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No-Poach Agreements Targeted by Plaintiffs, Enforcement Agencies and Senators

Client Alert

Authors: Jan P. Levine, A. Christopher Young and Melissa Hatch O'Donnell

4/04/2018
No-Poach Agreements Targeted by Plaintiffs, Enforcement Agencies and Senators

Agreements among companies to not hire each other’s workers are more risky than ever. The DOJ’s Assistant Attorney General for the Antitrust Division, Makan Delrahim, stated on January 19 that the division has criminal cases targeting these agreements in the works.1 Meanwhile, lawsuits challenging no-poach agreements in technology, entertainment, health care and other industries have settled, sometimes for hundreds of millions of dollars. The DOJ announced its latest settlement, a civil settlement with two rail equipment suppliers, on April 3, underscoring that it did not bring criminal charges only because the suppliers ended their agreements before the FTC and DOJ issued guidance on “no-poach” agreements in October 2016.2

Meanwhile, employees of franchises have brought new class action complaints, and politicians have joined the fray. Senators Cory Booker and Elizabeth Warren highlighted the dangers of no-poach agreements between franchisors and franchisees in a November 2017 letter to Attorney General Jeff Sessions that requested more information on the AG’s views and enforcement activities related to no-poach agreements.3 On March 1, 2018, Booker and Warren also introduced S. 2480, a bill that would prohibit agreements — including agreements among franchisors and franchisees — that “restrict[] one employer from soliciting or hiring another employer’s employees or former employees.” And the Washington State Attorney General has issued civil investigative demands addressed to a number of franchisors, requesting information about any no-poach agreements signed in the past five years and the reasons for having, changing or eliminating those agreements.4

Companies should be aware of this increased scrutiny and carefully evaluate any agreements (including franchise and joint venture arrangements) that limit the parties’ ability to solicit or hire workers from one another. Further, employers should share employment-related information with others only under limited conditions.

Antitrust Authorities’ Position

The federal antitrust authorities’ interest in no-poach agreements began during the Obama administration. In October 2016, the DOJ’s Antitrust Division and the FTC issued a joint “Antitrust Guidance for Human Resource Professionals,” which was “intended to alert” those involved in hiring and compensation decisions that it is per se illegal for competitors to agree not to compete with one another on the terms of employment, and that the agencies would proceed criminally against naked wage-fixing and no-poach agreements.5 We reported on that initial guidance, emphasizing that firms are horizontal competitors in an employment market if they compete to hire or retain employees, regardless of the goods or services those firms sell to consumers.6 Delrahim’s comments emphasize that the change in administration has not changed the federal antitrust authorities’ commitment to challenging naked agreements among employers to limit or fix the terms of employment with regard to compensation, benefits or job opportunities, including no-poach agreements.

The federal antitrust authorities’ attempts to curb no-poach agreements is consistent with their other policy initiatives challenging practices that tend to limit the free operation of the employment market. For example, the FTC has recently focused public attention on the high costs of overbroad occupational licensing regimes, pointing out that between 25 and 30 percent of jobs in the United States — including interior designers, florists and hair braiders — require a license, and that these requirements can operate to protect the interests of incumbents while reducing competition and hampering workers’ mobility. Similarly, the FTC took the lead in pushing the Supreme Court to reevaluate the state sovereign immunity doctrine, which had traditionally protected professional boards — even those controlled by market participants — from immunity against antitrust actions.7 In the 2016 guidance, the agencies underscored that “[f]ree and open markets are the foundation of a vibrant economy,” and “a more competitive workforce may create more or better goods and services.”8

Private Actions

Spurred by the FTC and DOJ’s condemnation, private plaintiffs have increasingly targeted no-poach and wage-setting agreements. These suits are attractive to plaintiffs because of the large number of potential class members, as well as the availability of treble damages, attorneys’ fees and joint and several liability under the antitrust laws. So far, employers have had difficulty dismissing these actions at the motion to dismiss and summary judgement stages,9 although many courts have dodged the question of whether the per se or rule of reason standard should apply. Defendants may have a good shot at defeating class certification, however, when plaintiffs must show that substantially all members of the class were adversely affected by the alleged no-poach agreement.10

