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Antitrust Considerations in Labor Market Enforcement

Julian Wolfe Kleinbrodt and Jacqueline L. Sesia

Summary

  • Despite the flurry of activity in labor market cases over the past five years, numerous unresolved issues remain about how to analyze these cases.
  • Courts analyzing no-poach cases have often reached different results depending on whether they apply a per se, naked restraints analysis or an ancillary restraints rule of reason analysis.
  • With a slate of criminal and civil cases set to come to judgment in the coming years, these unresolved questions will be brought to the fore.
Antitrust Considerations in Labor Market Enforcement
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I. Introduction

Although the Sherman Act has always applied to agreements restraining labor markets, the last five years have witnessed a dramatic uptick in scrutiny—from renewed private litigation to increased enforcement scrutiny and a wave of recent criminal indictments. Litigation in this area is testing the application of old legal theories to the unique realities of labor markets. While cases challenging naked no-poach restraints have proceeded as per se challenges, restraints within more complex commercial arrangements have posed challenging problems of proof that have flummoxed litigants and courts. And it remains to be seen whether antitrust law is a sensible way to tackle imperfections in labor markets.

II. The Evolution of No-Poach Litigation

Since its adoption in 1890, the Sherman Act has applied presumptively to all markets including for labor. While certain exemptions for organized labor were carved out, public and private enforcement in labor markets lagged—even though economic literature has long noted the potential existence of labor monopsonies.

That has begun to change in recent years. Among the most significant catalysts for increased attention was the Department of Justice (DOJ) and the Federal Trade Commission (FTC)’s October 2016 “Antitrust Guidance for Human Resource Professionals.” Growing out of a series of wage-fixing and no-poach cases pursued civilly, the agencies announced that the DOJ would begin criminally investigating naked no-poaching and wage-fixing agreements. The agencies also maintained that civil liability could remain even for restraints not subject to criminal prosecution.

The DOJ and FTC have continued to emphasize labor markets as potential areas for enforcement. For example, the Biden Administration tasked these agencies in July 2021 with addressing competition and promoting worker mobility in labor markets. In December 2021, the FTC and DOJ held a virtual public workshop to discuss competition in labor markets at which Chair Khan and Assistant Attorney General (AAG) Kanter emphasized their agencies’ commitment to, and increased collaboration in, addressing these enforcement priorities. And just last month, Chair Khan announced that potential harm to labor markets— including effects on wages, salaries, and even layoffs— would be considered by agencies reviewing potential mergers.

Despite these public pronouncements, the agencies did not immediately bring criminal prosecutions or civil enforcement actions. From October 2016 to December 2020, the DOJ brought just one civil case, United States v. Knorr-Bremse AG & Westinghouse Air Brake Technologies Corp. Even though that case alleged a naked, no-poach agreement among horizontal competitors, the DOJ settled with a civil decree because the conduct took place prior to the issuance of the HR Guidance.

The private bar was far more active. After Knorr-Bremse, fifteen related private lawsuits were filed and consolidated in In re Railway Industry Employee No-Poach Antitrust Litigation. Several private cases challenging naked no-poach agreements were filed, including Seaman v. Duke University alleging an agreement not to hire certain professors between Duke University and the University of North Carolina, Chapel Hill. And numerous cases were brought against quick service restaurants and other franchise systems in federal and state courts across the country.

On the criminal side, investigations finally materialized in December 2020 with the indictment of Neeraj Jindal. There, the DOJ alleged that Jindal and his co-conspirators conspired to suppress competition by fixing wages of physical therapists and physical therapist assistants. Two subsequent companies, and eleven individuals, have since been indicted. That includes a case against Surgical Care Affiliates (SCA) for conspiring to suppress competition for employees in outpatient medical care facilities, DaVita, Inc. and its CEO Kent Thiry for conspiring with SCA not to solicit one another’s senior-level employees, six Pratt & Whitney executives for agreeing to restrict the hiring and recruiting of engineers and other skilled-labor employees in the aerospace industry, and four individuals in the home health care industry for agreeing not to hire each other’s employees in the home health care industry and to refrain from raising wages of hourly workers. Trials in some of these cases are set for 2022.

These cases have highlighted several unique questions posed by no-poach agreements, and, in particular, the differences between naked and ancillary arrangements.

In naked restraint cases, courts have thus far found a per se analysis to be appropriate. For example, Judge Brooke Jackson in the District of Colorado denied a defendant’s motion to dismiss in United States v. DaVita, Inc. in January 2022, finding that a non- solicitation agreement may be a horizontal market allocation scheme subject to the per se rule. Although the court did not adopt the DOJ’s position that all non- solicitation agreements and no-hire agreements are horizontal market allocation agreements, the court found that the differences posed by labor markets were not so great as to rule out per se treatment. That decision mirrored the outcome in other naked no-poach cases, including the DOJ’s prosecution in United States v. Jindal.

Outcomes were initially less consistent in ancillary restraint cases. In contrast to its position in cases challenging naked restraints, the DOJ opined that ancillary agreements to legitimate collaborations cannot be condemned without more rigorous analysis. This principle received repeated testing in motions to dismiss brought by franchisors. In litigation against Jimmy John’s, Dominos, and Jackson Hewitt, for example, the courts initially left all modes of analysis on the table— per se, quick look, or rule of reason—as they waited to see how the record developed. In litigation against McDonald’s, by contrast, the district courts held that either a quick look or the full-blown rule of reason would apply. And still other jurisdictions have held only the rule of reason to apply as early as during the motion to dismiss stage.

