Department Of Justice Fires Warning Shot Over Unlawful No-Poach Agreements
On April 3, 2018, the Department of Justice’s Antitrust Division settled an antitrust action against the world’s two largest rail equipment suppliers, accusing them of maintaining “naked” no-poaching agreements in violation of the Sherman Act (see Complaint and Consent Decree). Although the civil enforcement action falls short of the agency’s recently-stated inclination to criminally prosecute such agreements, a closer review of the circumstances offers some insight to the agency’s strategies with respect to both the litigation and settlement of such cases.
The Antitrust Division’s Position Toward Horizontal No-Poach Agreements
There is no federal law that prohibits a company from entering into a contract with one of its employees to restrict the post-separation recruitment of co-workers to a competing company. However, no-poach agreements between companies (horizontal agreements), that are not reasonably tailored to support a broader, legitimate business collaboration, are generally viewed as antitrust violations under the Sherman Act.
On October 20, 2016, the DOJ and Federal Trade Commission released Antitrust Guidance for Human Resource Professionals, alerting companies that “naked” no-poach agreements – agreements that are not part of a broader, legitimate business collaboration – constitute per se antitrust violations and would likely be prosecuted criminally, rather than civilly (see our related article, dated November 9, 2016). More recently, on January 19, 2018, the head of the Antitrust Division, Makan Delrahim, announced that the agency would continue to follow its 2016 Guidance notwithstanding the change in administrations (see our related article, dated January 25, 2018). Further, Mr. Delrahim disclosed that the agency was already preparing criminal cases against multiple businesses and expected to commence litigation imminently.
Enforcement Action Against Knorr and Westinghouse
The recent enforcement action arose out of a series of alleged no-poach agreements between: (1) Knorr-Bremse AG (“Knorr”) and Westinghouse Air Brake Technologies Corporation (“Wabtec”); (2) Knorr and Faiveley Transport S.A. (“Faiveley”); and (3) Wabtec and Faiveley. Specifically, Knorr, Wabtec and Faiveley allegedly agreed to not solicit, recruit, or hire each other’s employees without the existing employer’s express permission. According to the Complaint, executive leadership of the defendants actively and strictly enforced the agreements.
The alleged pacts continued until approximately July 2015, when Wabtec announced its upcoming acquisition of Faiveley, whereupon Knorr allegedly called on its workforce to raid Faiveley of its most skilled employees. Ironically, the agency did not discover the agreements until shortly thereafter, when it was reviewing the Wabtec/Faiveley merger.
The agency filed suit against Knorr and Wabtec for violation of Section 1 of the Sherman Act, 15 U.S.C. §1, alleging “a series of unlawful agreements … to restrain competition in the labor markets in which they compete for employees.” However, it did not proceed criminally, due to the fact that the defendants had discontinued the agreements prior to the 2016 Guidance. In announcing the enforcement action, the agency confirmed that as a matter of prosecutorial discretion, it would only pursue criminal action against businesses that were believed to have maintained naked no-poach agreements after the issuance of the 2016 Guidance.
In the consent agreement, the agency negotiated two provisions that reflected a change from the Obama Administration. First, whereas past consent agreements generally called for open-ended agency review of the offending businesses’ competitive activities, this agreement contained a sunset clause calling for the agency oversight to terminate in the absence of further violations. Second, the agreement lowered the agency’s required standard of proof – down from clear and convincing to the preponderance of the evidence — when establishing a violation of the terms of the agreement. In other words, while the agreement reduces agency oversight, it makes it easier for the agency to enforce the settlement if there are any further no-poach agreements.
The Road Ahead
Given Mr. Delrahim’s January 2018 comments, we anticipate that the agency will soon initiate one or more criminal actions in relation to alleged naked no-poach agreements that took place after the 2016 Guidance was published. Meanwhile, the popularity of private civil actions should only continue to increase. For instance, on April 11 and April 23, 2018, employees in Pennsylvania and Maryland, respectively, filed federal class action lawsuits against Knorr and Wabtec, based on the same conduct alleged in the Agency’s Complaint.