08.27.2021 | Articles / Publications
Federal Regulators Taking Aim at Anti-Competitive Employment Practices
Employers in every sector use restrictive covenants to guard against loss of institutional knowledge, relationships, and training. These restrictive covenants come in three forms: “non-competition,” “non-solicitation,” and “no-poach” agreements.
Non-Competition Agreements: A non-competition agreement is typically a contract between an employer and an employee that will act to bar the employee from working for or owning a business in direct competition with the employer for a set period of time in a particular geographic area after the employee leaves employment with the employer.
Non-Solicitation Agreements: A non-solicitation agreement is typically a contract between an employer and an employee that will act to bar the employee from soliciting business from his or
her former customers for a set period of time after the employee leaves employment with the employer.
No-Poaching Agreements: A no-poaching agreement is typically a contract between an employer and an employee that will act to bar the employee from hiring the employer’s other employees for a set period of time after the employee leaves employment with the employer. These agreements are sometimes called “non-solicitation” agreements, but to avoid confusion with agreements barring customer solicitation, this article calls them “no-poaching” agreements. A variant of these agreements can also be found between two businesses, such as when a business bringing in an outside consultant for a particular project agrees not to directly hire the consulting firm’s employees.
The Legal and Regulatory Framework
The Sherman Antitrust Act prohibits contracts in “restraint of trade or commerce,” 15 U.S.C. § 1, and the Fair Trade Commission Act prohibits “unfair methods of competition” and “unfair or deceptive trade practices.” 15 U.S.C. § 45(a)(1). Two federal agencies, the DOJ and the FTC are authorized to enforce antitrust laws; the Supreme Court has held that any violation of the Sherman Act necessarily violates the Fair Trade Commission Act. FTC v. Indiana Fed’n of Dentists, 476 U.S. 447, 455 (1986). That means that the FTC can pursue businesses for behavior that would violate the Sherman Act and other trade practices it deems “unfair.” In addition, Sherman Act violations can lead to criminal prosecutions as well as civil actions, and the FTC may refer Sherman Act violations to the DOJ for criminal investigations. In addition, private plaintiffs injured by antitrust violations may bring civil actions for damages, and state attorneys-general may also bring actions under state-law analogues to federal antitrust statutes.
Stepped-up DOJ Enforcement Against “No-Poaching” Agreements
Since 2010, DOJ’s Antitrust Division has been prosecuting “horizontal” no-poaching agreements under the Sherman Act. In antitrust terms, a “horizontal” agreement is between two competitors, while a “vertical” agreement is among businesses at different levels of distribution in the supply chain. Notably, in September 2010, DOJ announced it had reached a settlement with several large technology companies who had agreed not to “poach” each other’s employees. See Justice Department Requires Six High Tech Companies to Stop Entering into Anticompetitive Employee Solicitation Agreements | OPA | Department of Justice. DOJ has also targeted filmmakers for using no-poaching agreements. See Justice Department Requires Lucasfilm to Stop Entering into Anticompetitive Employee Solicitation Agreements | OPA | Department of Justice.
In October 2016, DOJ and the FTC issued joint guidance for Human Resources professionals. See Antitrust Guidance for Human Resources Professionals (ftc.gov). In that guidance, the FTC and DOJ instructed that agreements between employers to not recruit certain employees or compete on compensation were per se illegal unless reasonably necessary to a larger legitimate collaboration between the employers. This does not mean that legitimate joint venturers, or employers sharing workspaces, cannot enter into no-poaching agreements, but they should be careful that these agreements are actually necessary to protect legitimate business interests.
Employers should be aware that this guidance is not just saber-rattling. In January, a federal grand jury in the Northern District of Texas returned a two-count indictment against a company that owns and operates outpatient medical care centers across the country. See Health Care Company Indicted for Labor Market Collusion | OPA | Department of Justice. The defendant, in that case, was accused of agreeing with its competitors to not hire each other’s senior-level employees. The grand jury returned true bills on counts of violation of the Sherman Act and conspiracy to violate the Sherman Act. These charges could lead to corporate fines up to $100,000,000 and individual fines of up to $1,000,000 along with an up-to-10-year prison sentence. And, of course, shortly after the grand jury indicted the company, the civil suits began: A former employee has sought class-action status in the Northern District of Illinois, alleging violations of the Sherman Act. See Case No. 1:21-cv-620 (N.D. Ill. Feb. 3, 2021), ECF No. 1. Since that filing, three other former employees have likewise sued, with two of their cases being consolidated into the original.
Executive Order 14036
On July 9, 2021, President Biden signed Executive Order 14036, 86 Fed. Reg. 36987. As part of that Executive Order, President Biden “encouraged” the FTC Chair to “exercise the FTC’s
statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” Id. at 36992. The Administration put out a “Fact Sheet” concurrent with the Executive Order, explaining that “[t]ens of millions of Americans—including those working in construction and retail—are required to sign non-compete agreements as a condition of getting a job, which makes it harder for them to switch to better- paying options.” See FACT SHEET: Executive Order on Promoting Competition in the American Economy | The White House.
This “encouragement” will likely find a warm reception with FTC Chair Lina Khan. Shortly before her nomination, then-Professor Khan and FTC Commissioner Rohit Chopra wrote and presented an article arguing that the “FTC might consider engaging in rulemaking on [noncompete agreements]” as a preferable alternative to piecemeal litigation under the Sherman Act. Rohit Chopra & Lina M. Khan, The Case for “Unfair Methods of Competition” Rulemaking, 87 U. Chi. L. Rev. 357, 371–374 (2020). Khan and Chopra also argued that “[a] rule could grant clarity as to when
non-compete agreements are permissible or not … giv[ing] notice to a much larger set of market participants than addressing noncompetes through adjudication.” Id. at 374. It is likely that the FTC will move quickly to promulgate rules prohibiting at least some non-competition agreements, given the FTC Chair and FTC Commissioner’s writing on the topic.
Given the changing enforcement and regulatory environment, it is a good idea to review your business’s no-poaching, non-competition, and non-solicitation agreements to make sure they
are fit to purpose and do not unduly restrain legitimate competition.
No-Poaching Agreements: While DOJ has focused on horizontal no-poaching agreements, scrutiny may soon fall on vertical no-poaching agreements, such as those between a prime contractor and its subcontractors. One question to ask is whether a no-poaching agreement is actually necessary to protect trade secrets, intellectual property, and/or other confidential information.
Non-Competition Agreements: Although the FTC has not begun its rulemaking process, some proactive steps could mitigate regulatory risk. It may be possible to argue a
“pro-competitive” justification for non-competition agreements with employees with access to trade secrets and intellectual property, or who have received widely applicable training at
the employer’s expense.
Non-Solicitation Agreements: Given the Biden administration’s aggressive posture toward competition in the labor market, a proposed rule might also conceivably include non-solicitation agreements. For many sales employees, a non-solicitation agreement can have some of the same practical effects as non-competition agreements and may attract similar scrutiny.