U.S. Antitrust Enforcement Legal Framework
The U.S. antitrust laws aim to protect competition. Section 1 of the Sherman Act guards against anticompetitive behavior, prohibiting “every contract, combination (…), or conspiracy in restraint of trade” by at least two parties. It has been a long-established rule, however, that the Sherman Act does not prohibit every restraint of trade, only those that are unreasonable. Regardless, certain acts such as price fixing, bid rigging, and market allocation agreements are considered so harmful to competition that they are almost always illegal. The courts and competition agencies in the United States have established that these naked restraints of trade that restrict competition without a legitimate purpose, have no plausible efficiencies and are therefore per se violations of the Sherman Act. A per se violation means a defendant cannot rebut an allegation by claiming efficiency or business justifications for its conduct. DOJ may criminally prosecute agreements considered per se offenses.
If conduct does not fall in the per se category, it is analyzed under the rule of reason. Under the rule of reason, the ultimate question is whether, on balance, the challenged agreement is one that promotes or suppresses competition. For agreements that may arguably restrain competition but arise as part of a larger, integrated undertaking between two parties (e.g., a joint venture), courts typically engage in a rule of reason analysis to determine whether these ancillary restraints are anticompetitive. Cases assessed under the rule of reason therefore typically do not amount to a criminal violation but may be subject to civil enforcement and liability. Those found to be civilly liable in violation of the Sherman Act will be ordered to cease and desist the conduct and exposed to mandatory treble damages and attorneys’ fees for successful plaintiffs.
Prior to 2016, U.S. enforcers did not pursue criminal penalties for labor market antitrust violations, instead seeking civil liability for such conduct. The DOJ brought its first wage-fixing case in 1994 against a hospital executive for conspiring to fix entry-level wages for registered nurses. In this case, the DOJ filed a civil action and parties entered into a settlement agreement whereby the defendants were enjoined from engaging in activities designed to fix the salaries. The DOJ’s first major no-poach case was in 2010 when it filed civil complaints against several Silicon Valley companies—including Lucasfilm, Pixar, Google, Apple, Adobe and Intel—for instructing recruiting managers to enter into “no cold-call” agreements. According to the DOJ’s allegations, the companies agreed not to initiate contact with one another’s employees and to notify each other when making an offer to a competitor’s employees. The DOJ reached settlements with these companies, prohibiting them from engaging in anticompetitive non-solicitation agreements and to implement compliance measures to address these practices. Notably, the DOJ observed that a rule of reason analysis would have been appropriate if the alleged agreements had occurred in the context of legitimate collaborations between the companies. However, because the companies did not argue that the agreements were ancillary restraints to any collaboration, the DOJ argued that the agreements were per se unlawful.
In October 2016, the DOJ and the FTC jointly published the Antitrust Guidance for Human Resources Professionals (2016 HR Guidance) and announced the DOJ’s intention to criminally charge certain wage-fixing or no-poach agreements. The 2016 HR Guidance explained that “[a]greements among employers not to recruit certain employees or not to compete on terms of compensation are illegal[,]” including agreements “to refuse to solicit or hire that other company’s employees.” Further, U.S. antitrust laws prohibit coordination in labor markets that unreasonably restrains competition for employees with regards to hiring, salary, wages, benefits, and other terms of employment. Importantly, the 2016 HR Guidance clarified the agencies’ position that companies may compete for employees (hiring and retention) even if they do not compete in their product or service offerings. In addition to DOJ enforcement, companies and individuals also need to consider potential civil actions brought by private plaintiffs, often as putative class actions. Because the burden of proof is lower in civil cases than in criminal actions, it may be easier for private plaintiffs to obtain a finding of liability than for the DOJ in a criminal proceeding. Such private plaintiffs may also choose to proceed with alternative theories of liability—one under the per se rule and, if that fails, one under the rule of reason. Certification of a class may be challenging, however, because of individualized inquiries necessary to determine whether proposed class members were harmed by the alleged conduct.
Despite the uncertainty as to whether and how the DOJ and private plaintiffs can successfully pursue antitrust actions in the labor markets, companies and individuals should take steps to avoid naked agreements between competitors and carefully consider whether ancillary agreements to legitimate collaborations are, in fact, necessary and lawful.