Notably, however, courts have not reached such differing conclusions once presented with a full record. In the past year, at least three courts—now with the benefit of a full record—have held that the rule of reason applies. That includes the Ninth Circuit, which ruled in Aya Healthcare Services v. AMN Healthcare that the rule of reason applied to a non-solicitation clause as part of a bilateral contracting agreement. The two courts supervising cases against McDonald’s and Jimmy John’s reached the same result, finding the evidence did not support their rulings on the pleadings that quick look or even per se rules analyses might apply.

What changed? Plaintiffs in these cases generally argued that the provisions were equivalent to naked market allocation agreements, relying on single-brand theories premised on training unique to a particular franchise system. But courts have found that the evidence tells a different story. Hiring provisions are not aggressively or uniformly enforced, training for low-wage workers is widely transferable, and compensation is not tightly correlated with the existence of hiring restrictions. Moreover, these provisions serve procompetitive interests in the context of certain business organizations, such as eliminating free-riding, incentivizing training, and promoting interbrand competition. And on the other side of the ledger, proof of a connection between intrabrand hiring restraints and depressed wages has been more challenging to prove than plaintiffs in those cases alleged.

III. The Road Ahead

So, what comes next? As noted above, the central premise of no-poach cases is that by restricting worker mobility, these restraints deprive workers of full competition for their labor and thereby depress wages. But as this premise has been difficult to evidence, a major question for future litigation will be whether antitrust litigation is the best (or even a good) solution.

For example, the question of how much no poach restraints impact worker mobility is not clear. The Department of Agriculture created “commuting zones” to describe the area in which individuals working various types of jobs often will travel for work. But access to childcare and public schooling systems may shift the contours of a particular commuting zone. Age is another significant confounding variable: workers of all ages may be willing to move long distances and switch industries for sizable earning boosts, but younger workers in particular are more likely to migrate across state lines for new opportunities. And the evidence developing in no-poach litigation bears out the common-sense intuition that individuals’ willingness to move varies broadly on a number of other considerations that are difficult to control for, such as proximity to family, transit systems, personal relationships, the type of job, job satisfaction, individual risk aversion, and employer size among many others.

The plaintiffs in the franchise cases filed thus far demonstrate the variation in individuals’ willingness to move. For example, in Jimmy John’s, the plaintiffs have varying backgrounds. One plaintiff was a part-time hourly delivery driver but left his employment due to displeasure with his hours. The other plaintiff left his job over his pay rate. And we can all think of friends, family, and even our own experiences where people have left jobs or taken new ones for innumerable reasons. Many employers offer benefits such as health insurance, retirement fund matching, wellness stipends, and paid time-off that have monetary value but factor differently into each employee’s calculus.

The problem is that these issues may contribute to disproportionate “bargaining power” that drives wages down. But it is far from clear that these human phenomena are problems to which the antitrust laws are the right solution; labor-management regulation, collective bargaining, and other legislative efforts have been proposed as potential “counterweight[s].” The human dimension makes it incredibly difficult to distinguish which limits on mobility or wages are traceable to competition concerns and which are not. Courts have circled around this issue but failed to grapple with it head on. Careful court watchers will be on the lookout to see how courts (and litigants) seek to solve these questions—and whether they are able to do so reliably.

Many of these same factual quirks have made it more difficult to apply traditional antitrust analyses in labor market cases. Three have already proven thorny: Market definition, market power, and analysis of competitive effects.

The law on defining labor markets is underdeveloped. Like traditional markets, they are defined by reference to the relevant type of job and relevant geography. But in cases thus far, proving the relevant framework has been anything but straightforward—particularly with regard to geography. The McDonald’s court recognized the complex role of geography in labor markets, noting that “[m]easuing geographic markets for labor is more complex” and may vary from one individual to another, especially considering that workers are not always in a position to consider positions requiring long commutes or moves.

The Department of Agriculture created the “commuting zone” to describe commuting patterns in the United States. The commuting zone was last updated in March 2019, and it is unclear what impact remote work may have in removing the boundaries of the commuting zone. Traditionally the commuting zone has been impacted by factors such as (i) presence of transit systems; (ii) requirements of the job (e.g. on-call medical professionals); and (iii) age of the employee (e.g. younger employees less willing to commute). But as noted above, these factors are fluid and difficult for traditional antitrust analyses to account for. Moreover, workplace changes wrought by the COVID-19 pandemic will make this task even more challenging. It is unclear what impact remote work may have in removing the boundaries of the commuting zone.

This analysis is further complicated by unique switching costs. In certain occupations, switching cost are low because skills are transferable. This is the case in the franchise industry, which has posed difficult for plaintiffs alleging antitrust violations to get around.

However, switching costs can be higher in other careers, such as those requiring graduate schooling or licensing examinations. Any SSNIP (or small but significant nontransitory reduction in wages) will need to take into account these switching costs—which have proven difficult to quantify—as well as human agency.

Similarly, these switching costs impact the ability to rely on traditional measures of market power. Current antitrust analysis often measures monopsony power (at least in the first instance) through market share. The many potential pitfalls of this measure in traditional markets are well known, but some argue they are particularly pronounced in labor markets. These critics argue that higher switching costs and significant bargaining power renders traditional market-share benchmarks inapt in labor market analysis; courts, however, have not yet addressed this issue.

IV. Conclusion

Despite the flurry of activity over the past five years, labor market cases are still at the antitrust trailhead. Numerous unresolved issues remain about how to analyze these cases given their unique human dimension—and whether many of the problems they seek to redress should even be antitrust concerns in the first place. With a slate of criminal and civil cases set to come to judgment in the coming years, these questions will be brought to the fore. Stay tuned.

This article was prepared by the Antitrust Law Section's Civil Practice & Procedure Committee.

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