Three of the seven companies defending allegations that they violated U.S. antitrust law by agreeing not to recruit each other’s employees agreed to settle all claims against them in In re: High-Tech Employee Antitrust Litigation for a total of $20 million. This putative class action and substantial settlement are important reminders of the caution required when considering any kind of agreement not to not to recruit or hire another company’s employees.
How to (Legally) Keep Competitors from Poaching Your Key Employees: Antitrust Law and Non-Poaching/Non-Solicitation Agreements
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 [...]