Recent U.S. Enforcement
The DOJ made good on its promise to criminally charge parties for naked wage-fixing or no-poach agreements. These indictments were the first of their kind, and the DOJ has stated that it will continue to bring similar actions. Despite failing to obtain convictions in its first cases to go to trial, the DOJ has declared initial rulings declining to dismiss its indictments as landmark rulings and continues with robust enforcement against this conduct. Described below are some notable recent labor market cases in the United States.
United States v. Neeraj Jindal.
On December 9, 2020, the DOJ obtained an indictment of physical therapist staffing company owner Neeraj Jindal for allegedly violating the Sherman Act by “enter[ing] into and engag[ing] in a conspiracy to suppress competition by agreeing to fix prices by lowering the pay rates to [physical therapists] and [physical therapist assistants].” Thereafter, the DOJ obtained a superseding indictment, charging Jindal’s employee, John Rodgers, with the same Sherman Act violation. Jindal and Rodgers filed motions to dismiss the indictment, arguing that the indictment failed to identify a per se violation and, therefore, did not charge a criminal violation. The court denied the motion, holding that “[f]or over 100 years, the Supreme Court has consistently held that price-fixing agreements are unlawful per se under the Sherman Act[,]” and that the indictment alleged a form of price-fixing via fixing pay rates.
A jury trial began on April 4, 2022. The DOJ argued to the jury that Jindal and Rodgers learned that their biggest client would be substantially cutting the amount it paid the company to supply physical therapists and physical therapist assistants, and, as a result, Jindal and Rodgers reached out to five competitors and secured an agreement with one to collectively lower wage rates in the area. The jury, however, disagreed with the DOJ. On April 14, 2022, after only five and a half hours of deliberations, the jury returned a verdict of not guilty on all Sherman Act violation charges.
United States v. DaVita, Inc.
On July 14, 2021, the DOJ announced an indictment charging DaVita, Inc. and its CEO, Kent Thiry, with violating the Sherman Act by “enter[ing] into and engag[ing] in a conspiracy with [a competitor] to suppress competition between them for the services of senior-level employees by agreeing not to solicit each other’s senior-level employees.” The defendants filed a motion to dismiss, arguing that the indictment failed to state a per se offense and violated defendants’ due process rights. The court denied the motion to dismiss, holding that “[s]ome non-solicitation agreements [including the one at issue here] can be properly categorized as horizontal market allocation agreements[,]” and, therefore, are subject to the per se rule. The court cautioned the government, however, that not all non-solicitation agreements are subject to the per se rule. Rather, to fall subject to a per se treatment, there must be some showing that defendants entered into the non-solicitation agreements with the purpose of allocating the market.
At trial, the DOJ argued DaVita and Thiry “cheated” by forming agreements with competitors not to solicit employees from each other. The defense countered that Thiry’s intent was never to allocate a market; instead, they argued, Thiry wanted to know about possible departures so that he could compete for those workers. The jury agreed with the defense, returning a verdict of not guilty on all counts as to all defendants.
United States v. Surgical Care Affiliates, LLC.
On January 5, 2021, the DOJ announced an indictment charging outpatient medical care facilities owners and operators Surgical Care Affiliates, LLC and SCAI Holdings, LLC (collectively, SCA) with violating the Sherman Act by “enter[ing] into and engag[ing] in a conspiracy to suppress competition [with certain competitors] for the services of senior-level employees by agreeing not to solicit each other’s senior-level employees[.]” Thereafter, SCA filed a motion to dismiss the indictment, arguing that the government failed to state a per se offense and fair warning of criminal conduct was not provided. As of the date of this article, the court has not ruled on the motion, and trial is currently set to begin in 2023.
Additionally, private plaintiffs filed a putative class action against SCA, DaVita, and certain executives, following on from the DOJ’s action. Discovery is underway, though class certification proceedings have not yet begun.
United States v. Patel.