Impact on Franchise Systems

No-poach agreements appear to be a particularly sensitive issue in agreements between franchisees and franchisors. Citing a Princeton University study, Senators Booker and Warren charged that “fully 58% of the largest franchisors, operating around 340,000 franchise units, used some form of anti-competitive ‘no poach’ agreements,” and that these agreements were especially common in low-wage, high-turnover industries.11 The study itself highlighted that these agreements are common in quick-service and full-service restaurants and tax preparation and maintenance service companies.12 Indeed, in the past year, private plaintiffs have filed class action complaints targeting restrictive hiring and solicitation terms in franchise agreements against several franchisors, including Carl Karcher Enterprises (i.e., Carl Jr.’s) (February 2017), McDonald’s (June 2017), Pizza Hut (November 2017) and Jimmy John’s (January 2018).13 The complaints in these cases often highlight defendants’ statements that franchisees are not joint employers, franchisees are third-party beneficiaries of the challenged terms, franchisees compete against one another and against company-owned stores, and that the alleged no-poach agreements restrict franchisees from hiring the employees of other franchisees and the franchisor (and vice versa). They then allege that “no-poach” terms of franchise agreements are per se unlawful, horizontal restraints of trade.14

In addition to challenging plaintiffs’ standing, franchisors have generally highlighted that no federal court has held that no-poach agreements are subject to the per se rule, and several have held that the rule of reason applies. Similarly, they argue that franchise agreements are vertical restraints that are eminently reasonable because they prevent intrabrand free-riding (i.e., they prevent franchisees from raiding each other’s employees after the franchisees incurred the time and expense to train them), thereby fostering interbrand competition. Franchisors also argue that the complaints fail to state a claim under the rule of reason because, for example, they fail to properly allege a relevant market. No court has yet ruled on a motion to dismiss a complaint challenging a no-poach agreement in the franchise space.

Other Areas of Concern

Joint ventures are another area of uncertainty. The FTC and DOJ agree that “legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.”15 It is unclear, however, how the antitrust authorities or the courts will evaluate no-poach agreements made as part of a joint venture, except that they are likely to scrutinize factors such as the reasonableness of the scope and duration of the agreements, which are touchstones in analyses of employee noncompetes. For example, when is a no-poach agreement, or some other agreement fixing the terms of employment, reasonably related to and reasonably necessary to achieve pro-competitive benefits from integration?16

Mergers and acquisitions are another common setting involving no-poach agreements that could be affected. Is a five-year nonsolicitation agreement entered into as part of a nondisclosure agreement in connection with due diligence reasonable? Although the antitrust authorities’ attention is on naked restraints of trade, private antitrust plaintiffs — emboldened by the agencies’ attention — may file complaints that bring these issues to the forefront.

Implications

Particularly in the wake of AAG Delrahim’s announcement of imminent criminal cases and the rise of private antitrust actions, firms should take the following actions to identify and limit their exposure:

  • Identify any naked no-poach agreements or other agreements setting or fixing the terms or conditions of employment, including unwritten “gentlemen’s agreements,” focusing on those in effect after October 2016. Companies with “naked” agreements should amend and modify these agreements to comply with the agencies’ policies, and seek legal guidance on how to limit exposure. Franchisors should carefully monitor the new cases in this area, identify any facts that might tend to suggest no-poach agreements with franchisees are horizontal rather than vertical, and weigh the value of such clauses against the risk inherent in this period of legal uncertainty.
  • Carefully consider the scope of any agreements limiting or fixing employment opportunities that are made as part of a legal collaboration, such as a joint venture. Although these agreements are not illegal per se, they can result in exposure especially if they are not reasonably related to and reasonably necessary to achieve pro-competitive benefits. Firms should consider whether employee noncompete agreements, which are subject to a more well-established body of law, can achieve their objectives.
  • Share employment-related information with others only under limited conditions. Sharing this information with competitors in the employment market could result in antitrust liability because it could evidence an agreement related to common employment terms or decrease (or be likely to decrease) competition. However, the agencies noted that an information exchange may be lawful if (1) a neutral third party manages the exchange of information, (2) the information is relatively old, (3) the information is aggregated to shield the identity of sources, and (4) enough sources are aggregated to prevent competitors from linking particular data to a particular source.17

Endnotes

1 Eleanor Tyler, Justice Dept. Is Going After No-Poach Agreements, BNA, Jan. 19, 2018, https://www.bna.com/justice-dept-going-n73014474358/.

2 DOJ, Justice Department Requires Knorr and Webtec to Terminate Unlawful Agreements Not to Compete for Employees, Justice News (April 3, 2018), https://www.justice.gov/opa/pr/justice-department-requires-knorr-and-wabtec-terminate-unlawful-agreements-not-compete.

3 Letter from Sens. Elizabeth Warren and Cory A. Booker to Attorney Gen. Jeff Sessions (Nov. 21, 2017), available at https://www.scribd.com/document/365092277/2017-11-21-Letter-to-Sessions-on-No-Poach-Agreements [hereinafter Warren/Booker Letter].

4 Janet Sparks, Anti-Poaching Clause in Franchise Agreements Is a Big Risk for Franchisors, Blue Maumau (March 19, 2018), available at http://www.bluemaumau.org/16342/
antipoaching_clauses_franchise_agreements_big_risk_franchisors
.

