It is no secret that the Department of Justice (DOJ) has been largely unsuccessful in the criminal no poach cases it has brought to trial to date. Its most public loss came with the acquittals earlier this year of DaVita, a dialysis company, and certain of its executives in the District of Colorado. DOJ also lost at trial in another high-profile case in the Eastern District of Texas involving a physical therapy staffing company (although it secured a conviction against a company executive for obstruction of justice). But DOJ has pressed on, claiming victories at the motion to dismiss stage. Indeed, following its recent trial losses, Assistant Attorney General Jonathan Kanter, who leads the DOJ’s antitrust division, had this to say:

Continue Reading DOJ Secures Its First No-Poach Win with a Guilty Plea by a Healthcare Staffing Firm

In January of this year, our colleagues Janene Marasciullo and David Clark wrote about federal criminal indictments issued for naked wage-fixing and no-poach agreements. They warned that these federal indictments should serve as a cautionary tale for HR and other company executives. The Illinois Attorney General’s office recently reinforced that warning at the state level.

An Illinois court recently denied a motion to dismiss an action by the Illinois Attorney General’s Office–Antitrust Unit against a manufacturing company and three staffing agencies alleging that the company helped the staffing agencies enter into “unlawful agreements…to refuse to solicit or hire each other’s employees and to fix the wages paid to their employees,” which are respectively known as “no-poach” and “wage-fixing” agreements. In particular, the Illinois AG’s complaint alleges that the manufacturing company essentially served as the enforcer of the agencies’ agreement not to poach each other’s temporary employees that they assigned to the company, and that on multiple occasions the staffing agencies complained to the company about each other “cheating” on their no poach agreement—prompting the company to admonish the “cheating” parties. Most interestingly, in an ionic illustration of the axiom that (alleged) crime does not pay, the complaint alleges that the company and the agencies continued to adhere to the terms of their no-poach and wage-fixing agreements despite an inability to attract temporary employees because of the low wages offered due to the alleged wage-fixing.

This state-level case, together with the recent similar federal cases, demonstrates that governments are on the lookout for no-poach agreements.

As reported here and here, in December 2019 and January 2020, the United States Department of Justice brought its first criminal charges against employers who entered into “naked” wage fixing agreements and no-poach (e.g., non-solicitation and/or non-hire)  agreements with competitors. According to DOJ’s 2016 Antitrust Guidance for HR Professionals, such agreements are “naked,” and, therefore, illegal per se, because they are “separate from or not reasonably related to a larger legitimate collaboration between competitors.”  Although DOJ recognized that such agreements may not be illegal per se when made in furtherance of legitimate joint ventures or business, it provided scant guidance on what it would deem to be a legitimate joint venture or collaboration.  The Pennsylvania Supreme Court recently addressed the issue in Pittsburgh Logistics Systems v. Beemac Trucking, 2021 WL 1676399, at *1 (Pa. Apr. 29, 2021).  Relying in part on DOJ’s Guidance, the Court found that the no-poach agreement was unenforceable because it was overbroad and contrary to public policy.

Plaintiff, a third party logistics provider, sought to enforce a no-poach agreement that prohibited defendant, who supplied trucking services to plaintiff, from hiring or soliciting any of plaintiff’s employees.  The Supreme Court found that the no-poach agreement was ancillary to the services agreement between plaintiff and defendant.  Therefore, it reviewed the agreement  under the “rule of reason,” test included in the Restatement (Second) of Contracts, which requires that the restraint be no greater than necessary to protect the plaintiff’s legitimate business interest and that the plaintiff’s need not be outweighed by the hardship to the defendant and the likely injury to the public.  The Supreme Court found that this test was consistent with DOJ’s Guidance, but concluded that the no-poach restraint was unreasonable.

