Provisions restricting the hiring of another company’s employees are often included in vendor agreements and a variety of corporate transactions and licenses. And it’s not unusual to see similar constraints adopted in settlement agreements resolving claims of corporate raiding, theft of trade secrets, tortious interference, and corporate dissolution disputes. Of course, it is customary for companies and key employees to enter non-compete agreements – and to let competitors know about these non-competes. But late last week, the Department of Justice Antitrust Division and Federal Trade Commission suggested that these common practices raise antitrust issues.
The DOJ and FTC’s Antitrust Guidance for Human Resources Professionals (Joint Guidance) follows a spate of recent civil enforcement activity and class action litigation asserting antitrust liability in the employment arena. Now, the principal antitrust enforcers are putting HR professionals and other corporate managers on notice that the agencies will pursue criminal sanctions in future cases that involve wage-fixing or no-poaching agreements between competitors – particularly where the agreements are not ancillary to a joint venture or “other larger, legitimate collaboration between employers.”
The agencies’ warning also reaches industry exchanges of compensation and benefit data. While the Joint Guidance provides tips for declining invitations to collude and avoiding antitrust liability in data exchanges, it is disconcertingly silent about how the agencies will react to anti-poaching agreements that are ancillary to legitimate settlement agreements and corporate transactions, including IP licenses and vendor services’ contracts.
The Joint Guidance, issued on October 20, begins with the premise that antitrust laws “apply to competition among firms to hire employees,” and therefore agreements among firms that constrain individual decision-making about wages, salaries, benefits – or any other employment terms – necessarily pose significant antitrust risks. Another significant point the Joint Guidance emphasizes is that firms competing to hire or retain employees are competitors in an employment marketplace that is far broader than the markets in which firms compete to sell products and services. The Joint Guidance warns against any agreement among employers not to recruit or solicit certain employees or not to compete on terms of compensation or other benefits.
Antitrust law draws a distinction between “naked” constraints – agreements not to compete that are not associated with any other valid collaboration such as a joint venture or clinical integration – and “ancillary” agreements reasonably necessary to pursue the goals of a valid collaboration. When firms enter no-poaching or similar arrangements as a “naked” restraint unrelated to any other joint activity, the result is a per se unlawful agreement, without any further inquiry into the agreement’s competitive effects. Even if an agreement of this type is “ancillary” to a larger collaborative effort between firms, antitrust scrutiny remains: the question becomes whether the restraint is reasonably necessary to the collaboration and whether it nonetheless has an anticompetitive impact in a relevant market.
“Going forward, the DOJ intends to proceed criminally against naked wage-fixing or no-poaching agreements,” the Joint Guidance warns. To avoid the antitrust risks, companies and their HR professionals are advised to shun invitations to collude with any other companies about recruiting, hiring and employee benefit packages. And the Joint Guidance goes further: businesses should avoid sharing sensitive information with competitors. “Sharing information with competitors about terms and conditions of employment can also run afoul of the antitrust laws,” the Joint Guidance advises. “While agreements merely to share information are not per se illegal and are ordinarily subject only to civil investigation and enforcement, they too may be illegal when they are likely to have an anticompetitive impact.”
The antitrust enforcers highlight trade association activity and proposed mergers as areas of potential risks where employment data is sometimes exchanged without the appropriate safeguards. As with other data exchanges, there are steps employers should take to reduce the antitrust risks when responding to compensation and other employment surveys, or when participating in trade association exchanges: (i) make sure that a neutral third party is managing the exchange, not an entity that competes for hires; (ii) share only dated – not current or prospective – wage and employment data; (iii) confirm that a sufficient number of employers (usually five or more) are reporting, making it difficult for a later reviewer to isolate individual responses; and (iv) all responses must be aggregated prior to reporting – individual responses should not be disclosed by the surveyor or exchange hosts.
Much of the recent enforcement and class action litigation activity has involved challenges in the medical and high-tech fields. In one case, the DOJ obtained a civil consent decree from the Arizona Hospital & Healthcare Association that forced the organization to abandon a uniform rate schedule that hospitals pay for per diem nurses. Several enforcement actions also involved “no poach” agreements among Silicon Valley tech firms, also resulting in consent decrees. At least one of these cases involved joint venture activity, but DOJ challenged the accompanying hiring restraints as broader than necessary to achieve the venture’s legitimate objectives.
All of which points to a question left hanging by the Joint Guidance: whether and to what extent non-solicitation agreements may be acknowledged as ancillary not only to joint ventures, but also to legitimate efforts to protect intellectual property (for example, in licensing or vendor service environments) and resolutions of disputes raising claims of trade secret theft, enforcement of non-competes, and other valid commercial rights. Non-solicitation agreements that are not “naked restraints” have a long history of judicial acceptance and enforcement – and in many situations outside of joint ventures – so it seems questionable that the agencies could suddenly get a “per se” label to stick in those circumstances. Existing case law might provide more latitude than the DOJ/FTC’s Joint Guidance is willing to admit.
The antitrust laws have general application to all employers. Even in industries enjoying antitrust exemptions, the competition for talent likely falls outside existing immunities. Collective bargaining and graduate student matching programs are two examples of specific antitrust exemptions that cover some – not all – of the collusive hiring conduct mentioned by the Joint Guidance. All of which puts corporate HR and legal departments in a tough position to identify the relevant agreements and practices to which their employers are a party, and consider adopting more stringent compliance measures to satisfy a Joint Guidance that seems to “fence off” ancillary, pro-competitive conduct in addition to naked restraints.