5 DOJ Antitrust Div. & FTC, Antitrust Guidelines for Human Resource Professionals (Oct. 2016) [hereinafter Antitrust Guidelines]. The Guidelines followed several DOJ and FTC civil actions against entities such as the Arizona Hospital & Healthcare Association (which on behalf of most hospitals in Arizona allegedly set a uniform bill rate schedule for temporary and per diem nurses), technology companies (which allegedly entered no-poach agreements, including agreements not to cold-call one another’s employees), Debes Corp. (which allegedly agreed to boycott temporary nurses’ registries), and the Fashion Designers of America and a fashion show producer (which allegedly attempted to reduce compensation for models). Id. at 3-4. All of these resulted in consent judgments. Id.

6 See Barbara T. Sicalides & Benjamin J. Eichel, Antitrust Division Threatens Criminal Prosecution for Employment Practices: Antitrust Agencies Issue Joint Guidance on Employment Restrictions, Competition News (2016), available at http://www.pepperlaw.com/publications/antitrust-division-threatens-criminal-prosecution-for-employment-practices-antitrust-agencies-issue-joint-guidance-on-employment-restrictions-2016-11-08/; see also DOJ, Acting Assistant Attorney General Andrew Finch Delivers Remarks at Global Antitrust Enforcement Symposium, Justice News (September 12, 2017), https://www.justice.gov/opa/speech/acting-assistant-attorney-general-andrew-finch-delivers-remarks-global-antitrust (“Your clients should be on notice that a business across the street from them — or, for that matter, across the country — might not be a competitor in the sale of any product or service, but it might still be a competitor for certain types of employees such that a naked no-poaching agreement, or wage-fixing agreement, between them would receive per se condemnation.”).

7 See Jan P. Levine & Melissa Hatch O'Donnell, Senate Bill Promises Antitrust Immunity to Boards That Reform Licensure in Latest State Action Defense Development, Client Alert (Aug. 14, 2017), available at http://www.pepperlaw.com/publications/senate-bill-promises-antitrust-immunity-to-boards-that-reform-licensure-in-latest-state-action-defense-development-2017-08-14/.

8 Antitrust Guidelines at 2.

9 See, e.g., Fleischman v. Albany Med. Ctr., 728 F. Supp. 2d 130 (N.D.N.Y. 2010) (denying defendants’ motion for summary judgment in case alleging that defendants exchanged information regarding nurses’ pay in an effort to fix wages); In re High-Tech Employee Antitrust Litig., 856 F. Supp. 2d 1103 (N.D. Cal. 2012) (denying motion to dismiss in case alleging an “interconnected web” of agreements to refrain from recruiting one another’s employees, including via cold-calling).

10 See Perry Cooper, Employers Should Brace for Slew of Antitrust Class Actions, Big Law Business (March 23, 2018), available at https://biglawbusiness.com/employers-should-brace-for-slew-of-antitrust-class-actions/.

11 Warren/Booker Letter at 1.

12 See Alan B. Kruger & Orley Ahsenfelter, Theory and Evidence on Employer Collusion in the Franchise Sector, Working Paper #614 (Sept. 2017) at 7; available at https://dataspace.princeton.edu/jspui/bitstream/88435/dsp014f16c547g/3/614.pdf.

13 See Class Action Complaint, Guerrero v. Carl Karcher Enterprises, LLC, No. BC 649777 (Sup. Ct. Cal. Feb. 8, 2017); Class Action Complaint, Deslandes v. McDonald’s USA, LLC, No. 17-4857 (N.D. Ill. June 28, 2017); Class Action Complaint, Ion v. Pizza Hut, LLC, No. 17-788 (E.D. Tex. Nov. 3, 2017); Class Action Complaint, Butler v. Jimmy John’s Franchise, LLC, No. 18-133 (S.D. Ill. Jan. 24, 2018).

14 To support their contention that the alleged conspiracy is horizontal in nature, plaintiffs argue that the franchisor is the organizer (or “hub”) of a hub-and-spoke conspiracy that targets horizontal competition between franchisors. They also argue that the alleged conspiracies are horizontal in light of franchisors’ operation of company-owned stores.

15 Antitrust Guidelines at 3.

16 These questions would also be relevant in an analysis of a no-poach term in a franchise agreement, if it were evaluated under the rule of reason.

17 Antitrust Guidelines at 5.

Jan Levine is a partner in Pepper Hamilton’s Health Sciences Department, a team of 110 attorneys who collaborate across disciplines to solve complex legal challenges confronting clients throughout the health sciences spectrum. Christopher Young is chairman of the Franchise, Distribution and Marketing Section of the Commercial Litigation Practice Group. Melissa Hatch O'Donnell is an associate in the Health Sciences Department.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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