Although the Supreme Court acknowledged that the plaintiff “had a legitimate business interest in preventing its business partners from poaching” its employees, it found that the no-poach agreement was overbroad because it prohibited defendant from hiring plaintiff’s employees for two years after the collaboration ended, regardless of whether they had ever worked with defendant.  The Court also found that the agreement was likely to harm the public by: (1) impairing the mobility of plaintiff’s employees, who were not parties to the contract; (2) depriving several named individual defendants of their livelihood; and (3) undermining overall competition in the labor market for the shipping and logistics industry, which would suppress wages and harm the publicly generally.  Along the way, the Court recognized that DOJ has “taken a strong stand against no-hire restrictions,” and that fourteen states had recently reached a settlement agreement requiring four national franchisors to cease using no-poach agreements restricting employee mobility.

The Supreme Court’s decision reflects increasing skepticism toward no-poach agreements.  Indeed, as reported here, President Biden has indicated that he favors eliminating non-compete and no-poach agreements that suppress wages, and state legislatures and law enforcement authorities seem to be ready to regulate this area.  As reported here,  New York is considering legislation that would prohibit no-poach clauses in franchise agreements and would create a private right of action for any employee subject to such an agreement, along with potential punitive damages and attorney’s fees.  Similarly, in 2019, Maine enacted a law prohibiting no-poach agreements between employers.

Notwithstanding these developments, employers who are involved in legitimate joint ventures can still take steps to protect their legitimate interest in ensuring effective business collaborations while protecting their trade secrets, good will and work force.   The Pittsburgh Logistics case provides important guideposts for business involved in legitimate joint ventures.  First, like non-solicitation clauses in agreements with employees, the restraints in no-poach agreements between partners should be no greater than necessary.  Thus, no-poach agreements between business partners should either end when the joint venture or collaboration ends or reflect the geographic and temporal limits recognized as enforceable in employment agreements in the relevant jurisdiction.  Second, businesses should consider requiring employees to agree to refrain from seeking positions with any business partner for whom they have worked while they are employed or for a reasonable period after their employment ends.  Indeed, the Pennsylvania Supreme Court found it significant that the employees were not aware of the no-poach agreement between the business partners and were not parties to the agreement, thus raising the question if the outcome would have been different had the plaintiff included a similar restriction in its employment agreements.

As shown by the DOJ’s recent criminal enforcement actions and the Pittsburgh Logistics case, the law in this area is rapidly developing.  However, each situation is unique and there is no one-size-fits-all approach to navigating this thicket.  Employers who wish to protect their work forces to ensure effective collaborations should review both their agreements with their business partners and their employees to ensure that their agreements can withstand scrutiny.

As readers of this blog know, no-poach and wage-fixing agreements are a current hot topic for both civil and criminal enforcement by the Antitrust Division of the Department of Justice.

Our colleague, Stuart M. Gerson has authored a helpful summary of recent history and what’s at stake regarding this topic, in an article published in Bloomberg Law: “No-Poaching Agreements, Wage-Fixing & Antitrust Prosecution.”

The following is an excerpt:

Especially in difficult economic times, companies look for stability and predictability. Hence, while intent upon avoiding litigation charging wage fixing or its close cousin, no-poach agreements, experience suggests that there are companies that might be considering various ways to exchange information related to employment that can be used for “bench marking.”

Such efforts are intended to be lawful means to create and share data that are updated from time to time and that reflect prevailing levels and standards by which companies might be able to intuit what their competitors are doing and therefore can establish market rates and practices which presumably the individual members of the group might adopt.

Although such companies might be concerned only about information exchanges, and not agreements to fix wages or avoid poaching of competitors’ employees, the potential enforcement stance of the Department of Justice simply does not allow for this simplification.

Click here to download the full article in PDF format.

Last week, the New York State Senate advanced two bills seeking to ban both “no-poach” clauses in franchise agreements and “no-rehire” clauses, which are commonly used in settlement agreements.

