On September 24, 2010, the Antitrust Division of the Department of Justice (the “DOJ”) announced a settlement of its complaint in U.S. v. Adobe Systems, Inc., et al. challenging the agreements of six prominent high tech firms (Google, Apple, Adobe, Intel, Intuit, and Pixar) not to “cold call” each other’s employees. The DOJ complaint alleged that these agreements were per se illegal under Section 1 of the Sherman Act. The settlement prohibits the defendants from entering into employee non-solicitation agreements, and more broadly, from entering, maintaining, or enforcing any agreement that prevents a person from soliciting, cold calling, recruiting, or otherwise competing for employees.
Antitrust challenges to hiring practices of firms competing for employees (an input into their business) are unusual, though not without precedent. The Adobe action reflects the DOJ’s concern with agreements that limit competition at any level. Further, while the investigation targeted the high tech industry – an area of special interest for the DOJ – Adobe has implications for all corporate employers.
According to the DOJ complaint, from 2005 to 2007, high level executives of the defendants entered into various bilateral agreements not to contact the other firms’ employees with employment opportunities (a practice known as “cold calling”). The defendants are among the most significant high tech firms in the U.S. As explained in the complaint, each firm would place the other party to the agreement on a no-contact list, so that its employees would not be recruited. The agreements applied only to direct solicitations, and did not restrict the hiring of employees that sought employment opportunities on their own. One justification asserted by a party was that the agreements were necessary to maintain good working relationships with technology partners with whom it was jointly developing services.
Nevertheless, the DOJ alleged that these agreements “eliminated a significant form of competition to attract high tech employees, and, overall, substantially diminished competition to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.” Further, according to the DOJ, these agreements could not be justified as ancillary to any legitimate collaboration agreement. As the DOJ explained, the agreements were not tied to any specific collaboration, and were not narrowly tailored (e.g., they covered all employees rather than those involved in a specific project). The existence of a business relationship between the parties to an agreement by itself was not sufficient to justify the restrictions. The DOJ deemed these practices as per se illegal, a treatment reserved for inherently anticompetitive conduct such as price fixing. Per se violations do not require any evidence of actual anticompetitive effects (e.g., reduced wages or benefits).
As part of the settlement, the defendants entered into a consent decree (which is subject to federal court approval) whereby they are enjoined from attempting to enter into, entering into, or enforcing any agreement with any person requesting or pressuring that person in any way to “refrain from soliciting, cold calling, recruiting, or otherwise competing for employees of the other person.” The scope of the prohibition therefore extends beyond the “no cold calling” practice in question in this matter. The decree, however, does not absolutely prohibit the use of non-solicitation provisions that are ancillary to, and reasonably necessary in, for example, employee severance agreements, merger agreements, consulting agreements, legal settlements, contracts with resellers or OEMs, and joint venture agreements. Such provisions would be permitted, provided they are appropriately tailored and otherwise comply with the antitrust laws.
This settlement serves as an important reminder that federal and state antitrust authorities will investigate and seek redress for agreements among competitors, not only in downstream markets where the competitors are sellers, but also in markets in which they are purchasers (of employment services in this case). Enforcement actions focusing on competition for employees are rare, but not without precedent. In its Competitive Impact Statement, the DOJ cites the 1996 case U.S. v. Association of Family Practice Residency Doctors, an action challenging non-solicitation restrictions in the hiring of medical residents for family practice residency programs where the restrictions were pervasive in that industry (95% of family practice residency programs).
The Adobe case illustrates the current DOJ’s active enforcement agenda, particularly in high tech industries. More generally, the case should put all companies on notice that they must be careful with respect to any agreements that restrict or limit their freedom to recruit or hire employees, regardless of whether they believe such agreements have any impact on wages or other benefits (i.e., any anticompetitive effect). While the DOJ has recognized that such agreements, if properly tailored, may be justified in certain circumstances (e.g., joint ventures), it would be prudent to consult counsel before entering into any agreements that restrict their hiring or recruiting practices.