The ‘No-Poach’ Approach: Antitrust Enforcement of Employment Agreements

Introduction

It has been over two years since the Department of Justice (DOJ) filed its first criminal indictment based on an alleged ‘no-poach’ agreement – an agreement between or among employers of different companies not to recruit or solicit employees of the other. Over this time, during which at least seven criminal indictments have been filed, two things are becoming clear: first, DOJ has been unable to convince juries to find the defendants criminally liable on the antitrust-related claims; and second, despite its losses, DOJ remains committed to prosecuting no-poach and wage-fixing agreements criminally.

DOJ’s continued pursuit aligns with the Biden administration’s commitment to protecting competition in the labor market, having issued an executive order in July 2021 that includes 72 initiatives by more than a dozen federal agencies in an aim to address competition issues across the economy.^[2]

Consistent with these trends and priorities, this article summarizes the legal landscape and recent developments. After introducing the legal standard and the application of antitrust laws to employment agreements, we discuss DOJ’s recent criminal indictments, including a string of losses and learnings from DOJ’s first guilty plea, DOJ’s latest statements doubling down on its commitment to continue to bring criminal no-poach cases and developments in the civil arena.

Antitrust issues associated with no-poach agreements

Agreements subject to antitrust enforcement in the employment context

We start by providing an overview of the types of agreements that are generally subject to antitrust scrutiny in the labor context.

Agreements subject to antitrust scrutiny may be between employers of different companies or between an employer and its employees. Agreements between employers typically raise more antitrust risk and include (1) wage-fixing agreements, which are a form of price-fixing and include agreements to set salaries at a certain level, within a certain range or according to certain guidelines; (2) no-poach or non-solicitation agreements, which are agreements not to recruit another company’s employees; and (3) no-hire agreements, which are agreements not to hire another company’s employees.

An agreement between an employer and its employees that may raise antitrust risk is a non-compete agreement, which limits the ability of an employee to join or start a competing firm after a job separation.^[3] Non-solicitation agreements also arise between employers and employees and limit the ability of an employee to solicit a company’s clients, customers or other employees after leaving the company.

The DOJ and the Federal Trade Commission (FTC) (together, the Antitrust Agencies) have focused on these agreements, asserting that competition in the labor market provides actual and potential employees with higher wages, better benefits, and more varied types of employment – all of which ultimately benefit consumers because ‘a more competitive workforce may create more or better goods and services.’^[4] The antitrust agencies, therefore, argue that competition for employees is akin to competition for products and services, and should be protected and promoted.

Critically, in analyzing agreements under the antitrust laws, the term ‘competitor’ includes any firm that competes to hire the same employees, regardless of whether the firm makes similar products or provides similar services.^[5] This broad definition of ‘competitor’ distinguishes the competitive analysis from the analysis applied in other antitrust contexts where the focus is more on current, future, or potential competition for goods sold and services offered.

As a result, firms may be subject to antitrust liability for entering into certain agreements with firms in different industries (e.g., entertainment and high-tech) if the agreement concerns the same types of employees (e.g., software engineers).

Antitrust laws applied to agreements in the employment context

The relevant antitrust laws that apply to no-poach and other employment agreements are Section 1 of the Sherman Antitrust Act (the Sherman Act), which prohibits contracts that unreasonably restrain trade,^[6] and Section 5 of the Federal Trade Commission Act, which prohibits unfair methods of competition and unfair or deceptive acts or practices.^[7]

Under the Sherman Act, there are two fundamental standards of review: (1) the per se standard, which applies to certain acts or agreements that are deemed so harmful to competition with no significant countervailing procompe­titive benefit that illegality is presumed; and (2) the ‘rule of reason,’ which applies to all other conduct and agreements and pursuant to which the factfinder weighs the procompetitive benefits of the restraint against its potential harm to competition to determine the overall competitive effect.^[8]

The Supreme Court has stated that the rule of reason is ‘presumptively’ applied and there is a ‘reluctance’ to adopt the per se standard.^[9] Historically, agreements between competitors (i.e., horizontal agreements) to engage in hard-core conduct, such as price-fixing, market allocating, or bid rigging are treated as per se illegal, while other conduct, including vertical agreements, (i.e., agreements between two firms at different levels in the chain of distribution) and ancillary restraints (i.e., those that are ‘reasonably necessary’ to a separate, legitimate, procompetitive integration) are subject to the rule of reason.^[10]

Depending on the circumstances, no-poach agreements may be analyzed under either the per se or rule of reason standard. Whether the per se or rule or reason standard applies has significant implications for the outcome of an enforcement action or litigation. If an agreement is found to be a ‘naked’ no-poach agreement, meaning there is no purpose for the agreement other than to restrict competition, the per se standard applies. As such, neither the court nor the DOJ or FTC will consider any proposed justifications for the agreement; it is illegal on its face. If, however, the rule of reason standard applies, such as if a non-solicitation provision is found to be ancillary to a larger agreement, then the fact finder will consider the business justifications for the restraint.

