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.
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.