Non-Solicitation Agreements Face Heightened Risk of Criminal Prosecution as DOJ Secures Latest Indictments
On July 15, 2021, a federal grand jury in Colorado returned two criminal antitrust indictments against DaVita (a kidney dialysis center operator) and its former CEO Kent Thiry, accusing them of conspiring with Surgical Care Affiliates, LLC (“SCA”) “to suppress competition between them by agreeing not to solicit each other’s senior-level employees.” SCA was indicted in January 2021 in a federal court in Texas for participation in the same conspiracy (see our previous alert). In an unrelated case, nurse staffing company VDA OC LLC was indicted in March 2021, allegedly for agreeing with one of its competitors not to recruit or hire nurses from each other or raise their wages.
The DaVita indictments continue the aggressive stance taken by the Department of Justice Antitrust Division (“DOJ”), having warned in its 2016 Guidance for Human Resource Professionals that it would pursue criminal prosecution against “no-poach agreements.”1 They also continue to heighten the risk of criminal culpability for non-solicitation agreements that companies may consider reasonable.
The DOJ framed its factual allegations in terms unflattering to the defendants and very similar to those used in criminal price-fixing indictments against competing sellers. DaVita, for example, allegedly had an unwritten “gentlemen’s agreement” with a rival firm not to poach each other’s senior-level employees. Recruitment efforts were permitted only after the employee notified their employer of their intent to leave. Even when notice was given, the defendants sometimes allegedly declined to interview candidates, hiding the existence of the agreement and later briefing the current employer about the outreach and response. The indictments allege that the defendants had a “valuable relationship” that they did not wish to jeopardize by competing for senior executives. The government seeks to frame these no-poach cases as uncomplicated criminal conspiracies between rival firms, including allegations about concealment and constant monitoring to verify compliance.
These allegations obscure the fact that felony criminal charges against non-solicitation agreements between employers are unprecedented. The DOJ recognized as much when it issued the 2016 HR Guidance, warning of criminal exposure only for future no-poach agreements. SCA has challenged the no-poach indictments in a motion to dismiss on which the Texas court has yet to rule, arguing primarily that the Due Process Clause does not permit the DOJ to pursue criminal charges for conduct no court has yet held to be per se illegal.
Risk to Business Community
By treating non-solicitation agreements between employers as per se illegal, the DOJ potentially opens the door to criminal enforcement for conduct that falls far short of the kind of clandestine conspiracy alleged against DaVita and SCA. In the DOJ’s view, the only criminal act necessary for the SCA/DaVita indictments is that the defendants agreed “not to solicit each other’s senior-level employees.” No motive, rationale or result (either achieved or merely intended) has been alleged. The DOJ’s view is that, much like horizontal price fixing and bid rigging, the challenged no-poach conduct is illegal and merits criminal prosecution regardless of the reasons for it, regardless of the agreement’s actual or likely effects on any competitive markets for labor, and regardless of whether the agreement may achieve pro-competitive benefits that outweigh any such effects. If the government were to claim that criminal culpability turned in any way on why the defendants reached an agreement or whether the agreement actually harmed competition, the courts may not accept that the DOJ can prove criminal intent necessary for a felony conviction by simply showing that the defendants entered into a no-poach agreement.
The DOJ’s position in the no-poach criminal cases raises serious concerns for employers who do not seek to depress salary levels, but instead use written employee non-solicitation agreements to protect legitimate interests recognized under state laws. These interests may be to protect against the theft of trade secrets in sensitive industries; to allow companies to collaborate and innovate in order to develop new products or services; or to end costly and time-consuming litigation when a key employee takes knowledge and goodwill from a former employer to that employer’s competitor. The DOJ’s stated position that non-solicitation agreements are illegal “per se” leaves little room for arguments that, in specific cases, they protect such vital interests.
The use of restrictive covenants for some or all of these purposes will present heightened risk, at least until courts consider the DOJ’s position in the SCA and DaVita no-poach cases. If the courts do not dismiss the indictments, only prosecutorial discretion may decide such agreements’ fates going forward, and the Biden Administration has been outspoken in its condemnation of most non-compete agreements.2
Recommendations for Employers
The 2016 HR Guidance states that DOJ policy is to prosecute only non-competes that are “separate from or not reasonably necessary to a larger legitimate collaboration between the employers” (such as “appropriate shared use of facilities”).3 The DOJ thus recognizes nominally that facts and circumstances matter in evaluating whether non-solicitation agreements are properly subject to criminal enforcement. But the 2016 HR Guidance does not have the force of law and says very little about what DOJ would consider a “legitimate collaboration.” For example, it does not address the common circumstance in which a former employer seeks to enforce an employee non-solicitation covenant against a new employer with which it is not engaged in an ongoing collaboration. Employers who face repeated disputes of this type with the same new employer should review carefully with legal counsel whether a no-poach agreement between employers is a legitimate means to avoid the cost and business disruption of repeated legal proceedings over enforcement of such covenants.
Court rulings in the SCA and DaVita cases may provide some guidance for companies and counsel seeking to navigate their risk of criminal exposure arising from no-poach agreements and conduct. Until then, agreements between employers that may have the effect of restricting employee mobility should be reviewed by counsel, even those that have been in place for a period of time.
1. United States Dep’t of Justice and Federal Trade Comm’n, ANTITRUST GUIDANCE FOR HUMAN RESOURCE PROFESSIONALS at 4 (2016) (“2016 HR Guidance”).
2. Exec. Order No. 14036, 86 Fed. Red. 36987 (Jul. 9, 2021) and accompanying “Fact Sheet” (calling on FTC to “ban or limit non-compete agreements”).
3. 2016 HR Guidance at 3.