by Glenn Davis
HeplerBroom LLC is an IMA B2B Partner
This is not about restrictions on how you cook your eggs or hunt game out of season.
But read on if you are an employer and want to know about a serious and growing antitrust risk, heightened by federal and state antitrust enforcement as well as private litigation. Agreements to refrain from soliciting another company’s employees (“no poaching” agreements) face increased scrutiny — with potential criminal consequences. In close alignment, there is a spate of new “wage-fixing” cases, a variant of price fixing.
It all started with three cases brought by antitrust enforcement agencies against several major high-tech companies, including eBay, Pixar, and Google. In these cases, the FTC or Antitrust Division of the Department of Justice obtained consent decrees after alleging that the competitors agreed not to “cold call” each other’s employees about job opportunities. One case directly resulted in private litigation (In re High-Tech Employee Antitrust Litigation), which received class certification and then settled in 2014 for $415 million. Disney agreed to pay $100 million to settle claims alleging it colluded through a “gentleman’s agreement” with other animation studios to not recruit/hire each other’s workers. Nitsch v. DreamWorks Animation SKG Inc., 14-cv-04062, U.S. District Court, Northern District of California (San Jose).
Federal Antitrust Guidance for Employers
In October 2016, the Antitrust Division and the FTC jointly released “Antitrust Guidance for Human Resource Professionals” (the “Guidance”). The Agencies plainly stated their intention to pursue criminal charges against companies or individuals that pursue “no poaching” agreements: “[T]he DOJ will criminally investigate allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each other’s employees.” (Emphasis added). “No-solicit agreements, depending upon the facts of each case, may be subject to criminal prosecutions.”
Under the October 2016 Guidance, the DOJ and FTC expressly prohibit agreements not to compete in the “employment marketplace.” This market is significantly different than typical product or service output markets, which focus on competition for the relevant products or services produced or sold by a firm. The Guidance applies beyond such “traditional” competitive settings. As long as companies hire from the same employee pool, the agencies view them as “competitors” and have decreed that it is illegal to limit competition in that input market, regardless of whether the two compete in the more traditional “relevant product market” sense.
Accordingly, Companies “should be on notice” of the consequences of poaching agreements even when direct competition is not affected. The Agencies intend to apply the per se or automatic standard of liability, rather than the rule or reason balancing test in most situations. Thus, defenses are severely limited. The Agencies like to use this example:
[A] business across the street from them — or, for that matter, across the country — might not be a competitor in the sale of any product or service, but it might still be a competitor for certain types of employees such that a naked no-poaching agreement, or wage-fixing agreement, between them would receive per se condemnation.
Accordingly, any agreement to limit competition for employees risks attack as per se illegal and criminal conduct. The per se label means the agencies will not look to the agreement’s effects or any efficiency or cost control intentions: “[I]f the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal …. [However] [l]egitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.”
Thus, not only could a firm end up paying millions of dollars in treble damages to a disgruntled competitor, but individuals implementing this form of price-fixing restraint could end up serving time. Even without the threat of criminal liability, government investigations and the application of per se illegality almost inevitably lead to costly follow-on class action cases.
Litigation Targets–From High-Tech to Pizza
Franchise systems have been frequent targets for poaching claims. According to a survey by Princeton economists 58% of the largest franchise systems have no solicitation or no poach provisions in their franchise agreements. The impact has been real.
The threat of a lawsuit by Washington State’s Attorney General persuaded 15 franchisors to drop anti-poaching provisions from their franchise agreements. Currently, 11 attorneys generals are investigating the use of anti-poaching provisions by franchisors.
Four private plaintiffs have sued U.S. franchisors for anti-poaching violations, seeking class action certification. For example, Jiffy Lube International faces a proposed class action in federal court in Philadelphia accusing them of violating the antitrust laws by imposing no-poaching agreements on Jiffy Lube’s oil change franchisees across the country. The complaint alleges that Jiffy Lube franchise agreements bar local owners from hiring one another’s employees, thereby depressing workers’ wages because franchises do not have to compete for employees.
Similarly, Little Caesars faces a class action by their own restaurant managers, who allege system franchise rules barring restaurants from seeking to employ current or former managers at the pizza chains other locations violate the antitrust laws. The agreement at issue required restaurant owners seeking to hire another restaurant’s manager to pay the prior employer twice the annual salary of that worker in liquidated damages.
But franchise systems are not the only targets. On April 3, 2018, after announcing a settlement with a non-franchise company, Assistant Attorney General Makan Delrahim of the Antitrust Division, stated that the criminal complaint was part of a broader Division investigation into no-solicit or no-poach agreements. And when the Antitrust Division has not sued directly, it has sought to influence outcomes by intervention in cases to make sure the judiciary understands its policy objectives.
