have the potential to keep competitors at bay and limit the talent pool for employers. This obviously has the practical effect of securing the employer’s current workforce, but the downside for employees is that their opportunities are not as plentiful. Also, the result of the existence of no-poach agreements is that it may become very difficult for employees to further his or her career, particularly if he or she does not have a specialized skill set that an employer depends on.
Juridical Basis for No-Poach Agreements
In the United States, employers must be aware of the federal and state laws governing such agreements. At the federal level, the law requiring all contracts or agreements in restraint of trade be void (with a limited number of exceptions) is the Sherman Antitrust Act of 1890 – also known simply as the Sherman Act. In fact, this law has been interpreted by federal courts to make all intra-company employee no-poach agreements per se illegal agreements. This interpretation stems from Section 1 of the Act which places a blanket prohibition upon all agreements between two or more employees or employers that restrain competition or trade among the states or with foreign nations. The cases of U.S. v. Working Water, LLC, and in particular, U.S. v. Knorr-Bremse Corp., 389 F.3d 1000 (Fed. Cir. 2004), held that employment agreements and contractual no-poach deals creating a restraint upon trade are per se illegal agreements. In other words, as a general matter, prohibitively expensive consequences can await those employers who attempt to limit competition and trade by pursuing an agreement with the intent of inducing employees from one company to join another. After several recent lawsuits against tech companies and other businesses, these prohibitions against the enforcement of no-poach agreements on both sides have become more evident.
No-poach agreements fall under the Sherman Act’s agreements "in restraint of trade" because they purposefully reduce competition for employees among companies and, in fact, may also lower wages for employees by limiting the career opportunities. The Sherman Act has become the "go to law" for those employees wishing to fight back against no-poach agreements. Several recent lawsuits brought under the Sherman Act have been filed against several large tech companies; however, companies outside this space have also been targets of these recent Sherman Act suits as well. One such example is a case against Jimmy John’s franchise in which this sandwich shop engaged in a no-poach agreement with other companies that similarly offered sandwiches made with bread. Jimmy John’s has settled with several parties for over $1 million in relief as a result of this agreement being found to be a per se illegal restraint on trade. Other significant states are now poised to step up their regulation of no-poach agreements, which by their nature restrain trade in employment amongst neighboring states, by incorporating statutes that regulate non-compete clauses. Particularly, California, Montana, New Hampshire, North Dakota, South Dakota, and Texas have opted for more restrictive interpretations of non-compete clauses. As such, employers that have forced their employees to sign no-poach agreements may find shelter within these more restrictive states. Additionally, at least a half-dozen other states have moved to protect low-wage workers through the enactment of statutes that ban non-compete arrangements for hourly workers; such states include Massachusetts, New Hampshire, Tennessee, and Utah.
Controversies and Criticisms
No-poach agreements, also known as "no-solicitation" or "covenant not to recruit," have been controversial in the context of antitrust law. Their practice was popularized a few years ago when two fast-food franchises in California and the D.C. area were sued by the DOJ for entering into these agreements with one another to not hire each other’s employees. The DOJ alleged this eliminated competition for labor on either side, resulting in reduced job mobility, and limiting the options for workers and their job prospects. Even though both fast-food companies were low-paying franchises (which may not seem like much of an attractive labor market), the prospect of limiting employees’ job prospects struck the right chord with antitrust regulators. This controversy continued to rattle the industry, as a Circuit Judge from Oregon remarked upon ruling that one plaintiff could proceed with a lawsuit against his previous employers under the Patriot Act based on the No-Poach Agreement signed upon joining, despite an arbitration clause. In that finding, the Court held that the restriction in the Agreement narrowed the employment market and limited a person’s freedom to work in an illegal manner. In conjunction with the DOJ, these no-poach agreements continue to be a hot topic with the FTC. In October and November this year, the DOJ and FTC hosted lunch events on the topic of "No-Poach Agreements" in Washington, D.C. This leads to an interesting conclusion on whether the DOJ and FTC are in agreement on this issue, given that, as mentioned earlier, the FTC has had a more guarded approach towards regulating these types of agreements. Such competition in thought can highlight the difference in the agencies’ doctrinal approaches to competition policy. From a business perspective, there are points of tension that arise in the anticipated protection offered by No-Poach Agreements. These include: Proponents of no-poach agreements may argue that they are pro-competitive, because the limits they impose, conditional on certain restrictions not being violated, provide for securing the most difficult resource to acquire – human capital. In this respect, no-poach agreements for managers or those in sensitive positions may be analogized to non-compete clauses. In contrast, critics may argue that they may stifle competition and aid in maintaining a potentially monopolistic marketplace.
