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April 21, 2022 Practice Points

What to Know About No-Poach Agreements

Penalties for getting these wrong can be severe. Learn some background to ensure you get them right.

By Jade Jorgenson

The Department of Justice’s (DOJ) Antitrust Division recently started targeting and criminally prosecuting illegal no-poach agreements under Section 1 of the Sherman Act. A no-poach agreement refers to certain illegal agreements made between competitors not to hire or pursue each other’s employees. Prior to 2016, the DOJ and Federal Trade Commission (FTC) treated these types of non-solicitation agreements exclusively as civil offenses. In 2016, however, the DOJ and FTC jointly released Anti-Trust Guidance for Human Resource Professionals, which warned that the DOJ could pursue companies, human resource professionals, owners, or general managers for criminal violations of so-called naked no-poach agreements. In January 2021, the DOJ made good on its promise and sought its first criminal indictment against a company for allegedly agreeing with competitors to forgo soliciting each other’s senior level employees. See United States v. Surgical Care Affiliates, LLC, No. 3:21-CR-000101 (N.D. Tex. Jan. 5, 2021).

Since January 2021, the DOJ has filed several more criminal indictments against companies and employees and submitted statements of interest in ongoing private suits related to naked no-poach agreements. See United States v. DaVita, 1:21-cr-00229 (D. Colo. Jan. 28, 2022) (DOJ brought a criminal complaint against DaVita, Inc. and its former CEO Kent Thiry alleging conspiracies with other health care companies to suppress competition for the services of employees, including by entering into naked no-poach agreements); United States v. Patel, 3:21-mj-01189 (D. Conn., filed Dec. 7, 2021) (DOJ filed a criminal complaint against six aerospace executives and managers for naked no-poach agreements); United States v. Manahe, 2:22-cr-00013 (D. Me., filled Jan. 27, 2022) (DOJ filed a criminal complaint against four managers of home healthcare agencies alleging a wage-fixing and no-poach conspiracy); In re Outpatient Med. Ctr. Emp. Antitrust Litig., No. 1:21-cv-00305 (N.D. Ill. filed Dec. 9, 2021) (DOJ filed a statement of interest urging the court to reject motions to dismiss a complaint alleging that the companies agreed to not compete for each other’s employees.) No court has yet ruled definitively on whether non-solicitation agreements between competitors can be prosecuted criminally under the Sherman Act.

Difference Between Naked No-Poach Agreements and Lawful No-Poach Agreements

Currently, the DOJ is only seeking criminal prosecutions of naked no-poach agreements, where the agreement is not considered reasonably necessary to a business collaboration. Not all non-solicitation agreements among competitors, however, are considered naked no-poach agreements. Rather, non-solicitation agreements between competitors may be lawful if they are ancillary to a legitimate business interest. Specifically, a non-solicitation agreement amongst competitors is valid if it is (1) reasonably necessary and ancillary to a legitimate business collaboration or purpose (e.g., merger, acquisition, investment, divestiture, collaborative project, settlement, etc.); (2) supported by a procompetitive justification, such as protecting trade secrets, participating in joint ventures, and entering into mergers and acquisitions; and (3) narrowly tailored in geographic scope, employment function, product group, and time period to match the scope of the business purpose. In other words, courts analyze whether the non-solicitation restriction is a naked restraint on trade (and thus invalid and per se illegal) or one that is reasonably necessary to a business purpose of the collaboration (and therefore valid, if upheld under the rule of reason). Notably, companies that do not make or provide the same products or services may still be considered competitors and may be liable for no-poach agreements if they compete in the same market for the same pool of employees. As long as two companies are competing for the same pool of employees, they are considered competitors for the purposes of no-poach violations.

Significant Penalties

Penalties for getting these no-poach agreements wrong can be severe. The Sherman Act imposes civil penalties of up to $100 million for a corporation and $1 million for an individual. Under federal law, the maximum fine may be increased to twice the amount the conspirators gained from the illegal acts, or twice the money lost by the victims, if either of those amounts exceeds $100 million. Additionally, the Sherman Act imposes criminal penalties of up to 10 years in prison. These penalties are in addition to any civil damages stemming from lawsuits brought by private plaintiffs to recover from the harm incurred as a result of no-poach agreements. Antitrust laws also allow for treble civil damages, which permits a private plaintiff to recover three times the amount of the actual damages suffered. Even more concerning, these lawsuits are routinely filed as class actions and have led to settlements in the hundreds of millions.

Jade Jorgenson is a senior associate with Fredrikson & Byron, P.A., in Minneapolis, Minnesota.

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