A nearly ubiquitous element of corporate conduct, thought to be legal and competitively harmless, now faces the prospect of criminal prosecution by the U.S. Department. of Justice, Antitrust Division (“Division”). On April 3, 2018 the Division announced a settlement of criminal charges against Knorr-Bremse AG (“Knorr”) and Westinghouse Air Brake Technologies Corporation (“Wabtec”) for having maintained over a period of years agreements not to compete for each other’s employees. One executive went so far as to state in an email that no-soliciting was a “prudent cause for both companies” and that the companies would “compete in the market.” In announcing the settlement, Assistant Attorney General Makan Delrahim of the Division noted that the criminal complaint was part of a broader Division investigation into agreements not to compete for employees, typically known as no-solicit or no-poach agreements.
While this development has been described as an “earth-shattering moment” for corporate human resources professionals, the handwriting has been on the wall for some time. Beginning in September of 2010 with the civil prosecutions of Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar (LucasFilm was later named as a defendant), the Division has staked out its views as to the anticompetitive effects of no-solicit agreements. Molly S. Boast, then the Deputy Assistant Attorney General of the Division, was quoted as saying that “[t]he agreements challenged here restrained competition for affected employees without any procompetitive justification and distorted the competitive process.” None of the no-solicit agreements subject of that proceeding were limited by geography, job function, product group or time period.
The Division’s investigation into no-solicit practices in the high tech sector resulted in a further complaint, charging eBay with participation in a no-solicit agreement with Intuit. The then head of the Division, Bill Baer, called the conduct “blatant and egregious” and noted that this agreement served “no purpose but to limit competition between the two firms for employees….”
The next step in this tide was a joint release from the Division and the Federal Trade Commission (“FTC”) entitled “Antitrust Guidance for Human Resources Professionals” dated October 2016 (“Guidance”). For the first time, the federal antitrust agencies intimated that no-solicit agreements, depending upon the facts of each case, may be subject to criminal prosecutions by the Division (the FTC has no criminal jurisdiction). The Guidance admonishes HR professionals not to engage in no-solicit agreements, whether “informal or formal, written or oral, spoken or unspoken.” It does note that:
…if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects. Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.
The Guidance also addresses agreements to share sensitive competitive information between competitors. It specifically refers to the exchange of such information in the context of a “proposed merger or acquisition,” in addition to an exchange in the context of a “joint venture or other collaborative activity” which is referenced in the no-solicit section.
With the Guidance outstanding since October 2016, the Division has announced its intention to treat as civil any no-solicit agreements which terminated prior to that date. Since the Wabtec-Knorr agreement terminated before October 2016, the agreement was prosecuted in a civil action. For those agreements which continued or started after October 2016, the Division’s Principal Deputy Assistant Attorney General, Andrew Finch, announced in a January 2018 speech that the Division “expects to pursue criminal charges.”
So for HR professionals the die is cast for any agreements entered into with competitors not to compete for, hire or solicit employees (cold calls of employees are typically the source of irritation that precipitates no-solicit agreements between competitors). The adage about orange being the new black may resonate all too well for these professionals.
An issue remains, however, as to whether a no-solicit provision in a Letter of Intent (“LOI”) in connection with a “proposed merger or acquisition” has a “safe harbor” under the Guidance. The language of the Guidance dealing with no-solicit agreements only addresses “joint ventures,” whereas the language on information exchanges specifically addresses “joint venture” and “proposed merger or acquisition.” This language distinction, while fairly clear, may not exclude a safe harbor and thus further inquiry is in order. What is the procompetitive reason why a no-solicit agreement in an LOI (or a binding merger agreement or asset purchase agreement) is appropriately evaluated under a rule of reason analysis whereas a no-solicit agreement in the regular course of business is subject to criminal jeopardy?
The explanation most frequently forwarded is that the merger seller needs to protect its employees (and its economic best interests) from poaching in the event that the merger with the now-educated buyer is terminated. Query how this is any different from the reasons put forward by Apple, Intuit and Knorr in connection with their no-solicit agreements. The Division has made it quite clear that it is not the effect on the company that makes no-solicit agreements anti-competitive and deserving of criminal attention. It is the effect on employees that matters. As the Division has noted:
…workers, like consumers, are entitled to the benefits of a competitive market. Robbing employees of labor market competition deprives them of job opportunities, information, and the ability to use competing offers to negotiate better terms of employment.
Some will contend that the risk is not significant because the LOI may be private. The reality, however, is that LOIs (or the merger agreement resulting therefrom) are required to be produced in the Hart-Scott-Rodino Act merger clearance process. So the federal agencies will be fully aware of an LOI or merger agreement with a no-solicit provision. Is the risk of a criminal prosecution worth the benefit of a no-solicit agreement?