DOJ signals criminalisation of ‘no-poach’ agreements

December 2018  |  FEATURE  |  LABOUR & EMPLOYMENT

Financier Worldwide Magazine

December 2018 Issue

The US Department of Justice (DOJ) announced earlier this year that it had a large number of ongoing investigations into “naked” no-poach agreements – that is, agreements between two or more employers not to recruit or hire each other’s employees.

According to Makan Delrahim, assistant attorney general for the DOJ Antitrust Division, his office has been “very active” in reviewing no-poach agreements, determining their lawfulness under federal antitrust laws and whether employers should be subject to criminal (as well as civil) antitrust liability. He also warned that criminal antitrust cases may be forthcoming.

Preceding and benchmarking Mr Delrahim’s statement of intent is a 2016 DOJ and Federal Trade Commission (FTC) directive – ‘Antitrust Guidance for Human Resource Professionals (HR Guidance)’ – which states that “naked no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws”.

Together, the HR Guidance and Mr Delrahim’s pronouncements represent a major shift in federal policy and a forewarning for employers to investigate their hiring and compensation practices to ensure compliance with recent and future changes to antitrust enforcement.

Antitrust laws: civil to criminal

Naked no-poach agreements – defined by the HR Guidance as those “separate from or not reasonably necessary to a larger legitimate collaboration between employers” – have historically been treated by the DOJ as civil violations of the antitrust laws, with moves toward affording them criminal status a much more recent development. Naked no-poach agreements stand alone and are not ancillary to a larger association with an employer.

“In 2016, the Obama administration shifted the policy around no-poach agreements and stated an intention to pursue criminal prosecutions,” explains Tara Reinhart, a partner at Skadden, Arps, Slate, Meagher & Flom LLP. “The DOJ focus is on agreements that are unconnected to a separate, legitimate collaboration between companies.”

The Eichorn agreement

That ancillary no-poach agreements that are reasonable in scope do not violate antitrust laws was confirmed in Eichorn v. AT&T Corp (3rd Cir. (2001)). “Eichorn was an ancillary, no solicitation agreement which was sustained as a lawful agreement,” explains Timothy F. Haley, senior counsel at Seyfarth Shaw LLP. “The purpose of the agreement was to ensure that the purchaser of the business being sold would have the benefit of the employees operating that business for a reasonable period of time after the acquisition.”

Employer impact

With criminal prosecution of no-poach agreements seemingly imminent, how employers respond to such a major policy shift is key. In many cases, personnel such as human resources (HR) are simply unaware that an agreement between employers not to hire employees constitutes conduct which may result in a violation of antitrust laws.

“The DOJ’s change in policy really caught companies’ attention,” observes Ms Reinhart. “Given the DOJ’s focus on no-poach agreements, companies should add the subject to their compliance training. These trainings should address both naked agreements and those a company does ordinarily when working with other companies. Training should extend not only to HR professionals, but also to high-level executives and those in R&D departments who are often the ones leading collaborations.”

In terms of the impact the promised DOJ crackdown on no-poach agreements is likely to have on the US economy, the answer depends on whom you ask. “Economists for plaintiffs’ lawyers say no-poach agreements suppress wages,” says Mr Haley. “Economists for defence lawyers say that any adverse impact is outweighed by pro-competitive benefits.”

The End Employer Collusion Act

Poised to have a major impact on the very existence of no-poach agreements is the End Employer Collusion Act (EECA) – a bill (introduced in the Senate in March 2018) which will make it unlawful for any entity to enter into a restrictive employment agreement, or to enforce or threaten to enforce a restrictive employment agreement.

“If signed into law, the End Employer Collusion Act will outlaw all no-poach agreements, even those that antitrust agencies recognise have pro-competitive effects,” says Ms Reinhart. “Companies will no longer be able to include no-poach provisions in collaboration agreements. We have to take the DOJ at their word: they will prosecute naked no-poach agreements criminally in the future and companies are adjusting to that possibility, and will educate their employees accordingly.”

One commentator who does not expect the EECA to be enacted is Mr Haley. “It would not only make naked no-poaching agreements unlawful, but also ancillary agreements, such as the one upheld in Eichorn,” he asserts. “Agreements of this kind have been viewed as pro-competitive and been upheld by courts for many years.”

Nothing settled

For the moment though, nothing is settled. While the DOJ has made clear its intent to “proceed criminally” against no-poach agreements, proponents of such pacts know that no US court has ever held that no-poaching agreements should be considered per se illegal, never mind criminal violations of federal antitrust laws.

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Fraser Tennant