The Effects of No-Poach Agreements on Corporations
Businesses may consider no-poach agreements beneficial if the retention of staff enables the business to make agreements with other competing employers or suppliers that otherwise could not be made if the employers were in direct competition. For example, two hotel chains may agree that they will not hire each other’s employees, so that each can offer better customer service and more consistent execution of a particular concept. A software company may not hire the programmers of a direct competitor, to avoid a the risk that they will be tempted to divulge proprietary information.
No-poach agreements allow businesses to identify the best talent in range of professional pursuits. By "freezing" the workforce, the lines are to an extent smudged, and employees are free from the impulse to take advantage of the highest current bidder. As the FTC describes it: If firms agree not to hire one another’s employees, competition in the labor market is reduced, and those firms are less likely to have to pay competitive wages to hire new employees. Without the wage pressure of competing for talent, firms are less likely to woo the workers that are most skilled or experienced, thereby reducing the likelihood that consumers will benefit from those workers’ talents .
However, no-poach agreements can also be inherently anti-competitive if their net result is an increase in employees’ power over individual companies’ ability to attract and retain high-quality employees. This can be especially true if no-poach agreements are used between businesses that are major competitors in a specific market and area. Referring again to the FTC. In defining "per se violation," the FTC has written: Due to their pernicious effect on competition, there are certain business practices that are so inherently anticompetitive that, for practical purposes, they require only a minimal inquiry into their anticompetitive effects to justify their condemnation. Such agreements are recognized as "per se" violations under Section 1 of the [Sherman] Act. Instead, these agreements are condemned without "elaborate inquiry as to the precise reason for the Anthitrust violations being found to be present." It is enough under this principle of law that the practice facially appears to be one that would tend to reduce competition and harm consumers.
The group of existing and potential employees eligible to be recruited becomes artificially small; wages do not reach market equilibrium; some employees will simply stay where they are rather than risk waiting for this agreement to expire; employers have less opportunity to find and hire experienced talent.
Alternatives to No-Poach Agreements
There are a number of alternatives that businesses may consider in order to protect against what they perceive as the threat posed by competitors hiring away their employees. One could consider implementing non-compete clauses, confidentiality provisions or less restrictive no-poach agreements that fall short of prohibiting all hiring.
With respect to non-compete clauses, while it is often desirable to prevent certain former employees from working at a competitor, the practice has always been controversial. Many states will not enforce a covenant not to compete unless the geographic area covered by the restriction is limited to the area in which a business has an interest, is appropriate (i.e., if the employer is an international company, an overly broad geographic area such as the entire United States may be found to be invalid), and is supported by consideration. Moreover, in most states, regardless of the geographic restriction, the covenant must be no longer than is necessary to protect a legitimate business interest. In any case, a postemployment non-compete restriction must always be narrowly tailored to the territory and/or the duration necessary to protect the legitimate interests of the employer. When assessing the reasonableness of restraint of trade, it is important to consider the extent of the prohibited area, the duration of the prohibition, and the nature of business activity to which the restriction is being applied.
As for restricting hiring via confidentiality clauses, generally speaking, there are few legal limits on the scope of confidentiality provisions; the primary caution in using such pre-employment contracts is to be sure that the terms of those agreements do not themselves violate anti-trust laws.
Ultimately, there are international treaties and state legislation that impact the validity of many of these contractual restrictions, and the legality of post-employment non-competition clauses varies from state-to-state, making it difficult for employers to uniformly apply those provisions throughout the United States. No single solution is optimal or equally effective for every business. Any decision on the best approach in a given situation will need to consider the financial resources of the party seeking to impose restrictions, the threat presented by the competition, the potential for as well as the potential for legal challenges to such restrictions, or the potential for litigation from an employee who has resigned in order to start competing.
Current Developments and Trends
Since the Fall of 2016, the DOJ has taken an aggressive enforcement position with respect to no-poach agreements. In particular, in its SEP Guidance, the DOJ flagged no-poach agreements as potentially invalidating standard FRAND terms. The DOJ has also begun to intervene in no-poach cases. Joining its fellow agencies (the Federal Trade Commission and National Labor Relations Board), on October 20, 2016 it stated that it would take action against employers that enter into such agreements and that employers’ counsel should recognize that such agreements are per se unlawful. And the DOJ has not been shy, intervening in cases pending in the Eastern and Southern Districts of Pennsylvania.
