Earlier this week, the Antitrust Division of the U.S. Department of Justice (Division) filed an action reinforcing its message that any agreement between companies not to solicit or hire each other’s employees is illegal and will be pursued aggressively. For a number of years the Division, through statements1 and filed actions, has sent a clear message that so-called “no poach” agreements violate the antitrust laws and may be challenged through either civil or criminal complaints. The current administration had reinforced this message in a series of speeches and statements.2
In the current action, the Division alleges that Knorr-Bremse AG (Knorr) and Westinghouse Air Brake Technologies Corp. (Wabtec) entered into a series of agreements designed to prevent the companies from soliciting, recruiting or hiring without prior approval each other’s employees. According to the complaint,3 Knorr and Wabtec both produce components for the railroad industry and employ skilled and specialized personnel to design and build their products. These employees are allegedly in high demand in the rail equipment industry, and Knorr and Wabtec historically competed aggressively to hire and retain them.
The Division alleges that for at least seven years Knorr and Wabtec were parties to agreements that largely eliminated competition between them for each other’s employees. The parties entered into agreements not to solicit the other’s employees and, over time, agreed not to hire employees of the other without prior consultation. Senior company executives entered into and enforced the agreements and implemented them through direct communications. Moreover, each party would instruct third-party recruiters not to target employees of the other. These agreements, the Division asserts, constitute a per se violation of Section 1 of the Sherman Act.4 Indeed, the Division notes that it believes it could have brought a criminal Section 1 case against the parties, but it chose not to because the parties terminated the agreements prior to October 2016 when the Division announced that similar agreements might be pursued criminally in the future.
At the same time it filed the complaint, the Division filed a proposed settlement with Knorr and Wabtec. The proposed consent decree, subject to court approval, prohibits the parties from entering into or enforcing any “no-poach agreement.” A no-poach agreement is defined as
Any Agreement, or part of an Agreement, among two or more employers, that restrains any person from cold calling, soliciting, recruiting, hiring, or otherwise competing for (i) employees located in the United States being hired to work in the United States or outside the United States or (ii) any employees located outside the United States being hired to work in the United States.5
Importantly, the proposed consent order also makes clear that the parties can enter into no-poach agreements if those agreements are ancillary to a legitimate business collaboration. The order does not define what constitutes a “legitimate business collaboration” or how the Division will judge whether the no-poach agreement is truly ancillary to the collaboration.6 It does require, however, that the parties here thoroughly document any such agreement so the Division can review it. The consent order will expire seven years after its entry by the court. Knorr and Wabtec will likely also face follow-on private class action litigation. Indeed, there was extensive private litigation in the aftermath of the Division’s 2011 cases.
Lessons and Guidance
As this case demonstrates, the U.S. antitrust agencies have made no-poach agreements a focus of their nonmerger enforcement efforts, and the Division is likely to seek criminal actions against parties to agreements that postdate October 2016. Criminal penalties can be severe, including substantial fines and possible debarment for corporations and material jail time and fines for individuals. The agencies’ interest extends beyond pure no-hire agreements to no-solicit agreements as well. Thus, even “informal” agreements not to solicit or recruit employees may be subject to enforcement if discovered. To violate the antitrust laws, the parties to the no-poach agreement do not have to be direct competitors in their primary business; they just need to be competitors for the types of employees subject to the agreement. So, for example, if a widget manufacturer and a gadget manufacturer each needs the same type of engineers and have historically competed for their services, the government would view a no-poach agreement between them as illegal even though they do not compete in the sale of their products. Parties to a joint venture or acquisition that are considering including any form of no-poach provision in their agreement should consult with antitrust counsel to confirm that the provision is consistent with the government’s requirements for ancillarity. Corporate counsel should instruct all human resources personnel that any agreement with another company, whether formal or informal, raises serious legal risk and that any personnel with knowledge of any ongoing agreement should (a) report it to counsel immediately and (b) report to counsel if they receive any contact from another company seeking to discuss entering into such an agreement.