September 13, 2019

Employee No-Poach Agreements - Practical Advice on Advising Clients in an Uncertain Legal Environment

Section 1 of the Sherman Act makes unlawful “[e]very contract, combination … or conspiracy, in restraint of trade.”  Courts, however, interpret the statute to prohibit only unreasonable restraints that harm competition.  To violate § 1, there must be (1) an agreement, (2) between two or more persons, (3) that unreasonably restrains trade, and (4) affects interstate or foreign commerce.  The agreement need not be explicit, formal, or written, but can be implicit, tacit, or verbal.  Finally, an unreasonable restraint of trade is one that is likely to result in higher prices, lower output, or less innovation.

There are two primary analytical frameworks that courts use to analyze whether an agreement (or conduct) violates § 1:  (1) the per se rule and (2) the rule of reason.  The per se rule condemns as unlawful the most serious antitrust offenses upon proof that an agreement has been reached; no analysis of the actual effect of the agreement is required.  The rationale behind the per se rule is that “there are certain agreements or practices which, because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”  The per se rule applies to “naked restraints of trade”—usually “horizontal restraints” (i.e., agreements among actual or potential competitors)—such as price fixing, bid rigging, and market allocations (allocating customers or territories).  Per se violations of § 1 carry the risk of criminal prosecution and civil penalties, including treble damages.

Rule of reason analysis generally applies to all other agreements, including horizontal agreements that do not relate to price and to “vertical restraints” (e.g., agreements among suppliers and customers or distributors).  Under the rule of reason, a factfinder weighs all of the evidence of the agreement’s procompetitive benefits against the anticompetitive harm; where the harm outweighs the benefits, the agreement is unlawful.  The rule of reason permits “ancillary” restraints of trade where the restraint is reasonably related and reasonably necessary to an otherwise procompetitive agreement, the restraint is narrowly tailored, and the overall effect of the agreement is procompetitive.  Agreements subject to the rule of reason are not prosecuted criminally, but still subject defendants to civil damages, which may be trebled.