When Google and Apple struck an informal agreement not to raid each others' employee ranks for gifted designers, programmers, and other tech talent—as a number of former employees at both companies contend—it was a seemingly collegial gesture in the notoriously cut-throat world of Silicon Valley. It may have also been illegal.
The Department of Justice takes a dim view of such agreements since many of them amount to collusion and manipulation of labor markets. While not all non-poaching agreements between competitors are illegal, unless they are constructed properly they can violate Section 1 of the Sherman anti-trust law.
A non-solicitation agreement whose sole purpose is suppressing competition—commonly referred to as a “naked” restraint—does not constitute a legitimate business interest. “Those types of agreements are basically condemned outright by US antitrust law,” says Nicholas Grimmer, an associate with law firm McDermott Will & Emery.
Considering the significant amount of time and money it typically takes to train employees, particularly in industries in which subject-matter expertise is sought and otherwise scarce, it can be frustrating for any company when it loses a talented employee to one of its competitors. To stifle bidding wars for top talent and to stem the tide of employee defections, some companies reach non-solicitation agreements with industry peers that prohibit them from recruiting workers already on the other company's payroll.
“Companies should be very careful in negotiating an anti-poaching agreement with other employers,” says Stewart Manela, a partner with law firm Arent Fox. “Unless an agreement is ancillary to another business venture, and narrowly tailored to achieve a legitimate business objective, it may be illegal under the anti-trust laws.”
Tech Talent Wars
Several Silicon Valley high-tech giants are learning this lesson the hard way. Several companies, including Apple, Google, and Intel currently are facing a class-action lawsuit in the U.S. District Court for the Northern District of California over allegations that they entered into bilateral “no-poaching” agreements with one another on several occasions between 2005 and 2009, where they allegedly conspired not to recruit each other's employees.
Pixar, Lucasfilm, and Intuit have already entered into settlements to resolve the lawsuit, agreeing to pay a total of $20 million. The remaining corporate defendants Apple, Google, Intel, and Adobe have yet to settle and some estimates of potential claims climb into the billions of dollars.
The case, In re High-Tech Employee Antitrust Litigation, was filed by a group of Silicon Valley software and hardware engineers, who argue that the “no-poaching” agreements violate Section 1 of the Sherman Act, which prohibits the restraint of trade. The argument is that any agreement that restricts competition in the market constitutes a monopolistic act that has an effect on interstate commerce.
“Unless an agreement is ancillary to another business venture, and narrowly tailored to achieve a legitimate business objective, it may be illegal under the antitrust laws.”
—Stewart Manela,
Partner,
Arent Fox
The corporate defendants in the case continue to challenge the lawsuit. “We don't believe we violated any law, and we further believe there is no evidence that we entered into a multi-company agreement,” says Chuck Mulloy, a spokesman for Intel. “We are in the process of conducting a defense in that matter.” The lawsuit is scheduled to go to trial in May.
The same high-tech giants—all except Lucasfilm—entered into a settlement with the Justice Department in September 2010 to resolve a civil antitrust complaint over the same allegations as the class-action lawsuit.
Compliance Roadmap
Even though not all solicitation agreements are prohibited, many are not supported by a legitimate business purpose. “A no-poaching agreement with a competitor is likely to be a problem, unless it is very closely tied to, and narrowly protects, some legitimate interest,” says Michael Lindsay, a partner with law firm Dorsey & Whitney.
The Justice Department has provided a compliance roadmap for companies to use in determining whether a solicitation agreement might be supported by a legitimate business purpose and, thus, may be valid. Examples of legitimate business reasons supporting a solicitation agreement is when the non-solicitation provision is:
Reasonably necessary for mergers or acquisitions, consummated or unconsummated, investments, or divestitures, including the diligence related thereto;
Reasonably necessary for contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies, or providers of temporary employees or contract workers;
Reasonably necessary for the settlement or compromise of legal disputes; or
Reasonably necessary for contracts with resellers or original equipment manufacturers; contracts with providers or recipients of services other than those enumerated in the preceding four paragraphs, or the function of a legitimate collaboration agreement, such as joint development, technology integration, joint ventures, joint projects, and the shared use of facilities.
CONDUCT NOT PROHIBITED
The following excerpt was taken from the Justice Department Settlement of United States of America v. Adobe Systems and explain what the final judgment does not prohibit.
The Final Judgment does not prohibit all agreements related to employee solicitation and recruitment. Section V makes clear that the proposed Final Judgment does not prohibit "no direct solicitation provisions" that are reasonably necessary for, and thus ancillary to, legitimate procompetitive collaborations. Such restraints remain subject to scrutiny under the rule of reason.
Section V.A.1 does not prohibit no direct solicitation provisions contained in existing and future employment or severance agreements with a Defendant's employees. Narrowly tailored no direct solicitation provisions are often included in severance agreements and rarely present competition concerns. Sections V.A.2-4 also makes clear that the proposed Final Judgment does not prohibit no direct solicitation provisions reasonably necessary for:
1.mergers or acquisitions (consummated or unconsummated), investments, or divestitures, including due diligence related thereto;
2.contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies or providers of temporary employees or contract workers;
3.the settlement or compromise of legal disputes; and
4.contracts with resellers or OEMs; contracts with certain providers or recipients of services; or 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.
Source: Justice Department.
Other considerations courts will weigh in determining whether a non-solicitation agreement is narrowly tailored include whether the agreement defines the scope of employees. “An agreement that names particular employees would be very narrow scope,” says Grimmer.
A solicitation agreement might also work if it defines the scope of a job function, or the experience level of the employee, “but the tailoring of that agreement still has to relate back to the purpose of the main agreement,” says Grimmer. “If two companies, for example, are in a research and development joint venture, it wouldn't make sense to have non-poaching agreement cover sales personnel who aren't involved in that joint venture.”
Another consideration: “Is it an agreement that extends in perpetuity, or one that ends when – or shortly after – the joint venture ends?” says Grimmer. “These are all factors in determining whether the agreement is reasonably or narrowly tailored.”
Non-Compete Agreements
Companies can also protect themselves from competitors through the use of non-compete agreements with their employees, which, in part, prohibit an employee from working for a competitor for a specified period of time, usually in a specified geographic area.
“These agreements can be a very effective way of protecting employees from poaching,” says Grimmer. Although they usually pose no federal antitrust issues, they can be illegal under state law, particularly if the agreement's scope and duration are deemed unreasonable.
That doesn't mean non-compete agreements are bulletproof. In some states, such as California and Oregon, they're generally not enforceable. “Before entering a non-compete, a company should understand the law governing the employment contract,” says Grimmer.
Test Case on the Horizon
A separate civil antitrust action brought by the Justice Department in November 2012 against eBay further challenges a no-poaching agreement that eBay entered into with Intuit. That case, U.S. v. eBay, is currently pending in the U.S. District Court for the Northern District of California.
If the Justice Department were to prevail in that case, it would be a watershed decision, Alison Smith, a partner in the law firm McDermott Will & Emery, said. “I do not believe there has ever been a case in which a no-poaching agreement has been held to be per se illegal.”
Smith adds that the broader implications of the case could extend well beyond the technology industry. “It could apply across the board to any type of employment agreement not to compete for employees,” she says.
The solicitation of employees in highly competitive industries is an important means of protecting against unfair competition, but companies that depend on such protections must be vigilant in updating their contracts to comply with the latest legislative and judicial developments.
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