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Antitrust Regulators Eye Criminal Enforcement in No-Poach Deals

May 17, 2021, 10:30 AM

Federal antitrust regulators are invoking an Obama-era policy to ramp up criminal enforcement of illegal no-poach agreements in employers’ hiring practices.

The Justice Department and Federal Trade Commission have in the past pursued civil charges against employers that illegally strike deals to refrain from hiring the other’s employees. But in 2016, the agencies issued joint policy guidelines stating that criminal charges could be brought in cases where there is proof of an explicit no-poaching arrangement or wage fixing.

The five-year-old policy has largely been dormant, but it is being dusted off.

In the last six months, the DOJ has brought two criminal indictments for restricting the free movement of labor: one against Surgical Care Affiliates LLC, a unit of UnitedHealth Group, for agreeing with competitors not to solicit one another’s employees, and another against a staffing company owner for allegedly conspiring with competitors to lower wages.

The charges against the staffing company underscore the Justice Department’s “ongoing commitment to enforcing antitrust laws,” Acting Assistant Attorney General Richard A. Powers of the DOJ’s Antitrust Division said when it announced the charges.

“The criminal aspect is a big deal because as you can imagine, before 2016 no one thought agreements about hiring were criminally enforceable like price-fixing or market allocations, and that’s a big shift,” David Reichenberg, antitrust co-chair at Cozen O’Connor in New York, said.

More Severe Penalties

Under heightened scrutiny, companies possibly could face criminal penalties that are more severe than costs from private litigation, not to mention possible jail time for executives. Following federal regulators’ lead, state-level enforcers also could ramp up their own scrutiny of these arrangements, attorneys say.

“With the incoming Democratic administration, there will be a general uptick overall in enforcement, and I think enforcers will continue to be very interested in this area as matters are investigated,” Reichenberg said.

Depending on the nature of the arrangement, the DOJ could bring criminal prosecution against the individuals and company involved. Both federal antitrust agencies could bring civil charges, and a private party harmed by the arrangement could bring its own civil lawsuit seeking treble damages.

“You usually see civil actions filed the second any kind of investigation is made public,” said Todd Miller, managing partner of Baker & Miller PLLC in Washington.

Recent Cases

Criminal indictments are significant because a grand jury has met and decided there’s enough evidence to support the charges, said Carol O’Keefe, a partner at Korein Tillery LLC.

The DOJ brought its first indictment in a wage-fixing scheme in December 2020 against Neeraj Jindal, the owner of a physical therapist staffing company based in Texas. Jindal allegedly conspired with his competitors in 2017 to lower staff pay and requested his competitors recruit others to the scheme, according to the indictment. Charges against Jindal are still pending.

The DOJ’s first criminal indictment of a no-poach scheme was issued January 2021 against Surgical Care Affiliates, a multi-state operator of outpatient care facilities. The company allegedly entered into two illegal agreements with competitors to not solicit each other’s senior-level employees.

SCA recently filed a motion to dismiss the case. The DOJ has filed a motion to halt proceedings of a concurrent private lawsuit against SCA so that any findings in the civil case would not interfere with its criminal case.

“I think the first several cases are as much about providing clarity to companies as to what kinds of cases are considered subject to criminal sanctions—so I think the timing of this indictment indicates the DOJ was waiting for the right case,” Reichenberg said.

Civil to Criminal

In their 2016 guidance, the DOJ and FTC said they intended to pursue criminal charges against per se wage-fixing or no-poaching agreements because such deals “eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been criminally investigated and prosecuted as hardcore cartel conduct.”

“For a while the FTC and DOJ dealt hand-slaps to the tech industry, so coming out with the 2016 guidance was really a warning shot to the world to indicate that cases which were previously treated as civil could actually be criminal,” Miller said.

The DOJ and FTC in their guidance cited a handful of settled cases involving big tech companies as examples of behavior that would result in criminal investigations or prosecutions.

“The examples in high tech are some of the most high-profile cases which were not prosecuted criminally before the guidance, so enforcers want to make clear that if that doesn’t stop they’re going after it,” Reichenberg said.

Earlier this month, online ad marketer Taboola Inc. revealed that the DOJ’s antitrust division is conducting a criminal investigation of its and the industry’s hiring practices. Taboola didn’t disclose the details of the investigation.

“While there can be no assurances as to the ultimate outcome, the company does not believe that its conduct violated applicable law,” the company said in a May 4 filing with the Securities and Exchange Commission.

Collaboration Constraints

Some attorneys worry that the increased scrutiny could dampen collaboration between competitors that work together while maintaining professional boundaries on soliciting each other’s employees.

“The 2016 guidance was a way to lay down a red line to say you’re doing things you’re not supposed to and we will take a look at indicting it criminally—but who knows how many handshake practices there are across the country between competitors who also have to work competitively,” said James P. Cooney III, partner at Womble Bond Dickinson (US) LLP, in Raleigh, N.C.

Those collaborations could enable competitors to innovate beyond what they could do alone, Cooney said. And acting in what is understood as a “professional” manner could result in a situation where both parties informally agree not to exploit their access to one another’s talent and steal away employees.

States also are monitoring how federal regulators approach criminal indictments in no-poaching cases, particularly as they ratchet up their scrutiny of large tech companies, attorneys say.

The Pennsylvania Supreme Court recently ruled that a no-compete provision in an agreement between logistics provider Pittsburgh Logistics Systems Inc. and shipping company BeeMac Trucking LLC undermined competition for industry employees.

“Although this wasn’t a criminal prosecution, it does raise eyebrows because it’s a state court case involving common contracts in which the federal antitrust principles are being endorsed,” Reichenberg said.

Attorneys general from 44 states and Washington, D.C. also recently asked Congress for more funding as they open more investigations of technology companies, which could include probes into no-poach agreements.

“A lot of these labor restraints are going to be more local in nature, so having states properly funded and pursuing antitrust matters may lead to an even greater increase in these cases than one would otherwise predict if you’re just looking at the federal level,” Miller said.

To contact the reporter on this story: Siri Bulusu in Washington at sbulusu@bloombergtax.com

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com

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