On December 15, 2021, the DOJ announced an indictment charging six aerospace industry executives and managers with violating the Sherman Act by engaging in a conspiracy to “suppress competition . . . by agreeing to restrict the hiring and recruiting of engineers and other skilled-labor employees.” One of the individuals indicted, Mahesh Patel, is a former executive that allegedly acted as an intermediary between the supply companies and was allegedly responsible for enforcing the agreement. The case is pending in the District of Connecticut and, as of the date of this article, no trial date has been set.
Following Patel’s indictment, engineers filed putative class actions against Patel, Patel’s former employer, several other aerospace industry firms, and other individuals. These civil cases are only in early phases.
Labor Market Issues Outside the United States
The DOJ has been at the forefront of prosecuting alleged collusion in labor markets, as only a few competition agencies and prosecutors in other jurisdictions have pursued this type of conduct to date. Many other enforcers have identified labor market antitrust issues as a concern, including in Brazil, European Union (and certain Member States), Japan, Korea, and the United Kingdom. Some of these jurisdictions, like the United States, may be able to pursue criminal penalties in addition to civil liabilities and we examine how these jurisdictions are likely to evaluate such issues.
Brazil.
In Brazil, Law No. 12,529/2011 (LDC) governs the prevention and repression of any anticompetitive conducts. The agency responsible for ensuring compliance with the LDC is the Administrative Council for Economic Defense (CADE), which regulates the repression of anticompetitive practices by parties that may affect competition in the Brazilian market and, indirectly, Brazilian consumers.
The CADE’s General Superintendence (GS/CADE) is a lower body under CADE, responsible for launching and conducting investigations into anticompetitive conduct. It does not have power to sanction, which can only be done by CADE’s Tribunal, a collegiate body with one president and six commissioners. The GS/CADE interprets the LDC as applicable to labor markets and acknowledges two types of collusive conduct in such markets: (i) wage-fixing agreements, and (ii) no-poach agreements. Wage-fixing agreements would be viewed as a per se violation because this conduct would eliminate competition in the same manner as agreements to fix prices or allocate customers, conduct that has historically been investigated and convicted as cartel practices. No-poach agreements would likely be considered as an agreement for market division and therefore a classic cartel behavior violating the per se rule, though there is room to argue that it may be assessed through the rule of reason. For example, exceptions to the application of the per se rule may take place in the context of franchises and mergers and acquisitions. Though GS/CADE may investigate such conduct under a per se analysis, it is ultimately the CADE Tribunal or the Judiciary that has the power to enforce and determine whether it is an offense under the LDC. Only the Judiciary can investigate and convict individuals involved with criminal anticompetitive conduct.
In March 2021, the GS/CADE for the first time opened an administrative proceeding to investigate anticompetitive conduct in labor markets. Thirty-six companies, including Brazilian subsidiaries of Abbott, Baxter, Bayer, GE Healthcare, and Siemens Healthcare, as well as 108 individuals linked to these companies, are targets of CADE’s investigation into alleged wage-fixing agreements related to the healthcare equipment and products industries. The investigation started after Getinge do Brasil Equipamentos Médicos, Maquet Cardiopulmonary do Brasil Comércio and its current and former employees entered into a leniency agreement with GS/CADE and federal prosecutors in 2019. Because the investigation is ongoing and in a preliminary stage, it is difficult to evaluate how the GS/CADE, CADE’s Tribunal or the Judiciary would assess the alleged anticompetitive behavior in the labor market.
European Union.
In the European Union, the Treaty on the Functioning of the European Union (TFEU) regulates anticompetitive conduct. The European Commission along with Member States enforce these laws. Article 101 TFEU is comparable to Section 1 in the United States. It prohibits “agreements between undertakings […] which have as their object or effect the prevention, restriction or distortion of competition […], and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions […].” It is unclear whether no-poach or wage-fixing agreements in labor markets would be viewed as an infringement by object (per se) or by effect (rule of reason), as the European Commission has never brought a case against such conduct.
The European Commission has treated horizontal collusive agreements for the purchase of inputs as by object restrictions of competition law, and labor market conduct is likely to be treated the same. Most of the national-level cases in Europe involved agreements assessed in the context of broader cartels that the national agencies deemed as by object infringements. The distinction is important given the potentially hefty sanctions at play: under EU competition law, companies can be fined up to 10 percent of their annual global turnover. There is no criminal prosecution for cartels at the EU level.