The penalties for violating the antitrust laws are severe and apply at both the company and the individual level. For per se criminal violations, companies face a maximum fine of up to $100 million or twice the gross gain or gross loss suffered, while an individual may be fined up to $1 million or face a 10-year prison sentence.^[11] For civil matters, the DOJ or plaintiffs may seek treble damages against companies.^[12] This is in addition to reputational damage, the potential for required changes to business practices and oversight monitoring as a result of a government consent decree, and significant time and effort to defend against an investigation or lawsuit.

Recent no-poach trends

Antitrust scrutiny of no-poach and other types of agreements in the employment context is not new; there has been civil enforcement and litigation going back nearly a decade, and promoting competition in labor markets has been a focus for years. Historically, however, enforcement was restricted to civil enforcement actions only and primarily against companies in the healthcare and technology industries.^[13] That changed in early 2021 when the DOJ announced its first criminal indictment relating to no-poach agreements,^[14] and the DOJ has continued to file lawsuits based on these agreements ever since.

Below we highlight four recent trends relating to no-poach agreements:

• the DOJ has had success defeating motions to dismiss but has not, to date, secured a guilty jury verdict;
• despite its losses, DOJ officials have made clear that criminally prosecuting no-poach agreements remains a priority;
• there are learnings from the DOJ’s first guilty plea, including how the DOJ calculates fines in no-poach cases and the potential importance of restitution; and
• civil prosecution of no-poach and wage-fixing agreements continues.

DOJ losses mount

The Antitrust Agencies first took the position that the DOJ would criminally prosecute no-poach agreements in 2016, when they issued joint guidance^[15] regarding the application of the federal antitrust laws to hiring practices and certain employment agreements.^[16] They warned the business community that ‘[g]oing forward, the DOJ intends to proceed criminally against naked wage-fixing or no-poaching agreements.’^[17]

The DOJ has followed through on its commitment, filing criminal indictments in at least seven separate cases, with the most recent on March 15, 2023.^[18] As shown in the table below, DOJ has been able to convince judges to deny motions to dismiss, allowing cases to proceed under the theory that no-poach agreements and wage-fixing may be per se illegal under the antitrust laws.

The stumbling block for the DOJ has been getting juries to agree the defendants are guilty: The DOJ has not been able to secure a guilty verdict on any competition-related claims, and its sole guilty verdict was on an obstruction charge related to no-poach allegations. In Patel, its most recent defeat, the case did not even get to the jury before the judge granted the defendants’ motion for acquittal, finding ‘no reasonable juror could conclude there was a “cessation of meaningful competition” in the allocated market.’^[19]

The DOJ’s success in defeating motions to dismiss has helped clarify a potential question that was raised when it began filing its first criminal indictments in late 2020:^[20] Can DOJ prosecute no-poach agreements criminally in the absence of federal precedent by the courts, or is such a prosecution a ‘due process’ violation? Historically, per se treatment and criminal prosecutions under the Sherman Act have been limited to hard-core cartel conduct (i.e., price-fixing, market allocation, and bid rigging) – virtually all other conduct is subject to the rule of reason standard. And, before 2016, there was no indication that the DOJ aimed to treat naked no-poach agreements criminally.

The due process defense was first raised by Surgical Care Affiliates (SCA), which argued that because there is no federal precedent that no-poach agreements are inherently illegal, ‘[f]undamental principles of due process and fair notice bar this prosecution.’^[21] SCA asserted that the plain language of the Sherman Act does not provide the necessary notice because it ‘does not, in clear and categorical terms, precisely identify the conduct which it proscribes.’^[22] It is, therefore, the courts, and not the Antitrust Agencies, that typically define per se illegal conduct, according to SCA, and the ‘government cannot just announce a per se prohibition on a new category of market practices.’^[23]

In response, the DOJ argued that:

the Supreme Court has long made clear that the Sherman Act applies equally to all industries and markets . . . [t]hus, agreements among buyers in a labor market not to solicit each other’s employees are treated no differently than agreements among sellers in a product market not to solicit each other’s customers.^[24]

The DOJ also argued that the text of Section 1 of the Sherman Act makes clear that violators may be charged criminally, and ‘judicial interpretations provide fair notice of the conduct that is prohibited.’^[25]

While the ruling on SCA’s motion to dismiss remains pending, in denying other motions to dismiss, other courts have soundly rejected the due process argument, as further discussed below.