However, the DOJ’s aggressive "criminalization" approach to no-poach agreements, which provided fodder for potential criminal investigations and prosecution, does not appear to have borne any enforcement fruit. In United States v. DaVita, Inc., DaVita personnel entered into a no-poach agreement with competitors that was designed to prevent the target company from hiring away any employees from its competitors. Beginning in 2013, DaVita and other dialysis providers entered into an industry-wide referral agreement that enabled the involved companies to refer patients to one another’s facilities in certain rural areas. No-poach agreements to prevent recruiting employees were an already known aspect of the referral agreement when the DOJ intervened. However, the Referral Agreement included a number of pro-competitive provisions including those that facilitated sharing of patient records, interoperability of medical equipment, and joint purchasing power.
As is not uncommon for referral agreements in the healthcare sector, the referral agreement with a competing several companies was memorialized in a Corporate Integrity Agreement with the Office of the Inspector General. Accordingly, the program was extensively vetted by the Office of Inspector General and carefully tailored to avoid antitrust scrutiny. The DOJ nevertheless argued that the referral agreement no-poach provision was unlawful and could not be dissociated from the pro-competitive provisions. The DOJ submitted an amicus brief supporting a supplemental indictment in the District of Delaware case arguing that the case should go forward. It also filed a complaint in the Eastern District of Pennsylvania, where another referral agreement had been entered into by the same parties, and moved to enjoin the referral agreement. The Eastern District of Pennsylvania dismissed the complaint because the DOJ failed to show likely success on the merits. The DOJ then appealed the dismissal to the Third Circuit Court of Appeal, where the Eastern District of Pennsylvania’s decision was affirmed.
The DOJ’s crackdown on no-poach agreements was not without legitimate health care industry concern. Anticipating that the DOJ would use the Referral Agreement to crack down on competitive exclusion agreements, the American Medical Association and select state medical associations filed an amicus brief in support of the defendants. Their concern that the Referral Agreement was a referral arrangement that had been approved by the Office of Inspector General under the Anti-Kickback Act and the AM Congress against Nursing Homesone of the first Corporate Integrity Agreement that was conditioned upon a settlement agreement negotiated by OIG . The specific no-poach provision, coupled with the DOJ’s aggressive disclaimer of any modified approach to the referral agreement and willingness to rely on its Corporate Integrity Agreement, was truly novel and raised serious concerns regarding chilling effects on the use of referral agreements.
In addition to the DOJ’s initiative, the FTC, led by Chairman Maureen K. Ohlhausen, who has stressed the importance of competition broadly, has intensified its efforts to revisit the no-poach issue. On September 26, 2016, the FTC announced its intent to reinstate the no-poach guidance issued during the prior administration. This no-poach guidance issued in 1996 and 19993, and again in the 2012 FAQs, indicated that no-poach agreements that do not restrict the parties’ ability to compete for business would be analyzed under the rule of reason. Thus, the FTC’s emphasis and recent guidance on commencing antitrust enforcement actions against no-poach agreements, particularly where firms have yet to enter into such agreements, may jeopardize the FTC’s existing guidance.
In fact, the FTC’s renewed interest in antitrust enforcement against no-poach agreements has already spawned litigation. A class action lawsuit has been filed against the American Dental Association, arguing that its agreement with the FTC regarding the Code of Ethics for dental professionals constitutes a restrictive covenant. Specifically, the class action complaint alleges that the Code of Ethics discourages dentists from employing office staff who have left other businesses where they might, otherwise, compete with their former employers. Because the ADA code of ethics is not unique, the GAO and the Congressional Black Caucus have criticized the ADA. Maine Senator Susan Collins also questioned the FTC about its narrow interpretation of the practice of dentistry exclusion agreement.
The public debate and scrutiny of the no-poach practice does not appear to have abated since the DOJ’s involvement. The American Medical Association has pressed the DOJ to clarify that the Referral Agreement was a pro-competitive referral agreement absent the no-poach provisions. Meanwhile, the DOJ has entered into BRIDGES agreements with two other healthcare providers in 2017. The BRIDGE letter candidly suggests that the DOJ will more aggressively scrutinize referral agreements going forward. In 2017, the DOJ received letters from several states arguing for heightened scrutiny of no-poach agreements, suggesting that state attorneys general may focus on the issue going forward.
Currently, guidance on the issue is scarce, as the DOJ no longer releases its Business Review letters. The DOJ has sought and received complaints that indicate it is actively engaged in this arena. Indeed, there is also speculation that the DOJ’s recent actions may have been taken in advance of its planned merger with the Federal Trade Commission. It is too soon to determine how these cases, the text of the BRIDGES letter, and amicus filings will play out in headline cases such as the pending cases in Delaware and Pennsylvania or private litigation. What is clear, however, is the DOJ’s antitrust division has publicly committed to devoting resources to these issues going forward.
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