The first of these bills, known as the End Employer Collusion Act (Bill S562), prohibits no-poach agreements between franchisors and franchisees.  Such agreements restrict franchisees from soliciting or hiring current or former employees of the franchisor or other franchisees.  The End Employer Collusion Act would also provide a private right of action for any person denied employment on account of a no–poach agreement, and would allow for the recovery of actual and punitive damages, as well as costs and attorneys’ fees.  The New York legislature is not the first to target no-poach clauses in franchise agreements; Washington passed legislation banning such clauses nearly two years ago.  In addition, prior to taking office, in his Plan for Strengthening Worker Organizing, Collective Bargaining, and Unions, President Biden indicated that he would like to see federal legislation in this area, and that he intends to work with Congress to “outright ban all no-poaching agreements.”

The second bill, S766, would prohibit employers from inserting no-rehire clauses in settlement agreements with employees or independent contractors.  Such clauses bar employees from applying for or accepting future employment with the employer, or its related entities, and were originally designed to protect an employer from retaliation claims in the event that the employee reapplied for his or her prior job and was not hired.  The proposed legislation would void settlement agreements containing no-rehire clauses.  However, the employer’s obligations under the settlement agreement, including payments to the employee, would remain intact, creating the possibility for an employee to sue the employer again after having received a settlement payment.  While the justification for the bill states, “[t]he bill would not, however, prohibit any termination of employment mutually agreed upon as part of a settlement, nor would it automatically force a defendant employer to rehire an employee who had previously settled a case against the employer,” it could expose employers to increased risk of multiple litigations with the same employee.

Both bills are ones to watch.

In the past month, the U.S. Department of Justice (DOJ) has made good on its 2016 threat, contained in its Antitrust Guidance for Human Resource Professionals (“Antitrust Guidance”) to bring criminal charges against people or corporations who enter into naked wage-fixing agreements or naked no-poach agreements.   First, as reported here, on December 9, 2020, DOJ obtained an indictment against the president of a staffing company who allegedly violated Section 1 of the Sherman Act by conspiring with competitors to “fix wages” paid to physical therapists (PT) and physical therapist assistants (PTA).  Although not mentioned in the indictment, a related Federal Trade Commission (FTC) complaint alleged that the defendant agreed with competing staffing companies to lower wages after a client unilaterally lowered the rates paid to the defendant for PT and PTA services.  On January 7, 2021, DOJ announced a second indictment, which alleged that two corporations operating outpatient medical care facilities violated Section 1 of the Sherman Act by reaching “naked no poach agreements” with two competitors, pursuant to which they agreed not to solicit each other’s “senior-level employees.”

Both indictments allege that the employers entered into purportedly “naked” wage-fixing and no-poach agreements, which are illegal per se, and thus are “deemed illegal without any inquiry into [their] competitive effects.”  If the courts allow DOJ to proceed on the illegal per se theory, this will significantly lighten the government’s burden of proof because it assumes the anticompetitive and unlawful character of the agreement.  In civil enforcement cases and statements of interest, DOJ has consistently argued that no-poach and wage-fixing agreements are illegal per se.  Although DOJ has obtained several consent decrees which indicate that such agreements are illegal per se, civil cases generally resolve through settlement, and as the 2019 decision in In re Railway Ind. Employee No-Poach Litigation (W.D. Pa No. 18-798) recognizes, the law on this issue remains unsettled.  Thus, these criminal cases may provide a vehicle for setting standards to determine when wage-fixing and no-poach agreements are “naked” and whether such agreements are illegal per se or subject to the rule of reason analysis.

The indictments also serve as cautionary tales for HR and other executives.  They demonstrate that employers should exercise care in their communications about recruiting and compensation practices because both indictments demonstrate the role of electronic communications to prove the alleged agreements.  The wage-fixing indictment quoted several text messages, exchanged between the lone defendant and unindicted co-conspirators which allegedly resulted in an agreement to suppress wages.  The no-poach indictment also relied extensively on email communications, including internal communications between defendants’ employees, as well as communication between defendants and unindicted co-conspirators, such as competitors and recruiters.  Significantly, the majority of communications cited in the no-poach indictment occurred long before DOJ’s Antitrust Guidance, and thus indicate that DOJ will rely on such earlier conduct to bolster a prosecution.  Accordingly, employers should review their hiring and compensation practices to ensure that they comport with DOJ’s Antitrust Guidance and should amend any guidance that does not.

