Not too many topics related to restrictive covenants gain buzzworthy status. However, when state and federal governmental agencies and class action attorneys start filing lawsuits nationwide, and Fortune 500 companies in various industries start settling and agreeing to change the way they do business, well, that usually generates some buzz and attention. It seems that not a week goes by lately without a new headline discussing the latest hot-bottom issue in the world of restrictive covenants – “no-poaching” agreements.
In its simplest form, a no-poaching covenant is an agreement, either in writing or orally, between two or more companies not to compete for each other’s employees, such as by not soliciting them during their employment or not hiring them for a period of time after the termination of their employment. They are a type of non-compete agreement that includes no-recruiting, no-solicitation, no-hire and/or other terms that impact an employee’s ability to move from one company to another. Companies sometimes include no-poaching clauses in settlements that resolve business disputes. They also might appear in the due diligence phase of a potential merger or acquisition, or within franchise agreements. In this article, I discuss these so-called no-poaching agreements, recent legal attacks to their validity and enforceability, and some takeaways.
The Initial Wave of Recent Attacks on No-Poaching Agreements
Around the fall of 2016, the United States Department of Justice’s Antitrust Division announced that from that point forward, it “intended to proceed criminally against naked no-poach and wage-fixing agreements.” According to the Antitrust Division, “[n]o-poach agreements are naked if they are not reasonably necessary to any separate, legitimate business collaboration between the employers . . . [and] are per se unlawful because they eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers.”
Around the same time in 2016, the DOJ and the Federal Trade Commission jointly issued written guidance entitled, “Antitrust Guidance for Human Resource Professionals.” This Guidance stated that no-poaching agreements among employers are per se illegal under antitrust laws, and provided a series of Q&A for HR professionals to consider. The Guidance also highlighted three civil enforcement actions brought by the DOJ against technology giants (1) eBay and Intuit, (2) Lucasfilm and Pixar, and (3) Adobe, Google, Apple, Intel, Intuit and Pixar, all of which resulted in consent judgments and the payment of hundreds of millions of dollars in fines and penalties. The DOJ/FTC Guidance did not address the legality of restrictive covenants contained in private employment contracts between an employer and an employee, including non-compete, non-solicit and non-disclosure clauses, which is an important distinction and the subject of other articles in this Series.
In April 2018, the DOJ filed a civil antitrust lawsuit against two of the world’s largest railroad equipment suppliers, Knorr-Bremse AG and Westinghouse Air Brake Technologies Corporation, and with it simultaneously filed a civil settlement. The complaint alleged that these companies and a third company, Faiveley, had “naked no-poach” agreements for almost a decade in violation of Section 1 of the Sherman Act. The Antitrust Division touted this settlement as “a strong, first-of-its-kind settlement that contains several provisions intended to terminate each defendant’s no-poach agreements and prevent future violations.” To that end, the settlement agreement included: (i) a broad injunction prohibiting the defendants from entering into or maintaining no-poaching agreements among themselves and with other employers for seven years; (ii) an affirmative obligation to cooperate in any Division investigation of other potential no-poaching agreements between the defendants and any other employers; (iii) a requirement that each defendant affirmatively notify its U.S. employees and recruiters and the rail industry at large of the settlement and its obligations; and (iv) the Division’s new consent decree provisions designed to improve the effectiveness of the decree and the Division’s future ability to enforce it.
The Next Wave of Recent Attacks on No-Poaching Agreements
The next shoe to drop was enforcement actions against franchises with naked no-poaching agreements. In January 2018, for example, the Washington State Attorney General’s office began investigating no-poaching and no-hiring agreements among franchise-based fast-food companies. These investigations resulted in “Assurance of Discontinuance” agreements with more than 30 national fast-food and restaurant chains to remove no-poaching clauses from their franchise contracts. Since then, the Washington State Attorney General’s office has indicated that additional industries, including hotels, car repair services, home health care services, and other franchise-based industries, will be investigated for illegal no-poaching agreements.
