The potential antitrust impact of no-hire agreements between competitors has been a hot topic over the last few years, particularly in the high-tech industry where competition for the most talented programmers, developers and engineers is intense. An antitrust class action pending in the US District Court for the Northern District of California against six high tech firms — Intuit, Apple, Google, Intel, Intuit and Pixar – illustrates just how high the stakes can be when a no-hire agreement among competitors is challenged under federal and state antitrust laws. The plaintiffs in that putative class action are five software engineers who claim that the defendants entered into a series of no-hire agreements between 2005 through 2009 that eliminated competition for labor, artificially reduced compensation and job mobility and cost employees to suffer hundreds of millions of dollars in lost wages. That class action stems from a similar antitrust action brought by the DOJ in 2010 against the same six firms, which asserted that the defendants violated Section 1 of the Sherman Act by agreeing that they would not cold-call each other’s employees. Although the DOJ’s antitrust action against Google, et al. settled shortly after it was filed, the class action challenge to the alleged no-hire agreements rages on. Additionally, on November 16, 2012, the DOJ filed a civil antitrust action against eBay, Inc., claiming that from 2006 to 2009, eBay violated federal antitrust laws by entering into a "handshake" agreement with Intuit to not hire each other’s employees.
Does the recent spate of antitrust challenges to no-hire agreements mean that negotiated no-hire provisions, which are commonly found in settlement agreements and commercial contracts, face an increased risk of being held unenforceable or, even worse, giving rise to a claim for damages? Probably not. In the 2010 Competitive Impact Statement filed by the DOJ when it settled its antitrust action against Google, et al., the government acknowledged that no-hire agreements that are ancillary to legitimate, pro-competitive collaborations — including contracts with consultants, settlement agreements or mergers and acquisitions — are not per se unlawful under the Sherman Act.
But even a no-hire provision that is ancillary to a legitimate business interest can face a challenge under federal or state antitrust laws if it is broader than necessary to achieve the legitimate business objective. Such challenge could come from the DOJ, a state enforcement agency or even employees who claim to have been adversely affected by the no-hire. In the event of such a challenge, the no-hire agreement must satisfy the rule of reason test, which balances the restraint’s procompetitive benefits against its anticompetitive effects.
In most cases, reasonable no-hire provisions that are ancillary to settlement agreements, consulting contracts, acquisition agreements and similar commercial transactions will satisfy the rule of reason test and present little if any risk of antitrust injury. Employers negotiating a no-hire provision in a settlement agreement or commercial contract can further minimize the risk of a successful antitrust challenge to a no-hire provision by observing a few basic principles. First, no-hire provisions should not be drafted as standalone agreements. Instead, they should be incorporated into a broader agreement so it is crystal clear that the no-hire provision is ancillary to a legitimate business interest, such as settling an employee poaching claim, retaining an outside consulting firm or facilitating a joint venture. Second, the no-hire agreement should be as narrowly tailored as possible by limiting its scope to specific categories of employees, products or services and geographic territories. Third, the no-hire should not be open-ended and should have a reasonable duration. The definition of reasonable in this context will depend to a large extent on the nature and size of the affected industry, the level of competition within the industry and the economic impact the no-hire provision will have within the industry. The inclusion of a severability clause, as well as a provision authorizing a court to “blue pencil” a potentially overbroad no-hire provision, can also be helpful. Finally, employers should carefully review any applicable state laws that could affect the enforceability of a no-hire provision. In California, for example, a no-hire provision that is perfectly reasonable under federal antitrust laws could still run afoul of California’s statutory prohibition of restrictive covenants.
While the outcome and potential impact of the present challenges to no-hire agreements in the high-tech industry remains to be seen, employers can take some comfort that a carefully drafted no-hire provision is unlikely to violate any state or federal antitrust laws provided care is taken to ensure that it is ancillary to a legitimate business purpose, narrowly tailored to accomplish that business purpose and reasonable in scope.