In addition, anyone who receives a civil investigative demand or grand jury subpoena from DOJ, or an inquiry from the FTC, concerning an antitrust violation should immediately consult counsel.  The Antitrust Division’s Leniency Program allows corporations and individuals who first “self-report” antitrust violations and “fully cooperate” with any DOJ investigation to avoid criminal prosecution.  Such self-reporting and cooperation should always be done with the guidance of counsel, as there are always risks associated with communicating with any government investigative agency.   Indeed, the second count of the price-fixing indictment alleges that the defendant violated 18 U.S.C. § 1505 by making misleading statements and withheld documents during the course of the related FTC investigation.  Promptly consulting counsel may help avoid or limit liability.

Finally, the upcoming change of administration is not likely to dampen DOJ’s enthusiasm for pursuing antitrust enforcement actions against employers. To the contrary, DOJ brought several civil enforcement actions against employers during the Obama Administration and as reported here, President-elect Biden has indicated that he favors eliminating “non-compete and no-poach agreement that do nothing but suppress wages.”  Of course, not every agreement is impermissible.  Even DOJ has recognized that no-poach agreements may be permissible in the context of legitimate joint ventures and in December 2020, DOJ filed an amicus brief that recognized that agreements between franchisors and franchisees are reviewed pursuant to a functional analysis.  Thus, the legality of agreements depends on the particular facts and circumstances.  Nonetheless, DOJ’s back-to-back indictments indicate that employers and recruiters should proceed with caution.  The time is ripe to review recruitment and compensation practices and communications, and to consult counsel to update them as necessary.

The recently passed Act to Promote Keeping Workers in Maine is poised to dramatically alter the status of restrictive covenants in Maine.  The Act accomplishes this by: (1) prohibiting employers from entering into no-poach agreements with one another; (2) barring employers from entering into noncompetes with lower wage employees; (3) limiting employers’ ability to enforce noncompetes; (4) mandating advanced disclosure of noncompete obligations; and (5) imposing a time delay between when an employee agrees to the terms of a noncompete and when the noncompete obligations actually go into effect.  In addition to barring the enforcement of noncompliant noncompetes, the Act authorizes the Maine Department of Labor to impose monetary civil fines of “not less than $5,000” on employers who enter into non-complaint agreements.  The Act apples to contracts entered into or renewed after September 18, 2019, so Maine employers should not waste time in revising their agreements to comply with the Act.

Prohibition of No-Poach Clauses in Agreements Between Employers

The Act prohibits employers from entering into “restrictive employment agreements” with one another.  A “restrictive employment agreement” is an agreement between two or more employers “including through a franchise agreement or a subcontractor agreement” which “prohibits or restricts one employer from soliciting or hiring another employer’s employees or former employees.”  Unlike federal antitrust law which prohibits “naked” no-poach agreements between employers, the Act does not provide an exception for no-poach agreements which are ancillary to a legitimate business collaboration.  This portion of the Act is likely intended to combat fast food franchisors’ practice of including employee no-poach clauses in franchise agreements.  However, it prohibits a wide range of less controversial practices such as including no-poach language in joint venture agreements, or staffing company service contracts.

The Act authorizes the Department of Labor to assess civil fines against employers who enter into, enforce, or threaten to enforce, “restrictive employment agreements.”

Ban on Noncompetes With Lower Wage Employees

The Act bars employers from entering into noncompete agreements with employees who earn less than 400% of the federal poverty line ($49,960 per year for 2019).  Because the income level below which employees cannot enter noncompete agreements is tied to the federal poverty line which is subject to annual change, Maine employers should develop procedures to ensure ongoing compliance with this rule.  The Act authorizes the Department of Labor to assess fines against employers who violate this provision by entering into noncompete agreements with lower income employees, regardless of whether the employer actually seeks to enforce the agreement.