In the spring of 2018, Senators Cory Booker (D-NJ) and Elizabeth Warren (D-Mass) introduced legislation called “The End Employer Collusion Act” to “prohibit agreements between employers that directly restrict the current or future employment of any employee.” Their bill specifically identifies franchise agreements as targets of the legislation. In addition, the Senators sent letters to almost a 100 franchise CEOs, across a variety of industries, urging them to stop using no-poaching agreements and requesting information as to each company’s practices on this issue.
In the summer of 2018, a coalition of more than a dozen state attorneys general (California, Illinois, Massachusetts, Maryland, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont and the District of Columbia) sent letters to eight national franchise-based fast-food chains requesting information related to their franchise agreements and no-poaching clauses. Many of these companies subsequently agreed to abandon their no-poaching clauses. For an informative overview of the public policy arguments related to no-poaching agreements at franchises, see July 17, 2018 University of Pennsylvania Wharton School of Business’s Knowledge@Wharton article and Podcast, “How Fair – or Legal – are Non-Poaching Agreements?”
On the heels of state and federal government enforcement actions and other legislative efforts to stop or curtail the use of no-poaching agreements in the private sector, class action attorneys have caught wind, and private lawsuits challenging no-poaching agreements are on the rise coast to coast. See, e.g., Deslandes v. McDonald’s USA, LLC (N.D. Ill. 2017); Ion v. Pizza Hut, LLC (E.D. Tex. 2017); Frost v. LG Electronics, Inc. (N.D. Cal. 2018); Butler v. Jimmy John’s Franchise, LLC, et al. (S.D. Ill. 2018); Yi v. SK Bakeries, LLC, et al. (W.D. Wash. 2018); Ogden v. Little Caesars Enterprises, Inc., et al. (E.D. Mich. 2018); Michel v. Restaurant Brands Int’l Inc., et al. (S.D. Fla. 2018); Avery v. Albany Shaker Donuts LLC, et al. (S.D.N.Y. 2018); Newbauer v. Jackson Hewitt Tax Services, Inc. (E.D. Vir.); In re: H&R Block Employee Antitrust Litigation (MDL – N.D. Ill.); In re: Railway Industry Employee No-Poach Antitrust Litigation (MDL – W.D. Pa). These lawsuits generally allege that no-poaching clauses in franchise agreements violate the Sherman Act and the Clayton Act as an unlawful restraint on the labor trade.
Continued Scrutiny of No-Poaching Agreements
So is there any end in sight to the onslaught of attacks to no-poaching agreements? The short answer is “probably not.” Just within the last few weeks, for example, the DOJ filed position statements in five pending civil actions brought by employees of fast-food franchises against their employers challenging no-poaching agreements in federal courts in North Carolina, Pennsylvania, and Washington. All signs point to a steady uptick in investigations, prosecutions and private class action lawsuits against not just companies in the technology and fast-food and restaurant industries, but also in the health care, higher education, insurance, tax preparation, car repair, fitness and wellness industries, and other franchise-based businesses that have no-hire, no-recruit, or no-solicit agreements among them.
Employers should review their existing contracts for no-poaching clauses and evaluate whether to remove them. In addition, Human Resource professionals and others involved in hiring and compensation decisions should review the DOJ/FTC’s “guidance” to identify and avoid antitrust pitfalls. The flood of activity in this area of restrictive covenant law will remain a hot-bottom issue for the foreseeable future, as will the threat of criminal and civil litigation for companies that use no-poaching agreements.
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The goal of this Series is to provide a brief overview and some interesting insights and practical pointers when dealing with unique issues that might arise in the context of restrictive covenants. It is not intended to provide and should not be construed as providing legal advice. Each situation is different, including the governing state law. If legal advice is needed, you should seek the services of a qualified attorney who is knowledgeable and experienced in this area of the law to address your specific issues or needs.