DOJ and FTC Release Guidance Putting Firms on Notice that the Justice Department Will Proceed Criminally Against Naked Wage-Fixing and No-Poaching Agreements

Elizabeth Prewitt
HHR Advisories & Publications

On Thursday, October 20, 2016, the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission issued joint guidance for human resource (HR) professionals to help educate and inform them about how the antitrust laws apply to employee hiring and compensation. Within this guidance, the Justice Department for the first time announced that it will hereafter proceed criminally against naked wage-fixing and no-poaching agreements.

In recent years, agreements between companies that inhibit employees' rights to work have drawn increasing attention from the Justice Department. With employment mobility at its peak, several companies have attempted to reach agreements with their direct industry competitors that could limit employee mobility. The Justice Department has investigated such agreements and, in several cases, has brought civil suits against the companies involved. For example, in 2010, the Justice Department filed a high-profile civil suit against several high-tech companies-including Apple, Adobe, Google, Intel, Intuit, and Pixar-which had entered into agreements not to solicit each other's employees. Similar suits followed against Lucasfilm and eBay, and there also were follow-on civil class actions filed on behalf of the affected employees.

The Justice Department determined that the companies reached "facially anticompetitive" or "naked" agreements that eliminated a significant form of competition to the detriment of employees who lost access to information and better job opportunities. It concluded that the non-solicit agreements between the companies were naked restraints of trade that were per se unlawful under federal antitrust laws. In the government's view, the primary impact of these agreements was to depress salaries artificially, as employees could not leverage offers from one company to move to another.

Notably, these agreements were not "ancillary to any legitimate collaboration," such as a joint venture or research project.

The civil suits culminated in settlements that broadly prohibited the companies from entering, maintaining, or enforcing any agreement that in any way prevented any person from soliciting, cold calling, recruiting, or otherwise competing for employees. The companies also were required to implement compliance measures to guard against these practices. Based on the Justice Department's recent guidance, however, no-poaching agreements will now be investigated as criminal antitrust violations with serious monetary penalties and the possibility of jail time.

While Justice Department scrutiny of this area is not new, its announcement of criminal enforcement is. It is significant that the Justice Department has decided to proceed criminally for the first time against wage-fixing and no-poaching agreements. Elizabeth Prewitt, a partner in Hughes Hubbard's antitrust practice and former longtime Justice Department litigator, was quoted today by Global Competition Review about the Justice Department's announcement, and explained that [t]he DOJ has historically limited criminal antitrust prosecutions to a small subset of violations which it considers to be severe and well-known by the public to be illegal. This decision evidences the Justice Department's view that no-poaching and wage-fixing agreements hamper competition in the same anticompetitive ways as agreements to fix the price of goods, rig bids, and allocate customers or market share-conduct that has traditionally been subject to criminal prosecution.

There also has been significant government action on the federal and state levels, over the past year, concerning non-compete agreements that employers enter into with their employees rather than with each other (as is the case with no-poaching and wage-fixing agreements). In March of this year, the U.S. Department of the Treasury released a report on the economic effects and policy implications of non-compete agreements and proposed directions for reform. The report noted that these non-compete agreements often cover low-wage workers unlikely to possess trade secrets that employers have a legitimate interest in protecting, as well as that workers are often poorly informed about the existence, details, and implications of their non-compete agreements. In May, the White House also released a report about non-compete agreements, suggesting that they limited job mobility, worker bargaining power, entrepreneurship, and wages. The White House instructed executive departments and agencies to propose new ways of promoting competition and providing consumers and workers with information they need to make informed decisions.

On the state level, in June, New York Attorney General Eric Schneiderman announced a high-profile settlement with legal news provider Law360, ending a multi-year investigation into the company's labor practices. In the settlement, Law360 agreed to end its use of mandatory non-compete agreements for its staff, which prohibited them from working for any competitor for a year after leaving the company. Several states also have recently enacted or proposed legislation intended to address the issues raised by non-compete agreements.

The recent attention to both no-poaching and non-compete agreements suggests that the entire arena of competition restraint via agreements relating to employment is becoming a focus of the government.

It is important to note that, notwithstanding the Justice Department's new policy of criminal liability, no-poaching agreements can still be entered into lawfully when they are not "naked restraints" on trade. A "naked restraint" is generally an agreement that is considered to be explicitly anticompetitive without any procompetitive justifications. Although the Justice Department has not provided comprehensive guidance about the types of conduct that would or would not fall into the "naked restraint" category in the employment context, the "naked restraint" label would not attach to ancillary restraints made in pursuit of a legitimate commercial interest and tailored to it in terms of geography, job function, product group, and duration. For example, the Justice Department will not criminally prosecute no-poaching agreements that are related or necessary to a larger legitimate business collaboration or the settlement of a theft of trade secrets dispute. Therefore, we would not expect a carefully drafted and narrow no-poaching agreement to be attacked criminally if it was entered into in the context of a joint venture or settlement that necessitates such an agreement. By contrast, a shared desire among competitors to hold down costs or preserve for each of them the benefits of their own employee training would not qualify as a legitimate reason for a no-poaching agreement. Even when there is no criminal exposure, agreements that restrain employees' freedom of movement and the ability to bargain may still be subject to civil lawsuits.

In the wake of this announcement, we recommend that all of our clients review and, if necessary, strengthen their existing antitrust compliance programs and their existing and future non-compete and non-solicitation agreements. It is particularly important that HR professionals are educated on these issues and ensure that their companies' hiring practices comply with the antitrust laws. The potential criminal sanctions are severe-both companies and individuals can be prosecuted for violations of U.S. antitrust law, punishable by a fine of up to $100 million for corporations and $1 million for individuals (or more, under certain circumstances), and the maximum jail sentence is ten years. Given the extraterritorial reach of U.S. antitrust law, this policy shift presents a risk to companies and individuals located outside of the U.S. as well.

An effective compliance program and careful drafting of agreements relating to employment competition are critical means for a company to deter or detect potential violations. The Antitrust Division of the Justice Department has a Leniency Program, which allows corporations and individuals to report their own violations and cooperate in the Division's investigation of the violations reported. As recent enforcement actions demonstrate, a corporation that is the first to report an antitrust violation, and meets other conditions of the Division's Leniency Program, can qualify for full immunity from fines, full immunity from prosecution for its cooperating employees and executives, as well as potential mitigation of civil damages.

Hughes Hubbard has extensive experience in counseling clients on antitrust compliance issues, and our lawyers have developed antitrust compliance programs and materials for many Fortune 500 companies. We have advised clients on how to prepare no-poaching and non-compete agreements that do not run afoul of antitrust laws and litigated major unfair competition cases involving noncompete agreements, non-solicitation agreements, and alleged employee theft of trade secrets.