ANALYSIS: Per Se, or Not Per Se — That is the No-Poach Question

The Department of Justice’s antitrust division has intervened as an interested party in a number of suits about “no poach” agreements, in which companies allegedly agreed not to recruit or hire each other’s employees. The DOJ wants to clarify, it says, which agreements among companies are always illegal restraints under Sherman Act §1 and which should get the legal benefit of the doubt under the “rule of reason” analysis, which balances pro-competitive and anticompetitive impacts of the agreement on a given market.

Per se violations, also called “naked restraints of trade,” are those that are so reliably anticompetitive that little inquiry into their market impacts is necessary. Per se offenses are also criminal acts chargeable by the DOJ under the Sherman Act. But not even criminal cases are inevitably reviewed under the per se analysis: recently, the DOJ was almost forced to prosecute a criminal price fixing case in the heir locator industry under a rule of reason analysis. The district court reconsidered its decision to apply the rule of reason, however, and the defendants pleaded guilty.

It is unclear what analytical approach applies to no-poach agreements, in particular, but we have more guidance from the DOJ about which no-poach agreements it considers “naked.” Whether courts agree, as the heir locator case demonstrates, may be a different matter.

Vertical vs. Horizontal

The clearly per se offenses that remain are all horizontal actions: customer allocation schemes, market divisions, bid-rigging, price fixing, and some horizontal boycotts. The DOJ’s positions in the no-poach cases make the distinction between vertical conduct and horizontal conduct.

Since publishing guidelines on prohibited no poach conduct three years ago, the DOJ has refined its stance on which types of no-poach agreements are subject to per se analysis and/or criminal prosecution. In essence, the DOJ asks:

1) did the parties make an actual agreement?

2) Are they legally capable of conspiring under the Copperweld doctrine, or are they legally pieces of the same entity like subsidiaries of a common parent?

3) Are the agreeing parties competitors in the same market for employees, and is there a horizontal relationship between them with regard to the no-poach agreement?

4) Should the agreement be treated under the rule of reason by virtue of being ancillary (subordinate and collateral) to a separate, legitimate transaction?

If the agreement is an “ancillary restraint,” or the parties are in a vertical relationship, the DOJ considers the rule of reason the appropriate analysis for any anticompetitive effects the agreement may have.

Per Se Sometimes

In a statement of interest filed around the same time, the DOJ argued that an alleged no-poach agreement between two hospitals should be subject to per-se analysis based on DOJ’s criteria. Danielle Seaman, a medical professor in Duke University’s health system, argued that her offer of employment at nearby University of North Carolina at Chapel Hill’s hospital was rescinded because the two universities had agreed not to hire each other’s medical faculty.

The DOJ’s statement of interest in the case argued that any agreement between Duke and UNC would be “per se” illegal because the hospitals compete horizontally for faculty. Indeed, the antitrust division formally intervened in the case to enforce the $54.5 million class-action settlement the parties reached in May 2019. The court entered final judgment in the case in September without deciding which analytical framework should apply to the claims.

The DOJ also filed a statement of interest in a class action alleging railroad equipment makers had agreed not to hire each other’s employees, arguing that the agreement is subject to the per se rule. Again, because the agreement was between horizontal competitors, the DOJ argued to the U.S. District Court for the Western District of Pennsylvania that the agreement should be per se illegal.

The railroad class action follows on the DOJ’s own complaint against the railroad equipment manufacturers. The DOJ alleged that the agreement was per se illegal, but the antitrust division declined to criminally prosecute the two railroad equipment firms.

Can I Get a Quick Look?

Two courts have concluded that the alleged behavior isn’t per se illegal, but bad enough to qualify for a “quick look” analysis that is somewhere between per se and the full, balancing rule of reason analysis.

The franchise cases involve fast food and other franchise businesses that agreed with the franchisor not to hire other franchisee’s employees. The DOJ argues that these agreements are purely vertical—between the franchisor and the franchisee—and therefore are subject to a rule of reason analysis.

But the plaintiffs allege that the agreements are pointless unless they are horizontally enforced. Therefore, the plaintiffs allege, the arrangement isn’t vertical, but is instead a “hub and spokes” conspiracy to keep labor costs down by keeping employees of one franchise from looking for better wages at another. Why else would a franchisor care if workers move between individual franchises, they ask.

In one case brought by a McDonald’s manager, the court said that the quick look is appropriate and concluded that the plaintiff has adequately alleged that the no-poach agreement is a hub-and-spokes conspiracy. In another, brought by employees of Cinnabon franchises nationwide, the court concluded that the no-poach agreements aren’t unambiguously anticompetitive like per se offenses, but are bad enough to require a quick look.

Watch This Space

At the moment, there isn’t a lot of guidance from the courts on how no-poach agreements will be evaluated when private parties bring suit. But companies can be fairly confident what elements of the agreement will be most important in any DOJ decision to bring an enforcement action. The remaining no-poach cases winding through litigation will be informative.