Is Your Non-Compete an Antitrust Violation? Some Courts Say “Yes”

I promised last week to give you real case examples of non-compete agreements that were found to violate antitrust laws. You may recall that the problem arises more often when businesses enter into agreements not to compete with each other, or not to take each other’s employees. Click here if you missed last week’s post so you can get up to speed. In the meantime, let’s take a look at those cases, and then let’s talk about how you might be able to stop your competitors from taking your employees– after the jump, of course!

(image from wikipedia.org)

OK, let’s get started.

Remember how I said that non-poaching agreements can present antitrust issues? (Of course you do, I just said it at the beginning of this post — and last week. OK, well here’s a real live case that teaches that lesson many times over. In 2010, the Department of Justice investigated several competitor software companies’ hiring practices. A number of these companies agreed not to compete for each other’s engineers. How did they go about ensuring such non-competition? When one of them made an offer to an employee of a competitor company, they would share the information with each other. The DOJ found this practice to be “facially uncompetitive”, because it limited employees’ job opportunities. The DOJ ordered these companies to stop this practice.

Let’s assume these companies did stop. Maybe there were some fines, but is it a big deal? What additional consequences if any ensued from this practice? Employees who worked as software engineers for these companies found out about the DOJ investigation and conclusions and filed suit. They claimed that the participating companies’ practices constituted wage suppression, which is an antitrust violation. The employees claimed that the companies shared employee information and agreed to cap employees’ wages, which in turn restricted recruitment and hiring of employees. These practices allegedly led to depressed wages, which were far below market standards. Intuit, Pixar and Lucasfilms reached settlements with some of its employees in 2013. Apple, Google, Adobe and Intel settled a similar case for $415m in early 2015.  While these cases alleged resulting suppression of wages, the intent of these agreements was to ensure that competitors would not take each others’ employees.

What about sharing wage  or price information? Sharing price information tends to be a sure way for competitors to be found in violation of antitrust laws. The U.S. Supreme Court said so in United States v. Container Corporation of America, 393 U.S. 333 (1969).  Same with cost information.  Courts more recently have found sharing wage information to be as much an antitrust violation as sharing information about cost and pricing. For example, in  Cason-Merenda v. Detroit Medical Center, 862 F. Supp. 603 (E.D. Mich. 2012) plaintiffs alleged that eight hospitals “violated § 1 of the federal Sherman Act, 15 U.S.C. § 1, by agreeing to regularly exchange compensation-related information among themselves in a manner that has reduced competition among Detroit-area hospitals in the wages paid to RNs”. While this case primarily decided the question of whether there was enough commonality among all proposed class members for the case to proceed as a class action lawsuit, it also confirms that this type of information-sharing can create antitrust exposure for employers. Similarly, in Fleishman v. Albany Medical Center, 728 F. Supp. 2d 130 (S.D. N.Y. 2010) the court found that Albany-area hospitals conspired to fix wages of all their Registered Nurses, which is generally considered ” a per se violation of the Sherman Act”. (You may recall from last week’s post that the Sherman Act is one of the main bodies of federal antitrust law.) So are all non-poaching and non-competition agreements now “out”?  Is there any way you can protect yourself from bullies on the business playground? The answer to these questions are “No” and “Yes”, respectively. What can you do? In general, here are your options:

Agreements ancillary to sale of a business or to engaging in a joint venture: Parties may legitimately agree to refrain from hiring each other’s employees for a specific and reasonable amount of time. Otherwise it might be hard to get a buyer, out of fear that the seller will turn around and raid the sold business and hire those employees away. Parties to a potential business sale may include a non-poaching agreement in what is known as a Letter of Intent. Here, a seller might be afraid to proceed with a transaction and allow a would-be purchaser to do its due diligence, because it would be providing the would-be purchaser with information about the seller’s employees. The would-be purchaser could decide not to complete the transaction and hand-pick desirable employees, seeking to hire them away from the seller, or, if a new buyer comes along, then hire them away from the new purchaser. Similarly, a joint venture that includes key employees may warrant a non-poaching agreement. If you are thinking of entering into a joint venture with a competitor, the opportunity to poach key employees may be too hard to resist. You may also include non-poaching agreements in contracts with staffing agencies, vendors, consultants, accountants and other vendors. What do all these scenarios have in common? 1) The non-poaching agreement is ancillary to the main agreement; 2) The non-poaching agreement is an inducement for the parties to feel comfortable proceeding with the main transaction; and 3) It is narrowly tailored to protect very specific, very legitimate interests. In other words, it protects against unfair competition. A plain old non-poaching agreement, with no time limit, without any connection to a transaction or other bigger concern or issue, in contrast, stifles fair competition.

Non-Competes — between employers and employees. Click here, here and here for a review of non-competes. Now, some of you may have received a letter from a competitor if you have hired one of their employees, and the employee signed a non-compete with the competitor. The letter tells you that you might be sued if you don’t terminate the employee. Why is that OK and not a non-poaching agreement? If you were sued, it would not be because you breached an agreement. The reasoning here is that would be helping the employee breach his/her non-compete, and that would be interfering with the employee’s contractual relationship with the former employer. The employee’s knowledge and possible use of trade secrets or other confidential and proprietary information, would work to your benefit and the competitor’s detriment. That conduct crosses the line between fair and unfair competition. It’s OK to compete for good employees. It’s not OK to gain knowledge of  and use confidential and proprietary information belonging to a competitor.

OK, I think we’ve covered everything for now. Next week we’ll discuss something new. Adios!

Disclaimer: Contents of this post are for educational/informational purposes only, are not legal advice, and do not create an attorney-client relationship. Consult with competent employment counsel in the state(s) in which you employ people with your specific questions.

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