February 17, 2020

February 17, 2020

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February 14, 2020

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New Guidance for HR Professionals Regarding Wage-Fixing and No-Poaching Agreements Highlights New Focus on Criminal Prosecutions and Raises New Concerns for Employer

In October, the Department of Justice (“DOJ”) Antitrust Division and the Federal Trade Commission (“FTC” and collectively the “Antitrust Agencies”) jointly issued new guidance for Human Resource professionals regarding agreements between competitors related to hiring and compensation of employees (the “Guidance”).  The Guidance explains the Antitrust Agencies’ position with regard to wage-fixing[1] and no-poaching[2] agreements between competitors in the employment marketplace.[3]  It also highlights the agencies’ intent to shift toward criminal prosecution of companies and individuals who enter into these types of agreements when they are not ancillary to a legitimate business collaboration, such as a joint venture or a merger or acquisition.

The Guidance is particularly significant because it announces that the Antitrust Agencies will view standalone, or “naked,” wage-fixing or no-poaching agreements between competitors in the employment marketplace as per se illegal regardless of whether they have an actual anti-competitive effect.  According to the Guidance, a “naked” wage-fixing or no-poaching agreement is an agreement that is separate from or not reasonably necessary to a larger legitimate collaboration between companies, such as a joint venture or a proposed merger or acquisition of one company, or a division thereof, by another company.  In the Guidance, the Antitrust Agencies compared such “naked” wage-fixing and no-poaching agreements to price-fixing agreements—which have traditionally been criminally investigated and prosecuted as hardcore cartel cases—and indicated that they view them as eliminating competition in the same irredeemable way.  Accordingly, the DOJ intends to investigate and, where appropriate, bring criminal, felony charges against companies and individuals it believes are guilty of violating antitrust laws by entering into such “naked” wage-fixing or no-poaching agreements.  This represents a shift in how the Antitrust Agencies have traditionally dealt with wage-fixing and no-poaching agreements and significantly increases the risk of antitrust violations for employers.

Moreover, while many Human Resources professionals likely already recognize that agreeing with another company to set wages can be a violation of antitrust laws, they may not realize the risks surrounding certain types of no-poaching agreements or the sharing of compensation-related information in situations that have not traditionally presented significant antitrust concerns.  As an initial matter, there have been several civil enforcement actions in recent years against high-profile technology companies that allegedly agreed not to hire each other’s employees.  The Guidance discusses those cases and indicates that, going forward, the type of agreement at issue in those cases could subject the companies and individuals involved to criminal prosecution instead of civil enforcement actions.

The Guidance also raises concerns about the inclusion of no-poaching provisions in certain agreements between entities that might be competitors in the employment marketplace.  For example, it is common to include no-poaching provisions in settlement agreements of non-competition, non-solicitation and trade secrets cases involving two companies because the poaching of an employee is often part of what led to the litigation in the first place.  Moreover, the company whose employee went to work for a competitor often wants to avoid widespread exodus of employees to a competitor and, correspondingly, to ensure that the situation and the resulting damages do not repeat themselves in the future.  However, in the wake of this new Guidance, the inclusion of no-poaching provisions in settlement agreements raises serious concerns.  The Guidance itself does not address this specific situation and it is unclear how the Antitrust Agencies would view such a provision.  However, because there is generally no larger business collaboration between two companies that are parties to this type of litigation, there is risk that a no-poaching provision in a settlement agreement could be viewed as exactly the type of “naked” agreement that the Antitrust Agencies consider to be per se illegal.  Given this risk, great caution should be exercised when structuring settlement agreements and litigants should work with experienced counsel to address their underlying concerns in a way that avoids raising antitrust concerns.

The new Guidance also highlights the potential antitrust risks associated with sharing compensation information and entering into no-poaching agreements in connection with joint ventures and proposed mergers and acquisitions.  Sharing information regarding employee compensation and no-poaching agreements are common in these types of business deals and the Guidance acknowledges that this conduct is not per se illegal.  However, the Guidance clearly indicates that simply because two entities are parties to a joint venture or a proposed merger or acquisition, they will not necessarily be shielded from scrutiny.  Thus, it is crucial when engaged in these types of business collaborations that the parties take appropriate precautions.  For example, it is permissible to obtain competitively sensitive compensation information during the due diligence phase of mergers and acquisitions, but access to that information should be restricted as much as possible and the parties should ensure that no subsequent changes in compensation result from access to a competitor’s compensation-related information.  The Guidance makes clear that even in the absence of evidence of an express, oral or written agreement to fix wages, discussions or information sharing between two competitors and subsequent parallel behavior, such as maintaining the same or similar wages, may lead to an inference of a wage-fixing agreement.  Similarly, employee non-solicitation or no-poaching agreements, which are frequently part of purchase agreements in mergers and acquisitions and joint venture agreements, should still be acceptable as long as they are reasonably necessary to the larger legitimate collaboration between the employers.  Care should be taken, however, not to overreach by making the scope of the agreement broader than necessary to the legitimate needs of the business deal.

In sum, employers should tread very carefully when sharing compensation-related information or entering into no-poaching agreements with anyone who could be a competitor in the employment marketplace, even when doing so in contexts that have not traditionally raised serious antitrust concerns.

[1] A wage-fixing agreement is defined as an agreement—either oral, written or as evidenced by communications and parallel behavior—between two companies about employee salary or other terms of compensation, either at a specific level or within a range.

[2] A no-poaching agreement is defined as an agreement—either oral, written or as evidenced by communications and parallel behavior—between two companies to refuse to solicit or hire the other company’s employees.

[3] The Guidance is limited to agreements between competitors in the employment marketplace and expressly states that it does not address the legality of provisions contained in contracts between an employer and an employee, including non-competition clauses.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.


About this Author

Karin Johnson, Legal Specialist, Sheppard Mullin, Labor, Employment

Ms. Johnson is an associate in the Labor and Employment Practice Group in the firm's Washington, D.C. office.  She also works closely with the Business Trials Practice Group on commercial litigation matters.

Areas of Practice

Ms. Johnson’s practice encompasses all aspects of traditional labor and employment law, including compliance counseling and litigation or arbitration of employment-related claims such as “just cause” discharge cases under collective bargaining agreements and breach of contract, wrongful termination, and discrimination claims, among...

Kevin M. Cloutier, Labor and Employment Attorney, Sheppard Mullin Law Firm

Kevin Cloutier is a partner in the Labor and Employment Practice Group and co-chair of the firm's Non-Compete and Trade Secrets Team in the firm's Chicago office. He is also a member of the Firm's Diversity and Inclusion Committee.

Areas of Practice

Mr. Cloutier’s practice focuses on all areas of labor and employment law, with an emphasis on employment-related litigation and proactive counseling of management-side clients. He is an experienced trial lawyer with first-chair trial experience before state and federal trial and appellate courts all over the country, arbitrators, FINRA, the National Labor Relations Board, and administrative agencies. He has successfully argued multiple law-changing and precedent-setting federal appeals on behalf of his clients.

Mr. Cloutier’s litigation experience includes defending employers of all sizes in class and collective actions, multi-plaintiff, and single plaintiff cases, including statutory discrimination and harassment claims, wage and hour claims, whistle-blower actions, retaliatory discharge, white-collar criminal matters, traditional labor law, tort and contract claims, and ERISA benefits claims.