US DOJ Adds Complexity to Enforcement of "No-Poach" Agreements Under Antitrust Law
On Thursday, March 7, the Antitrust Division intervened in three antitrust class actions to urge the court that no-poach agreements between vertically related firms, such as between franchisor and franchisee, should be analyzed under the rule of reason, which weighs the procompetitive benefits against the anticompetitive effects. The Division’s previous enforcement policy statements instead focused on prosecuting no-poach agreements as unlawful on their face and therefore potentially bringing criminal sanctions.
The Department of Justice Antitrust Division has repeatedly emphasized that one of its enforcement priorities is policing agreements between companies to not solicit or hire one another’s employees (“no-poach” agreements). As the Division’s most recent statement and legal action show, there is great complexity to this area. Under federal law, according to the Division, some no-poach agreements are unlawful on their face and potentially subject to criminal penalties for companies and individuals, while others under the Division’s view are subject to the more lenient rule of reason standard and, therefore, not subject to criminal enforcement. Human resource professionals now face additional challenges in ensuring their employment practices comply with federal antitrust laws.
On Thursday, March 7, the Antitrust Division intervened in three antitrust class actions to urge the court that no-poach agreements between vertically related firms, such as between franchisor and franchisee, should be analyzed under the rule of reason, which weighs the procompetitive benefits against the anticompetitive effects. The Division’s previous enforcement policy statements instead focused on prosecuting no-poach agreements as unlawful on their face and therefore potentially bringing criminal sanctions. The Division explained that companies can be competitors in the labor market even if they are not competitors in the product or service markets, and under most circumstances if they compete for employees, a no-poach agreement between them would be viewed as horizontal and unlawful on its face. The Division now states that if a no-poach agreement between two entities competing for employees in the same labor market is ancillary to a legitimate business transaction or collaboration between them, the no-poach agreement should instead be analyzed under the more lenient rule of reason.
The Division also criticized any hybrid analytical approach under the antitrust laws, such as the truncated, “quick look” analysis some courts have adopted to analyze no-poach agreements. Under a quick look analysis, the court undertakes an abbreviated inquiry—less than the full rule of reason—“when the great likelihood of anticompetitive effects can easily be ascertained.” The Division disfavors this approach and prefers the full rule of reason, at least in the franchise setting, because no-poach agreements may provide procompetitive benefits and promote interbrand competition, factors which might be missed under a quick look review.
What can HR professionals do?
In 2016, the DOJ and the FTC issued joint guidance for human resource professionals and indicated that it would challenge no-poach agreements criminally under the per se rule. In its filing on Thursday, the Antitrust Division clarified that its guidance was limited to horizontal no-poach agreements that lack a legitimate, ancillary business purpose.
Human resource professionals who come across any variant of no-poach agreements will have to make a legal determination on how to handle the agreement. In a speech last week, Deputy Assistant Attorney General Michael Murray provided a stylized framework of “the right questions to ask in a systematic way” that human resource professionals can use to preliminarily review no-poach agreements:
- First, are the parties to the agreement capable of “concerted action” under the antitrust laws? Entities within the same corporate structure are not capable of concerted action, but unrelated corporations that are clearly “independent centers of decision making” can. Answering this question becomes difficult the more related the entities are and involves a “functional consideration” of how the parties actually operate.
- Second, do the parties to the no-poach agreement compete against one another in the labor market? If so, the Division views them as being horizontally related with respect to the no-poach agreement.
- Third, if the parties are capable of concerted action under the antitrust laws, and they are competitors in the labor market, is the no-poach agreement “subordinate and collateral to a separate, legitimate transaction” and reasonably necessary to “make the main transaction more effective in accomplishing its purpose”? If there is no “ancillary” procompetitive business purpose to the no-poach agreement, the per se rule likely would apply. Additionally, if the agreement existed after October 2016, when the DOJ issued its guidance, the Division may pursue criminal charges against companies or individuals.
Answering these questions is a highly fact-intensive inquiry and involves additional nuances. And while the Antitrust Division’s enforcement posture is evolving, states remain free to interpret their antitrust laws differently. Human resource professionals should seek knowledgeable counsel to assess the antitrust risks associated with no-poach agreements.
In addition to reviewing a no poach agreement under federal antitrust law, any such agreement should also be assessed under state laws as well, including state antitrust and other statutory regimes that impact employment agreements.