While the European Commission has yet to bring an action regarding wage-fixing or no-poach agreements, the EU Competition Commissioner, Margrethe Vestager, has made it clear that the European Commission views these as “buyer cartels” and that the cartelists do not need to be competitors in the downstream market. In October 2021, Commissioner Vestager flagged that the European Commission was planning a series of dawn raids in the months to follow and expressly called out cartels in labor markets, including wage-fixing and no-poach agreements.
The European Commission can only enforce where there are cross-border effects and has not yet taken action against wage-fixing and no-poach agreements, but there has been increasing enforcement at a national level in the European Union. In April 2022, the Portuguese Competition Authority (AdC) moved to the forefront of national no-poach enforcement with its first action in the labor markets: fining Portugal’s Football League (LigaPro) and 31 clubs €11.3 million over a prohibition on hiring out-of-contract players who had used the coronavirus pandemic as a reason for unilaterally terminating their contract at another club. The AdC subsequently issued a policy paper that discussed competition in the labor market and offered guidance on such conduct. In its priority-setting document for 2022, the AdC noted that wage-fixing and no-poach agreements will be among the regulator’s priorities for this year.
In April 2021, the Polish Competition Authority opened an investigation against the Polish Basketball League and 16 of its club members in relation to conduct limiting players’ ability to switch clubs after the basketball season finished early due to the coronavirus pandemic. The Polish regulator apparently consulted with the Lithuanian authority and the European Commission about its investigation, which is still ongoing. This highlights that the European Commission and national regulators are stepping up their enforcement coordination in this area.
Other countries in Europe, including some EU Member States, have also opened wage-fixing and no-poach agreement investigations across a variety of industries, including Romania (automotive), Hungary (recruitment), Lithuania (basketball), France (flooring), Spain (freight forwarding, haircare), Italy (modelling), the Netherlands (hospitals, supermarkets), and Ireland (financial services, by the financial regulator).
There is no private enforcement at the EU level, and as such there has been no civil litigation arising out of wage-fixing or no-poach agreements. Any actions would need to be brought at the national Member State level and follow the applicable national procedural rules.
Korea.
In Korea, the Monopoly Regulation and Fair Trade Act (MRFTA) is the primary statute that regulates anticompetitive conduct, and the Korea Fair Trade Commission (KFTC) is the competition agency that enforces it. The KFTC has the exclusive authority to make criminal referrals to the Prosecutor’s Office for criminal offenses that violate the MRFTA. The Prosecutor’s Office cannot issue indictments for antitrust violations without such a referral from the KFTC (except for those violations that stipulate criminal punishment under the Criminal Code, such as bidding obstruction). To date, the KFTC has not issued explicit guidelines or initiated any reported cases relating to wage-fixing and no-poaching agreements, but the general cartel regulations of Article 40(1) of the MRFTA would allow for it to bring such cases.
Wage-fixing agreements may be considered illegal under Korean law as they unfairly restrict competition. The MRFTA Article 40(1)(i) prohibits any agreement in which a company sets, maintains, or changes the price of goods or services jointly with other companies and would treat such behavior as conduct that unfairly restricts competition. Since wages or any components of compensation, such as bonuses or insurance, correspond to the price of the services by the employees, wage-fixing agreements with other companies would be analogous to a price-fixing cartel. In addition, the exchange of wage information would be considered an exchange of commercially sensitive information that would substantially restrict competition in the relevant market. Such an exchange would therefore be prohibited as a type of collusion under the amended MRFTA. The KFTC can impose a cease-and-desist order and an administrative surcharge of up to 20 percent of the relevant sales during the violation period. Companies may also face a criminal fine by a court decision not exceeding KRW 200 million (approximately $165,000), and individuals may face either imprisonment up to three years or a criminal fine not exceeding KRW 200 million.
