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No-Poach Agreements Can Pose Antitrust Risks; Consider Alternatives

Oct. 8, 2020, 8:01 AM

“No-poach” agreements—whereby different employers agree not to solicit or hire each other’s employees—have been the subject of increased scrutiny in recent years by state and federal governments and private plaintiffs.

There are often legitimate reasons for no-poach agreements, but like any other agreement between independent entities, they are still susceptible to challenge as an anticompetitive agreement amongst competitors to restrain trade.

Attorneys can best serve their clients considering no-poach agreements by (1) being mindful of certain key inquiries that inform any assessment of antitrust risks they can pose; (2) ensuring that their terms conform to certain antitrust best practices; and (3) considering whether less-restrictive alternatives can accomplish the client’s goals.

This way, attorneys can help further their clients’ legitimate, pro-competitive goals while mitigating their client’s antitrust exposure for potentially unlawful restraints of trade in the market for labor.

Assessing Antitrust Risks

In assessing possible antitrust risks posed by a no-poach agreement, the most crucial inquiry is what the relationship is between the client and the putative counterparty.

The most common source of antitrust risk for no-poach agreements is Section 1 of the Sherman Act, which prohibits any “contract, combination … or conspiracy, in restraint of trade,” and, as its language implies, this requires at least two entities that are legally capable of conspiring with one another.

If a company is considering entering into a no-poach agreement with a company that it owns, that owns it, or that is also owned by its owner, Section 1 generally does not apply under the Supreme Court’s Copperweld line of cases. This isn’t to say that the antitrust laws do not apply—a “single” entity that is outside the reach of Section 1 can still constitute a monopoly in violation of Section 2. But the antitrust risks are lessened if the parties share a unity of ownership extensive enough to render them a single economic decision-maker.

Competitive Dynamics Inquiry

The relationship between the parties is followed closely in importance by an inquiry into the competitive dynamics in the relevant labor market. Put differently, what does the client hope to accomplish with the no-poach agreement?

Is the client engaging in negotiations to potentially merge with a competitor? The client may be wary of sharing information on its workforce in due diligence, out of concern that the competitor will hire away their employees, weakening their ability to effectively compete.

Does the client’s business involve trade secrets or intellectual property that an employee can’t be expected to forget after their employment ends? The client may want to reduce the risk that competitors gain an unfair competitive advantage by hiring their employees for their knowledge of the client’s trade secrets.

Or does the client employ highly-skilled personnel or incur substantial recruiting or training expenses? The client may hope to avoid the risk that it will incur significant recruiting or training costs only for a competitor to hire away the more skilled employees before the client can recoup those costs.

In each case, knowing the client’s goals and the competitive landscape of their labor market helps attorneys to appropriately counsel the proper course of action. Most fundamentally, attorneys should ensure that a no-poach agreement they are negotiating is no broader than necessary to accomplish the client’s legitimate, pro-competitive goals, and is not being used to accomplish an anti-competitive purposes (for example, reducing salary expenses by reducing competition for employees).

This can be accomplished by limiting the scope of employees covered, the geographic or temporal reach of the agreement, and by otherwise narrowing the agreement’s breadth. Avoiding overly broad or restrictive agreements not to hire a competitor’s employees minimizes the risk that the agreement draws challenge under the antitrust laws.

Consider Alternatives

While the no-poach agreement can be a legitimate and effective means of accomplishing a variety of pro-competitive goals, it is still only one tool available to address workforce concerns. Skilled antitrust counsel can advise clients on alternatives that can accomplish the client’s legitimate, pro-competitive concerns with less risk than a blanket agreement not to hire.

In the merger negotiation context, for example, confidentiality or “clean team” agreements can limit the extent to which detailed employee information is disseminated within a competitor’s organization, reducing both the antitrust risk of the information sharing itself and the risk that the competitor will poach the client’s employees.

In the intellectual property context, non-disclosure agreements with employees can mitigate the risk that they will disclose or use the information they learn after leaving that job, and appropriately-tailored non-compete agreements can help reduce the possibility that employees are placed in the impossible position of having to forget what they learned at their former employer when taking a job with a competitor.

And in the context of clients with significant training or recruitment costs, non-compete or other agreements with the employees themselves can address the concerns about recouping those costs. As these examples demonstrate, narrower restraints may be able to accomplish the client’s goals with reduced risk of antitrust exposure.

There are often other means by which employers can address poaching, intellectual property, or other concerns, and these alternatives can often be less risky, more effective—or both—than a blanket agreement with a competitor not to hire away each other’s employees.

Defending even a “simple” antitrust lawsuit can take months to years to defend and cost hundreds of thousands of dollars. When advising clients on how to handle issues relating to hiring and retention of its employees, therefore, an ounce of prevention is worth three pounds of cure.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Raymond (Ray) A. Jacobsen Jr. is global head of McDermott’s Antitrust Practice and based in Washington, D.C. He advises clients on mergers, acquisitions and complex antitrust litigation and has significant experience in the defense, medical devices, biotech, consumer product, energy and health care industries.

Nicole L. Castle is a partner in McDermott’s New York office and provides legal counsel on complex civil and criminal antitrust litigation. She represents clients in complex, multidistrict class action antitrust litigation and defends mergers and acquisitions before the DOJ and FTC.

Joshua W. Eastby is an associate in McDermott’s Chicago office and focuses on antitrust regulatory and litigation matters. He defends clients in securing regulatory clearance of mergers and acquisitions and in securing favorable outcomes and efficiently managing e-discovery in complex antitrust litigation.

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