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How to (Legally) Keep Competitors from Poaching Your Key Employees: Antitrust Law and Non-Poaching/Non-Solicitation Agreements

Posted in Joint Ventures/Competitor Collaboration

by Nick Grimmer

How can a company legally protect its valuable interests in key employees, when a competitor can just swoop in with a more attractive employment offer?  A non-poaching agreement or clause (also called a no- or non-poach, -hire, -interference, -switching or -solicitation agreement or clause, depending on the circumstances) can offer protection.  In these agreements, competitors or potential competitors for skilled labor might agree not to cold call, solicit, recruit or even hire each other’s employees.  The agreements usually cover specified employees or categories of employees (e.g., by title, skill area or salary level) and usually last for a set period of time. 

The ancillary restraints doctrine generally governs non-poaching agreements.  Under that doctrine, a restraint of trade (here, the non-poaching agreement) is permissible if it is one in which there is also a legitimate/procompetitive main agreement, and the covenant in restraint of trade is necessary and merely ancillary (i.e., collateral or subordinate) to that agreement.  If it is not, then it is a “naked restraint of trade” and will be per se illegal under federal antitrust law (and the plaintiff—typically, the affected employee(s)­—will need only to prove the existence of the restraint, as opposed to having to show its anticompetitive effects, which are presumed).  Conversely, if a non-poaching agreement is ancillary to a legitimate/procompetitive agreement, it is judged under the rule of reason, which involves a balancing of procompetitive benefits and anticompetitive effects. 

Agreements that keep employees out of competitors’ camps come in several flavors.  The basic types—and their general antitrust treatment—include:

“Naked” agreements between competitors:  Like an (illegal) agreement among competitors to divide sales territories, a naked agreement among competitors for labor simply to not hire each other’s employees is likely per se illegal (in essence, they both entail “you keep what’s yours, I keep what’s mine”).  To avoid per se illegality, keep these points in mind:

  • The purpose of the main agreement must be legitimate; a non-poaching agreement aimed only at “protecting” employees from poaching or improving relations with a competitor for labor is a non-starter.  We address examples of legitimate purposes below.
  • The more related and tailored the non-poaching agreement is to a legitimate purpose, the more likely it is necessary and ancillary to a legitimate main agreement (such that the rule of reason will apply); conversely, a broad, vague or general non-poaching agreement might be subject to per se treatment.  So, a non-poaching agreement should:
    • be in writing
    • set a specific end point with a clear relationship to the main agreement (e.g., a reasonable period following a sale); and
    • specifically define the scope of covered employees (by class, position, section of the company, geography or even name) in a manner clearly related to the main agreement; it should cover only the employees that are or might be directly involved or at issue in the main agreement.  So, for example, if two companies enter a joint venture that relates to only one of their numerous product lines, the joint venture agreement’s non-poaching clause should not cover all of each company’s employees.

Agreements ancillary to sale of a business, a collaboration (e.g., a joint venture), or some other type of legitimate agreement:  Where a business is sold or spun off, parties often legitimately agree not to hire certain of each other’s employees for some period of time.  Otherwise, a purchaser of, for instance, a research and development division, might forgo the deal out of fear that the seller would just turn around and raid its previously-affiliated division.  Similarly, a letter of intent or memorandum of understanding can include a legitimate non-poaching agreement.  With nothing to stop a would-be purchaser from using a new treasure trove of employee information to cherry-pick the best of the buyer’s newly-acquired talent, a due diligence project can easily turn into a recruiting expedition. 

Likewise, competitors evaluating or entering a joint venture might legitimately use a non-poaching agreement if the venture involves key employees.  Without the agreement’s protection, they might fear that deal will give their competitor (or the joint venture itself) an irresistible opportunity to poach key talent.  This concern is particularly worrisome (and protectable) where the employees at issue are privy to trade secrets.  Legitimate non-poaching agreements subject to the rule of reason can arise in numerous other situations, too, including contracts with consultants, auditors, vendors, recruiting agencies and providers of temporary employees or contract workers. 

Non-compete agreements (between employers and employees):  Vertical agreements between an employer and an employee might—for a certain period of time following employment and in a certain geographic area—legitimately prohibit the employee from working for the employer’s competitor or otherwise competing against the employer (and some even prohibit a former employee from soliciting or hiring the company’s current employees).  These agreements can be a very effective way of protecting employees from poaching.  As vertical agreements, they usually pose no federal antitrust issues; however, they can be illegal under state law, particularly if the agreement’s scope and duration are deemed unreasonable.  Some states (including California and Oregon) are quite hostile towards non-competes, whereas others (including Florida and Ohio) seem particularly willing to enforce them.  And in most states, the non-compete agreement must be signed when the employee is offered the position and/or must be supported by independent consideration.  So before entering a non-compete (or even a non-poaching agreement, which might also be governed by state law), a company should understand the law governing the employment contract (and should know that merely specifying a state’s law will not necessarily lead to its application). 

In sum, an employer that takes a careful approach and crafts narrow solutions stands a good chance of lawfully retaining its valuable employees, or at least keeping them from competitors.

Finally, several recent and current cases involve non-poaching agreements.  In Re: High-Tech Employee Antitrust Litigation, Master Docket No. 11-CV-02509-LHK (N.D. Cal.) is a particularly noteworthy example, as it highlights the issues likely to arise in future non-poaching agreement cases, particularly in the class action context.  That court recently held a hearing on plaintiffs’ supplemental motion for class certification; the court’s decision, which will likely focus on whether a class of technical employees satisfies the class-action “predominance” requirement, will be featured in this blog.  Stay tuned!