In United States v DaVita Inc, Colorado District Court Judge Jackson ruled that naked horizontal non-solicitation agreements that allocate the market (i.e., those that are not ancillary to a legitimate procompetitive business purpose and have ‘no purpose except stifling competition’), are per se violations of the Sherman Act.^[26] Judge Jackson found that naked no-poach agreements belong to an existing category of per se treatment – market allocation – because, as alleged, the defendants agreed to ‘allocate senior-level employees by not soliciting each other’s senior level employees.’ These allegations, Judge Jackson ruled, made clear that ‘the agreement entered was a horizontal market allocation agreement carried out by non-solicitation.’^[27] As a result, Judge Jackson found that defendants had ‘ample notice’ that entering into a naked agreement to allocate the market of employees would subject them to criminal liability.^[28]

In United States v Jindal, Texas District Court Judge Mazzant considered the defendants’ argument that the indictment violates the ‘fair warning requirement’ of the due process requirement because ‘no court has found that purported wage-fixing agreements constitute criminal conduct and neither the Supreme Court nor any Court of Appeals has held wage fixing to be per se unlawful.’^[29] The court rejected the defendants’ ‘semantical argument’ (i.e., that price-fixing is per se illegal but wage-fixing is not): ‘Regardless of whether the Indictment characterizes Defendants’ conduct as wage fixing or price fixing, the Sherman Act, in conjunction with the decades of case law, made it “reasonably clear” that Defendants’ conduct was unlawful.’^[30]

In United States v Patel, Connecticut District Court Judge Bolden considered the defendants’ argument that they lacked constitutional notice that the alleged conduct was illegal because ‘judicial decisions had not recognized the alleged conduct as a per se violation of the Sherman Act.’^[31] The court disagreed, noting that:

horizontal market allocation agreements have long been held per se unreasonable . . . the per se rule has been constitutionally applied in prosecutions for decades . . . [a]lthough no poach agreements have rarely been prosecuted as a method of allocating the market, the fact that Defendants allegedly allocated the market in a novel way does not create a Due Process concern.^[32]

While Judge Bolden denied the motion to dismiss, in his order granting acquittal, he wrote that ‘[a]s a matter of law, this case does not involve a market allocation under the per se rule.’^[33]

In United States v Manahe, Maine District Court Judge Woodcock discussed the rulings in DaVita and Jindal, holding that ‘because the horizontal restraints alleged in the indictment have long been held per se unreasonable, the Court rejects, consistent with the DaVita and Jindal Courts, [the defendant’s] vagueness and notice challenge.’^[34]

DOJ confirms indictments to continue

Recent DOJ statements have made clear that the DOJ will continue to enforce no-poach and wage-fixing agreements criminally and DOJ will not be deterred by its string of setbacks. The DOJ filed its latest indictment in March 2023.^[35]

Following the back-to-back losses in the DOJ’s first wage-fixing and no-poach criminal trials in April 2022, Assistant Attorney General Kanter said:

Both of those cases – which were extremely important cases establishing that harm to workers is an antitrust harm – survived motions to dismiss. The courts said, ‘These are legally sound cases.’ We won those decisions. So, we’re going to continue to bring the cases. We’re not backing down.^[36]

In remarks in January 2023, Kanter highlighted the VDA OC, LLC guilty plea, saying ‘we uncovered an agreement among competing employers not to raise the pay of nurses serving medically fragile students in a school district in Las Vegas. These are nurses helping kids. Could you imagine someone more deserving of the fair wage that results from competition for their labor?’^[37]

In announcing the DOJ’s latest indictment in Lopez, Kanter emphasized DOJ’s position: ‘The Antitrust Division will be vigilant in protecting workers.’^[38]

Further, the DOJ believes these cases are ‘righteous cases’ that impact ‘the ability of hardworking people to find jobs’ and cause ‘real harms.’^[39] In April 2023, just weeks after United States v Manahe ended in acquittals, Deputy Assistant Attorney General Manish Kumar stated that ‘[w]e think that these are extremely important cases’ and that DOJ is ‘certainly learning’ from its losses. Kanter noted that ‘while we have work to do to ensure we can bring those cases to a jury and convict,’ the cases are being brought ‘for the right reasons.’^[40]

In light of these remarks, companies and employees should continue to exercise caution about discussions with competitors about labor or employment issues, and employers should not enter into naked no-poach or wage-fixing agreements.