General Limits on the Enforcement of Noncompetes

The Act provides that noncompete agreements will be enforceable only if they are reasonable and necessary to protect an employer’s: (a) trade secrets; (b) confidential information; or (c) goodwill.  Employers can demonstrate that a noncompete agreement is necessary by showing that its legitimate business interests cannot be protected through an alternative restrictive covenant such as a nonsolicitation or nondisclosure agreement.

Disclosure Requirements for Noncompete Agreements

The Act requires employers to disclose that acceptance of a noncompete agreement will be required prior to making an offer of employment for a position that will require the acceptance of a noncompete agreement.  Employers must also provide current or prospective employees a copy of any noncompete agreement at least three business days before the employee or prospective employee will be required to sign the agreement.  Failure to provide either form of advanced notice is punishable by civil fine.

Delayed Effective Date of Noncompetes

The Act mandates a six month waiting period between when an employee enters into a noncompete agreement and when the noncompete obligations are binding on that employee.  In addition, noncompete agreements are not binding on employees during their first year of employment with an employer.[1]  These rules merely effect whether an agreement is enforceable; the Department of Labor is not authorized to levy fines against employers with noncompliant agreements.

Conclusion

The Act’s strict limits on noncompetes will force Maine employers to find more creative options to protect their proprietary information, goodwill, and other legitimate business interests.  For example, employers may want to adapt to the Act’s prohibition on noncompete agreements during an employee’s first year of employment by adopting robust garden leave, nonsolicitation, or forfeiture on competition agreements not subject to the Act’s strict requirements.

Violations of the Act’s provisions governing no-poach agreements between employers, subjecting lower wage employees to noncompete agreements, and disclosure requirements are all punishable by fines of “not less than $5,000.”  In light of these potentially significant monetary penalties, Maine employers should take steps to modify any noncompliant forms prior to the Act’s September 18, 2019 effective date.

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[1] The Act’s provisions governing the delayed effective date of noncompete agreements do not apply to allopathic or osteopathic physicians.

On March 12, 2019, Dunkin’ Donuts, Arby’s, Five Guys Burgers and Fries, and Little Caesars agreed to stop including “no-poach” clauses in their franchise agreements and no longer to enforce such clauses in existing agreements. A no-poach clause is an agreement between employers not to hire each other’s employees. The franchisors agreed to end this practice following an investigation by a coalition of attorneys general from 14 states into the use of no-poach clauses in fast food franchise agreements.[1] In a press release announcing the settlement, Maryland Attorney General Brian Frosh explained his concern “that no-poach provisions make it difficult for workers to improve their earning potential by moving from one job to another or seeking a higher-paying job at another franchise location, and that many workers are unaware they are subject to these no-poach provisions.”

In addition to the ongoing investigation by the attorneys general, there are also pending several class actions targeting no-poach agreements, including in the United States District Court for the Eastern District of Washington. Interestingly, in some of those actions, the United States Department of Justice (“DOJ”) weighed in on the plaintiffs’ attempted application of federal antitrust law to franchise agreements. In a March 8, 2019 Statement of Interest, the DOJ forcefully argued against the class action plaintiffs’ novel legal theory that no-poach clauses in franchise agreements are per se unlawful under federal antitrust law, thereby allowing courts to find liability in the absence of sophisticated proof of market impact. This filing indicates that while the DOJ remains committed to its 2016 Guidance announcing an increased role for antitrust enforcement in combating anticompetitive employment practices, it is not interested in radically changing basic principles of antitrust law.

In light of these developments, franchisors should review their franchise agreements to ensure they comply with applicable laws, paying particular attention to any no-poaching language in those agreements. Other employers who may have entered into formal or informal no-poach agreements should evaluate the necessity of such agreements in view of the increased scrutiny they are receiving from the government and individual plaintiffs.

