Can a business agree with a competitor not to recruit each other’s employees without running afoul of the Sherman Act? Like many answers in the restrictive covenant field, it depends. As several of our nation’s leading high tech companies recently learned, a business better have a demonstrable legitimate business reason for agreeing with its competitor not to recruit each other’s employees or the Department of Justice may bring suit.
On September 24, 2010, the Department of Justice (“DOJ”) initiated a lawsuit in the United States District Court for the District of Columbia, entitled United States of America v. Adobe Systems, Inc., et al., Civil Case No. 1:10-CV-01629. The DOJ filed a Complaint against Adobe Systems, Inc. (“Adobe”), Apple Inc. (“Apple”), Google Inc. (“Google”), Intel Corporation (“Intel”), Intuit, Inc. (“Intuit”) and Pixar, alleging that those companies entered into various bilateral agreements in which they agreed not to actively solicit each other’s highly skilled technical employees, and that those agreements violated Section 1 of the Sherman Act, 15 U.S.C. § 1. According to the Complaint, at various times beginning in the period from 2005 to 2007, Apple entered into mutual agreements with Google, Adobe, and Pixar not to cold call each other’s employees, and Google entered into similar agreements with Intel and Intuit. The executives of these companies allegedly “actively managed and enforced the agreement[s] through direct communications.”
The DOJ further alleged that the companies, which compete for highly skilled technical employees and solicit employees at other high tech companies to fill employment openings, engaged in concerted behavior that both reduced their ability to compete for employees and disrupted the normal price-setting mechanisms that apply in the labor arena. The DOJ called these no cold call agreements “facially anticompetitive” because they eliminated a significant form of competition to attract high tech employees, and, overall, substantially diminished competition to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.
At the same time that it filed the Complaint, the DOJ filed a proposed Final Judgment, Stipulation and Competitive Impact Statement, effectively announcing the settlement of its claims, by which the defendant companies would agree to refrain from entering into similar agreements in the future (i.e., from entering, maintaining or enforcing any agreement that prevents a person from soliciting, cold calling, recruiting or otherwise competing for employees). On October 1, 2010, the DOJ invited public comment on these documents over the ensuing 60 days. The proposed settlement of the DOJ’s claims is subject to the approval of the Court.
Recognized Legitimate Business Reasons
The proposed Final Judgment does not prohibit all inter-competitor agreements related to employee solicitation and recruitment among the six companies. It contains a section making clear that it does not prohibit “no direct solicitation provisions” that are reasonably necessary for, and thus ancillary to, legitimate pro-competitive collaborations. Such restraints remain subject to scrutiny under the rule of reason test applied to horizontal restraints of trade.
The proposed Final Judgment lists the following legitimate business reasons that would support a “no direct solicitation provision”:
- When the non-solicitation provision is contained within existing and future employment or severance agreements with the Defendant’s employees;
- When the non-solicitation provision is reasonably necessary for mergers or acquisitions, consummated or unconsummated, investments, or divestitures, including the diligence related thereto;
- When the non-solicitation provision is reasonably necessary for contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies or providers of temporary employees or contract workers;
- When the non-solicitation provision is reasonably necessary for the settlement or compromise of legal disputes; or
- When the non-solicitation provision is reasonably necessary for (i) contracts with resellers or original equipment manufacturers, (ii) contracts with providers or recipients of services other than those enumerated in the preceding four paragraphs, or (iii) the function of a legitimate collaboration agreement, such as joint development, technology integration, joint ventures, joint projects (including teaming agreements), and the shared use of facilities.
As the DOJ explained, the various agreements between Apple, Adobe, Google, Pixar, Intel and Intuit were not tied to any specific collaboration and were not narrowly tailored (they covered all employees at the companies). The DOJ alleged these agreements were per se illegal, i.e., were activities akin to price-fixing that are conclusively presumed to be unreasonable restraints on trade, and thus anticompetitive. The agreements, therefore, were not seen as protecting any legitimate business interest but rather as detrimental to employees seeking to sell their services for the most advantageous wages, work experience, and other benefits.
An enforcement action such as this one by the DOJ, seeking redress for agreements among competitors in markets in which they are purchasers of employment services (as opposed to more traditional enforcement actions in markets were competitors are sellers of competing goods), is not without precedent. The DOJ’s Competitive Impact Statement discusses a 1996 enforcement action brought in the United States District Court for the Western District of Missouri, United States v. Ass’n of Family Practice Residency Doctors, No. 96-575-CV-W-2. In that matter, the DOJ similarly challenged as per se illegal certain guidelines designed to curb competition between residency programs for senior medical students and residents of other programs. Members of the Association of Family Practice Residency Directors had agreed not to directly solicit residents from each other. Those agreements were similarly seen as anticompetitive and harmful to the residents.
In contrast to the situation presented by the non-hire agreements among competitors in U.S. v. Adobe, in which the restrictive effects on competition are so far-reaching, restrictive covenants between an employer and an individual employee generally have not been successfully challenged as per se violations of the Sherman Act. Aydin Corp. v. Loral Corp., 718 F.2d 897, 900-01 (9thCir. 1983). Rather, when such covenants not to compete are challenged on antitrust grounds, they have been subject to a traditional “rule of reason” analysis, in which a plaintiff must prove that the agreement has an adverse effect on competition in the relevant market (as distinguished from the effect on the particular employer and employee involved). See DeSantis v. Wackenhut Corp., 793 S.W.2d 670, 688 (Tex. 1990). Generally, application of the “rule of reason” has led courts to uphold employer-employee restrictive covenants not to compete against antitrust challenge. See Bradford v. N.Y. Times Co., 501 F.2d 51, 59 (2d Cir. 1974). In any event, even if an employer-employee restrictive covenant passes federal antitrust muster, such an agreement is also typically analyzed under state law to determine whether it protects a legitimate business interest of the employer, unduly harms the employee’s ability to earn a living, and/or infringes upon the public interest. See Bradford, 501 F.2d at 60; Inflight Newspapers, Inc. v. Magazines In-Flight, LLC, 990 F. Supp. 119, 139-40 (E.D.N.Y. 1997).
Legal practitioners would do well to heed the lessons evident from the DOJ’s Complaint against Adobe, et al. When a corporate client is seeking relief from competitors’ efforts to recruit away its employees, simply reaching mutual non-solicitation and non-hire agreements with certain competitors, while possibly solving the problem of defecting employees, could expose the company to unwanted interest and even prosecution by governmental authorities under the antitrust laws. In most cases, particularly for large, high-profile corporate clients operating in a concentrated market, this quick fix should be avoided. Alternative (“pro-competitive”) methods of encouraging employees to stay with the company and spurn offers from competing employers should be explored and implemented.
Direct agreements by corporate clients with other companies to avoid soliciting and/or hiring the employees of those companies should be limited in duration and scope, and should be entered into only when supported by legitimate business reasons such as those outlined above. Corporate clients can still have it as a term when settling their non-compete or raiding cases with competitors, when entering into severance agreements or when selling a business, among other circumstances commonly encountered. Broader industry-spanning agreements, however, that could truly foreclose employment opportunities to a significant segment of the market should be avoided.
PETER L. ALTIERI is a Member of Epstein Becker Green’s Litigation and Labor and Employment practices in the firm’s New York office. DAVID J. CLARK is a Senior Counsel in Epstein Becker Green’s Litigation practice in the firm’s New York office.
Reprinted with permission from the Dec. 22, 2010, edition of the New York Law Journal © 2011 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.