Sole guilty plea sheds light on damages calculation

In the DOJ’s sole guilty plea, VDA OC, LLC (VDA) pleaded guilty to ‘knowingly entering into and engaging in a conspiracy to suppress and eliminate competition for the services of nurses by agreeing to allocate nurses and to fix the wages of those nurses.’^[41] As alleged in the indictment, the agreement occurred over a relatively short nine-month time frame, beginning in October 2016.^[42]

VDA was sentenced to pay a criminal fine of $62,000 and restitution of $72,000 to victim nurses.^[43] Under the US Sentencing Guidelines, fines for certain antitrust offenses are calculated in two steps: first, by determining the base fine, which is ‘20 percent of the volume of affected commerce,’^[44] and second, by determining the culpability score.^[45]

Before this guilty plea, it was not known how the DOJ would determine the volume of affected commerce in these cases. In its sentencing memorandum, the DOJ set forth its calculation, requesting the court calculate commerce based on the wages paid to the affected nurses during the relevant period. Using that methodology, the volume of commerce attributed to VDA was $218,016 based on payroll receipts, resulting in a base fine of $43,603 (20 percent of $218,016). Based on the culpability score, which considers various factors, such as the size of the organization, the acceptance of responsibility, and other multipliers, the recommended fine range was $52,324 to $104,647.^[46]

The criminal fine of $62,000 is on the lower end of the recommended range. This could be because VDA agreed to pay a relatively high amount of restitution: $72,000, which is almost a third of the agreed volume of commerce and represents a much higher percentage than the settlement rates in prior no-poach civil cases.^[47] This strategy could be modeled by future defendants, especially as a way to avoid potential follow-on litigation. Indeed, the DOJ noted in its sentencing memo:

the criminal fine is a just sentence because VDA has agreed to pay restitution to its employee nurses in the amount of $72,000, which would potentially obviate the need for them to undertake the trouble and expense of bringing parallel civil suits to recover damages.^[48]

Civil prosecutions continue

The DOJ remains active in trying to curb no-poach agreements in the civil context.

In July 2022, DOJ announced it had reached a settlement with Cargill Inc, Sanderson Farms Inc, and Wayne Farms LLC, pursuant to which the parties agreed to pay $84.8 million to resolve DOJ allegations that the companies – all poultry processors – violated the antitrust laws by illegally exchanging information about worker wages and benefits, which ‘harmed a generation of poultry processing plant workers by artificially suppressing their compensation.’^[49] This settlement (which remains subject to federal court approval) was followed by private class action litigation. In September 2022, the companies agreed to pay another $84.8 million in settlements.^[50] This is a reminder of the costly follow-on litigation that can occur after a government investigation.

Also in July 2022, the DOJ filed a statement of interest in Markson, et al v CRST International, Inc, et al, a civil suit filed against the defendants, several transportation and logistics companies, which were alleged by the plaintiff truck drivers of having entered into horizontal no-hire agreements whereby the defendants agreed not to hire drivers under contract with any of the other defendants.^[51] The DOJ filed its statement to ‘address the appropriate statement for analyzing when “no-hire agreements” violate the Sherman Act,’ stating that ‘[a]greements among competitors to allocate markets have long been condemned as per se unlawful. [T]he same rule applies whether competitors agree to allocate markets for customers or workers.’ DOJ, therefore, urged the court to ‘analyze any no-hire agreements between Defendants under the per se rule.’ The parties subsequently settled with the defendants.^[52]

Conclusion

Over two years have passed since the DOJ announced its first criminal indictment relating to no-poach agreements. Since then, the DOJ has defeated multiple motions to dismiss, filed another indictment in March 2023, and made it abundantly clear criminal prosecutions based on no-poach or wage-fixing agreements will continue; however, juries continue to return ‘not guilty’ verdicts relating to the antitrust claims, and the DOJ has only obtained a single guilty plea. With multiple cases pending, 2023 could be a pivotal year to see if the losses continue or if DOJ is able to turn the tide.

As the Biden administration continues to emphasize the importance of preserving competition in labor markets, there is no room for error for companies. Companies should implement a robust antitrust compliance policy,^[53] including antitrust training for employees, and engage antitrust counsel to review current non-solicitation provisions and non-compete clauses to help mitigate their antitrust risk and to try to keep out of the Antitrust Agencies’ crosshairs.

Notes