No-poach agreements will likely also be viewed as a violation of the MRFTA Article 40(l)(iv), which prohibits behavior that restricts areas in which a party or a counter party conducts a transaction. Although this prohibition generally applies to market or customer allocation, it may also apply to conduct restricting a counterparty from transacting with others. In addition, Article 40(1)(ix) prohibits conduct that substantially restricts competition in a relevant market by interfering with or limiting the business of other companies. No-poach agreements could be construed as anticompetitive conduct that restricts a counterparty from transacting with others and interfering with the business of other companies.
The KFTC may accept plausible justifications or cognizable efficiencies for wage-fixing and no-poach agreements, such as if they are ancillary to a legitimate business purpose. The KFTC may compare the procompetitive benefits against the anticompetitive effects of the agreements to determine whether they are illegal and prohibited under the MRFTA.
To date, there has been no private civil litigation in Korea targeting wage-fixing or no-poach agreements. As competition authorities worldwide actively enforce wage-fixing and no-poach agreements, the KFTC possibly could enforce them in the near future as the agency continues to monitor competition enforcement trends overseas.
Japan.
The Antimonopoly Act (AMA) is the primary law that governs competition in Japan. The Japan Fair Trade Commission (JFTC) enforces the AMA by enacting guidelines and issuing cease-and-desist orders and surcharge payment orders. These JFTC orders can be appealed to the Tokyo District Court, which has exclusive jurisdiction over such lawsuits. Upon finding cartel activities, the JFTC may file a criminal accusation to the prosecutor general.
Until recently, the JFTC has not explicitly taken the position that general employment issues and contracts are within the scope of the AMA. However, in 2018, the Competition Policy Research Center, composed of JFTC staff members, outside researchers, and practitioners, issued the “Report of the Study Group on Human Resource and Competition Policy” (CPRC Report), which the JFTC mostly adopted in its submission to the OECD in 2019. These materials address the applicability of the AMA in labor markets, including collusive behavior to wage-fixing and no-poach agreements.
Both the CPRC Report and the JFTC OECD submission conclude that agreements among employers on the terms of trade with employees or individual workers may violate Articles 3 and 8 of the AMA. Such violations are subject to the JFTC issuing a cease-and-desist order, a surcharge payment order, or both, and could also be criminally prosecuted. Both wage-fixing and no-poach agreements may be in violation of the AMA, but the two agreements are viewed differently. Wage-fixing agreements, defined as agreements related to wages or rewards paid to employees, are a violation of the AMA in principle, meaning that wage-fixing agreements have “no room for consideration of whether such actions have pro-competitive effects, whether they have public-benefit purposes, or whether they are appropriate means.” The JFTC adopts a softer tone for no-poach agreements, which are defined as agreements related to transferring or switching jobs, and which may be a problem under the AMA. The CPRC Report describes further that even if no-poach arrangements have the objective of recovering the training costs of the employees, such objective will not normally justify the violation, because there are usually other appropriate means to recover labor investment costs. On the other hand, the JFTC OECD submission states that such ancillary restrictions may be necessary to recoup investment for human resources. The CPRC Report and the JFTC OECD submission both advise that unilateral conduct by a single contracting party, such as noncompete agreements, may violate the AMA.
To reflect on some recent developments in labor markets, the JFTC in 2019 released the “Guidelines Concerning Rules Restricting Transfers in the Sports Business Field Under the Antimonopoly Act” (Sports Guidelines). The Sports Guidelines explain that rules restricting transfers of players in a sports league or among multiple sports teams, including no-poach agreements, may be problematic under the AMA, though issues will be decided on a case-by-case basis. Further, in 2021, the JFTC, jointly with the Small and Medium Enterprise Agency and the Ministry of Health, Labor and Welfare of Japan, released the “Guidelines for creating a safe environment where people can work on a freelance basis” (Freelance Guidelines). The Freelance Guidelines focus on unilateral conduct by a business operator against freelance workers. It clarifies that the AMA and the Subcontract Act are generally applicable to transactions between business operators and freelance workers and that certain unilateral conducts could violate the AMA and the Subcontract Act.