In 2019, in the last month alone, the Antitrust Division has sought to intervene in private “no poach” litigation four times. On February 6, 2019, the Antitrust Division filed a notice of intent to get into a class action against Duke University and the University of North Carolina concerning an alleged conspiracy to suppress compensation of medical school professors. Seaman v. Duke University, et al., No. 1:15-cv-00462-CCE-JLW (M.D.N.C. 2/6/19). In that case, a Duke radiologist asserted that senior administrators and deans at Duke and UNC’s medical schools allegedly entered into a pact not to hire each other’s faculty members. The pact allegedly limits mobility and reduces compensation opportunities.
On February 7, 2019, a class of current and former employees of Booz Allen Hamilton Inc., CACI International Inc., and Mission Essential Personnel LLC seek damages and injunctive relief for alleged no-poaching agreements among U. S. government contractors. Hunter v. Booz Allen Hamilton Holding Corp., No. 2:19-CV-411 (S.D.Ohio Feb. 7, 2019). The defendants allegedly agreed not to hire each other’s employees for intelligence contracting work at a U.S. military installation in Molesworth, England. The complaint alleges that the three contractors each had Indefinite Delivery/Indefinite Quantity (IDIQ) contracts and, prior to the alleged “no-poach” agreement, competed aggressively to hire employees with experience at JAC Molesworth to provide services under contract task orders. According to the complaint, these alleged no-poach agreements had the effect of suppressing the wages and benefits for skilled workers at JAC Molesworth because they stopped a bidding war for talent.
Meanwhile, a federal court in Colorado has certified a class of 90,000 au pairs, who have settled their wage-fixing claims against fifteen au pair agencies for $65.5 million. The case is set for preliminary approval of the settlement. Beltran v. InterExchange, Inc., Case No. 14-cv-03074-CMA-KMT (D. Col. Jan. 9, 2019).
The U.S. State Department’s J-1 cultural exchange visa programs includes an au pair program for foreign nationals to work in the United States. The program allows them to work as au pairs for up to 45 hours a week for a minimum wage of $195.75 per week plus room and board. The State Department made exclusive arrangements with the selected 15 agencies to recruit and place the au pairs with host families.
The plaintiffs alleged the 15 au pair sponsor agencies are competitors who control 100% of the au pair opportunities in the U.S. and entered into wage fixing agreement not to exceed the federally mandated minimum wage. In March 2016, the district court found that the plaintiffs sufficiently alleged an agreement among the sponsor agencies to fix the au pairs’ wages. The court principally relied upon:
- Defendants’ direct statements suggesting an agreement to pay the same wage floor existed among them.
- Defendants’ statements that the wages would be the same at any agency.
- Advertisement of au pair wages at an identical amount.
- The industry structure, with 15 agencies controlling 100% of au pair recruitment and placement.
- Loose statements at an industry event that the agencies did not want au pairs shopping for higher wages.
Beltran v. InterExchange, Inc., 176 F. Supp. 3d 1066, 1077-1078 (D. Col. 2016). The direct and circumstantial evidence was sufficient to exclude the possibility of independent action.
What Can Employers Do?
The Antitrust Division’s recent consent judgments confirm the primacy of the per se rule, unless the restriction is akin to an “ancillary restraint;” a restriction necessary to support a pro-competitive transaction. Several of the judgments, including United States v. Adobe, et al; United States v. Lucasfilm LTD; and United States v. eBay, contain identical language declaring a “no direct solicitation provision” not prohibited if such a provision is either:
- Part of an agreement with an employee, rather than a competitor;
- Reasonably necessary for mergers or acquisitions;
- Reasonably necessary for contracts with consultants, outsourcing vendors, or providers of temporary employees;
- Reasonably necessary for the settlement or compromise of legal disputes; or
- Reasonably necessary for (i) contracts with resellers or OEM’s; (ii) contracts with providers or recipients of services; or (iii) the function of a legitimate collaboration agreement.
In other words, for non-solicitation or non-poach agreements to pass muster, they must be tethered to some reasonably necessary lawful objective, rather than act as a naked restraint without any justification. The key is to avoid per se illegality treatment.
If your company has used or is considering implementing any agreements with other companies relative to hiring practices, ask these questions:
- Why are we concerned with restrictions with other companies on hiring?
- With whom are we considering entering into this agreement?
- Is there a concentration of employers and qualified employees in a geographic area?
- Is the agreement ancillary to an acquisition or disposition of assets or technology?
- Is the agreement necessary to protect intellectual property, trade secrets or other protectible information?
- Is there any reason direct agreements with the employees will not suffice?
- Are there less restrictive means to protect our interests?
- Have we consulted legal counsel before entering into any agreements, written or otherwise, related to no-poach, no-solicit, no-hire, or other restrictions between employers?
Agreements among independent companies to fix wages have always been viewed as per se illegal. Compliance training for Human Resources personnel and hiring decision-makers will go a long way to ward off this risk.
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