The U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) recently issued guidance for human resource (HR) professionals on the antitrust risks of certain types of non-solicitation agreements and the exchange of hiring-related information. The Guidance serves as a reminder to HR professionals to carefully review the use of non-compete and non-solicitation provisions in employee agreements, subcontracts, and other joint venture agreements.
While the DOJ and FTC recognize that these types of provisions are often procompetitive, the Guidance emphasizes that employers – including nonprofits – that agree not to compete to hire or retain employees are likely in violation of the antitrust laws. Given these risks, it is critical for HR professionals at nonprofits to take steps to ensure that interactions with other employers do not result in unlawful agreements.
Overview of Antitrust Risks for HR Professionals
The federal antitrust statutes, the Sherman Act (15 U.S.C. § 1 et seq.) and the Federal Trade Commission Act (15 U.S.C. § 41 et seq.), prohibit contracts, agreements, and other conduct that unreasonably restrains trade. Under these laws, certain "hard-core" practices, such as an agreement to fix prices, are considered per se illegal. In the Guidance, the DOJ and FTC explain that an agreement between competing employers (such as two nonprofits) not to hire or solicit each other's employees is a per se violation of the antitrust laws in the same way as an agreement to fix prices or allocate customers is. Separate from these "naked" agreements, the Guidance recognizes that non-compete and non-solicitation provisions often serve a legitimate purpose when reasonably necessary to a larger collaboration between employers or between employers and an employee. It should be noted that the Guidance interprets competitors broadly. Specifically, entities that compete to hire or retain employees are competitors in the marketplace, "regardless of whether the entities provide the same services or make the same products" (emphasis added).
Prohibition on "Naked" Agreements Not to Solicit or Hire Employees
In releasing the Guidance, the DOJ and FTC focused on "naked" no-poaching or wage-fixing agreements. A "naked" agreement is one that is unrelated or unnecessary to a larger legitimate collaboration between the employers. Going forward, the DOJ intends to proceed criminally against naked wage-fixing or no-poaching agreements. The Guidance indicates that the DOJ will investigate the entities and individuals involved, such as HR professionals.
In the past, for example, the DOJ has brought enforcement actions against companies that agreed not to poach each other's employees, such as by not placing cold calls to recruit each other's employees or refraining from hiring employees who work for a competitor. This was the case, for example, in an action the DOJ brought against two technology companies for agreeing not to hire each other's employees. According to the DOJ, there was "no evidence of a relevant legitimate collaborative project" involving the two companies – it was simply a naked agreement not to compete in the hiring of employees.
Similarly, in the "questions and answers" section, the DOJ explains that an HR professional at a nonprofit would violate the antitrust laws by calling another nonprofit organization to ask it to agree to a cap on employee wage rate increases. As explained in the document, a "desire to cut costs is not a defense," and nonprofits compete for employees the same as any other employer.
The Guidance also cautions HR professionals on the antitrust risks of sharing information with competitors about terms and conditions of employment and/or hiring practices. Structured properly, an information exchange or benchmarking program is a legitimate function of a nonprofit organization. The main competitive concern with information exchanges and benchmarking programs is the potential for participating members to use the information exchanged to further a price-fixing or other anticompetitive conspiracy. In this regard, the Guidance explains that the sharing of compensation information, in particular, may violate the antitrust laws unless the information exchange is carefully designed to prevent harm to competition.
Fortunately, the FTC and DOJ have provided guidance on how to structure an information exchange or benchmarking program to minimize potential antitrust risk. Specifically, the program should stay within the bounds of the following guidelines:
- A neutral third party manages the exchange,
- The exchange involves information that is relatively old,
- The information is aggregated to protect the identity of the underlying sources, and
- Enough sources are aggregated to prevent competitors from linking particular data to an individual source.
Permissible Non-Compete and Non-Solicitation Provisions in Employment and Other Joint Agreements
Unlike naked agreements, non-compete and non-solicitation provisions are usually permissible in employment, subcontract, and service agreements, provided the provisions are narrowly tailored and reasonably necessary for the collaboration between the two companies or the company and employee. These types of restrictive covenants, which are generally procompetitive, are distinguished from "naked" agreements between employers that they will not solicit each other's employees.
For example, an employer may require an employee to sign a non-compete restricting the employee from competing against the employer for a limited period of time after the employee leaves the company. Similarly, an employer may seek a non-solicitation agreement restricting an employee from attempting to "poach" the employer's other employees after the employee leaves the company. Other examples of legitimate collaborations include:
- A legitimate joint venture or project, such as joint development, technology integration, subcontract or teaming agreement, and the shared use of facilities.
- Contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies, or providers of temporary employees or contract workers.
- Contracts with resellers or OEMs; contracts with certain providers or recipients of services.
In these cases, the use of a non-compete or non-solicitation clause is unlikely to raise significant antitrust concerns if it is narrowly tailored and reasonably necessary for achieving a procompetitive collaboration (such as protecting a company's trade secrets). These provisions are generally analyzed under the rule of reason, which balances the procompetitive benefits of the provision against the potential anticompetitive harm, to determine the likely overall effect on competition. The competitive analysis typically involves a review of the reasonableness of the restrictive covenant's duration and scope, and whether the covenant is reasonably related to a legitimate purpose.
Suggested Best Practices for Minimizing Potential Antitrust Risk
In the Guidance, the FTC and DOJ suggest that HR professionals implement safeguards to prevent inappropriate discussions or agreements with other firms. Although the Guidance does not provide specific safeguards, the implementation of the following will go a long way toward minimizing potential antitrust risk:
- HR professionals and others engaged in hiring and compensation decisions should receive training on the antitrust laws. As helpful background, the DOJ and FTC have published a quick reference card that sets forth a list of red flags for HR professionals to look out for in their day-to-day work.
- Do not share information with competitors on the terms and conditions of employment unless the information exchange is part of a program monitored by antitrust counsel. Terms and conditions of employment include, but are not limited to, compensation and employee benefits, such as, for example, paid parking. Similarly, hiring policies should not be exchanged with competitors.
- A non-solicitation provision is permissible where it is reasonably related to, and necessary for, a subcontract or teaming agreement. The DOJ and FTC have advised that any such provisions should be limited as follows:
- Identify with specificity the agreement to which the non-solicitation provision is related.
- Narrowly tailor the non-solicitation provision to only those employees who are anticipated to be involved in the project relating to the subcontract agreement.
- Include a specific termination date or event.
- Any non-compete agreement should be narrowly designed to further a legitimate business interest, such as ensuring that the purchaser is able to put the assets purchased to productive use or the service provider is able to protect their investment in building their products and services. The non-compete should be tied to a particular economic activity or line of business, and limited in duration and geographic scope – avoid overly broad non-competes that prohibit competition outside the scope of the transaction.
- Determine whether the non-compete or non-solicitation provision involves a profession or set of skills that is scarce in the market. Federal and state antitrust enforcers may be more aggressive in cases where there is a limited supply of replacement workers (think physicians) or where the restrictions are not otherwise in the public interest.
- Consult legal counsel if it is determined a violation already has occurred.
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In either case, don't forget about state laws – almost every state has its own unique laws governing the use of non-compete agreements. California, for example, has very strict non-compete laws, whereas many other states allow non-competes that are reasonable in scope and duration (as set forth above).