To date, the JFTC has not issued a cease-and-desist order or a surcharge payment order against wage-fixing or no-poach agreements. In November 2020, the JFTC announced that it closed its investigation against Nippon Professional Baseball (NPB), the Japanese top professional baseball organization. NPB allegedly caused twelve baseball teams to enter into an agreement to not sign contracts with certain baseball players. The JFTC stated that the conduct might violate Paragraph 1(i) of the Designation of Unfair Trade Practices (Concerted Refusal to Trade), but it did not discuss the applicability of the Sports Guidelines. The NPB agreed to voluntary measures, including repealing the agreement, and the case was subsequently closed.
While there is no pending civil litigation that involves wage-fixing or no-poach agreements, noncompete agreements have been contested in court on the claim of unilateral conduct in the abuse of superior bargaining position. More civil cases may arise, however, as the JFTC continues to investigate anticompetitive behavior in labor markets.
United Kingdom.
In the United Kingdom, wage-fixing and no-poach agreements may be prosecuted both civilly (under the Competition Act 1998) and criminally (under the Enterprise Act 2002). The UK competition rules (whether under the Competition Act or the Enterprise Act) generally mirror the EU rules. The Competition and Markets Authority (CMA) is the principal enforcer of these laws.
Like in the European Union, companies can be fined up to 10 percent of their annual global turnover for an infringement. In terms of criminal cartel sanctions for individuals, the penalties may be a maximum sentence of five years’ imprisonment or an unlimited fine. The CMA also has the power to apply to court for a competition director disqualification order to be made against a director of a company which has been found to have infringed competition law. Post-Brexit, there can be parallel enforcement of EU and UK competition rules.
To date, the CMA has not prosecuted any labor market antitrust cases. The Competition Act provides an indicative list of anticompetitive agreements. The list does not specifically include wage-fixing or no-poach agreements, but we expect the agency may still interpret the Competition Act broadly enough to include them because it prohibits agreements between undertakings that affect trade within the UK and that have an anticompetitive object or effect.
Conclusion
While uncertainties still remain as to how future courts and regulatory agencies will enforce and adjudicate wage-fixing and no-poach agreements, it is clear that such conduct exposes the involved participants to significant risk.
Outside and in-house counsel and company executives should assist the company and its employees in understanding what is permissible and impermissible in communicating with other companies on labor market issues. Because some competitor communications and agreements concerning labor market issues may be lawful, particularly if they are necessary ancillary restraints to a joint venture or acquisition, obtaining advice from counsel is advised. For example, companies may, in certain circumstances, discuss best practices for employee safety, training and development, or diversity awareness without raising significant antitrust risks. Companies may also use third-party consultants to receive historical, aggregated, and anonymized data on employee benefits and salaries. Some guidance follows:
- Companies should make independent and unilateral hiring and employment decisions.
- Engaging third-party services or consultants around employment terms to analyze the company’s performance (i.e., benchmarking) or to assist in hiring may be permissible. When using third-party services or consultants, the company should ensure that historical data is anonymized and the service provided is for a legitimate purpose.
- It may be permissible to engage and exchange ideas with competitors about best practices to improve employee experiences. However, such communications present some risk, and counsel should be consulted before engaging. Though communications within the legitimate boundary of discussion are permissible, employees should be mindful of how such communications can lead to impermissible topics relating to salaries, wages, benefits, or any other employment terms.
- Non-solicitation clauses that are limited in scope and duration in relation to employee separation agreements, mergers and acquisitions, or certain vendor or consultant projects may be permissible, if ancillary to a legitimate procompetitive purpose.
- Companies and their employees should not coordinate or give the impression of coordinating with any other company around recruiting, hiring, salaries, wages, benefits, or other employment terms. The company should not keep “Do Not Call” or “Do Not Hire” lists unless decided unilaterally within the company and the list clearly states that it is the product of a unilateral decision of the company.
Companies with global footprints face considerable risk if their employees and executives communicate or agree with competitors on labor market issues. Although the United States is leading the way in investigating and pursuing such conduct, other countries have also prioritized enforcement in this area, and we expect to see more actions in the near future. Given the staggering size of some of the fines already issued, as well as the potential for criminal penalties (including prison for executives), companies are advised to develop robust compliance programs, provide detailed training for executives and employees, and engage counsel to evaluate and advise on business activities that might lead to enforcement.
