Labor: Antitrust concerns with non-hire and non-solicit agreements

The DOJ’s investigation into technology companies serves as a warning for employers

Employers will often enter into restrictive covenants to serve some legitimate business purpose. These restrictive covenants, often entered into with potential, current or departing employees, take several forms: general non-compete agreements, and agreements not to solicit or hire current company employees. The latter type of agreements serves to avoid the situation where a departed employee will help raid or “poach” additional employees from the former employer.

There are occasions when one company will bring in the departed employee’s new employer, and seek to enter into an arrangement with the new employer (prior to or in the context of a threatened suit over the employee’s conduct) that prohibits the hiring or solicitation of employees for a period of time. From a legal standpoint, the question typically is whether such agreements with the employee or the employee’s new employer will be enforced by a court. But an additional question cannot be overlooked: Does the non-hire or non-solicit agreement violate federal and state antitrust laws?

The Department of Justice (DOJ) continues to take a strong interest in agreements that it deems to have the potential to significantly harm or stifle competition between companies in highly-competitive markets One of the more prominent battles continues to take shape in the world of technology, resulting from a September 2010 consent agreement between the federal government and several high-tech companies, such as Apple, Google and Intel. In that proceeding, the government alleged that side agreements between and among those companies not to solicit or recruit the others’ employees constituted unlawful antitrust behavior because they were stifling competition and precluding employees from being able to get better compensation and working conditions.

Despite that consent agreement, eBay has recently fought the government’s efforts in this area, claiming that the federal government (and California in a companion state-law suit) has overstepped its authority and failed to sufficiently allege that eBay has engaged in any antitrust behavior with respect to an alleged arrangement between the company and Intuit. Developments in that case will be worth watching, and there should be no doubt that the DOJ will continue to scrutinize restrictive covenants affecting employee movement.

But that’s not to say that all such agreements are facially unlawful. There certainly are situations when restrictive covenants will likely continue to be upheld, such as covenants in single employee separation agreements and settlement agreements, as well as joint venture and sale-of-business agreements when the covenants are narrow in scope. Similarly, the government is less likely to have an interest when there is little risk of antitrust injury because the agreeing companies are relatively small and have lower thresholds of competitive sales. 

In order to successfully challenge a non-hire or non-solicit agreement on antitrust grounds, you will generally need to show an agreement between companies in a highly-competitive market that  both directly impedes the ability of employees generally to sell their services to companies within the same competitive market and has a negative impact on the value of the services by artificially keeping labor prices down. The key is whether any agreement you enter into will have a broad anti-competitive impact on your market, or whether there will be a short-lived, relatively insignificant impact on competition because of the nature of the agreement and the companies that are parties to that agreement.

Contributing Author

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Michael Schmidt

Michael C. Schmidt is a member of Cozen O'Connor and practices in the firm’s Labor & Employment Group. He concentrates in representing management in...

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