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[1] The coalition includes law enforcement officials from Maryland, California, the District of Columbia, Iowa, Illinois, Massachusetts, Minnesota, North Carolina, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, and Vermont.

States across the country have been using enforcement actions, legislation, and interpretive guidance to limit employers’ ability to enforce restrictive covenants against low wage workers. The recent decision in Butler v. Jimmy John’s Franchise, LLC et. al., 18-cv-0133 (S.D. Ill. 2018) suggests this trend may extend to federal antitrust law.

The Butler case relates to the legality of certain restrictive covenants in Jimmy John’s franchise agreements.[1] The Complaint alleges that Jimmy John’s required franchisees to agree not to hire any job applicants who worked for a different Jimmy John’s franchise in the previous year. Franchisees also agreed not to solicit one another’s employees. The franchise agreements also named all other Jimmy John’s franchisees as third party beneficiaries of the agreement. This meant that if Franchise B hired a Franchise A employee, Franchise A could sue to enforce the agreement between Franchise B and Jimmy John’s Franchise LLC (the franchisor).

In determining claims of antitrust violations, the distinction between “horizontal” and “vertical” agreements is highly significant. Challenges to vertical agreements are analyzed under the “rule of reason” under which plaintiffs must prove market power and that the challenged practices actually harm competition. This generally requires sophisticated economic analysis. Horizontal agreements not to compete, in contrast, are generally deemed “per se” unreasonable and do not require any proof regarding market context.

In Butler, the Court characterized the franchise agreements as horizontal agreements. Such a characterization permitted the plaintiffs to state a claim without alleging that a particular franchisor has sufficient market power to effect the market for employees in an entire geographic region. In other words, the plaintiffs did not have to prove that Jimmy John’s on its own had enough market power to depress the wages of delivery drivers in a particular city.

To keep things in perspective, Butler is an isolated district court decision which may remain an outlier. However, it serves as another example of how subjecting low wage workers to restrictive covenants can impose heightened litigation risk. Butler provides another reason (on top of the joint FTC/DOJ Antitrust Guidance for Human Resources Professionals and DOJ enforcement actions following through on that guidance) for employers to ensure their restrictive covenants are not only enforceable but compliant with antitrust law.

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[1] Jimmy John’s has since agreed to remove the challenged provisions from their franchise agreements.

On October 20, 2016—just about three weeks before the presidential election won by Donald Trump—the Department of Justice and the Federal Trade Commission issued a remarkable document, entitled “Antitrust Guidance for Human Resources Professionals,” which outlined an aggressive policy promising to investigate and punish employers, and even individual Human Resources employees, who enter into unlawful agreements concerning recruitment or retention of employees.  As stated in that document, “[a]n agreement among competing employers to limit or fix the terms of employment for potential hires may violate the antitrust laws if the agreement constrains individual firm decision-making with regard to wages, salaries or benefits; terms of employment; or even job opportunities.”

For over a year, a question on the minds of many practitioners was whether the Antitrust Guidance document and policy would remain a priority for the DOJ and FTC under President Trump.  Those agencies had not issued public pronouncements, and there was uncertainty over whether conduct like wage-fixing and no-poaching agreements would continue to warrant serious civil or criminal scrutiny.  Would the new administration continue the Obama Administration’s antitrust guidance initiative or would it lean more toward a more laissez-faire, do-not-interfere with corporate management philosophy?

We may now have the answer.  The Trump administration has voiced support of this Obama-era policy.  On Jan. 19, 2018, U.S. Assistant Attorney General for the Antitrust Division Makan Delrahim remarked at a conference that if employers have engaged in no-poaching or wage-fixing agreements since the issuance of the policy, their actions will be treated as criminal.  He noted the Antitrust Division has “been very active” in reviewing potential violations, and that, “[i]n the coming couple of months, you will see some announcements, and to be honest with you, I’ve been shocked about how many of these there are, but they’re real.”

Employers and practitioners should stay tuned for these announcements from the Antitrust Division.