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The Danger of Using Illegitimate Means to Protect a Legitimate Interest: When Restrictive Covenants and Antitrust Laws Collide

Client Advisory

May 2, 2019

As we move increasingly towards a service and knowledge based economy, the old saying that “our employees are our most valuable asset” is even more meaningful. It should therefore be unsurprising that an employer may wish to protect this “valuable asset” – an employee who developed a specific expertise or clientele, or both, with the employer’s assistance – through a post-employment restrictive covenant that limits the departing employee’s ability to work for a competitor (non-competes) or precludes the departing employee from soliciting former clients or colleagues (non-solicits).

The costs associated with an employee or an entire team jumping ship to a competitor can be significant. It may, therefore, be tempting for an employer to consider entering into “no-poaching” or “wage fixing” agreements with its biggest competitors, who are facing the very same problem. This, however, runs afoul of U.S. antitrust laws, as such behavior can harm employee prospects and depress wages. Although the antitrust laws at issue are not new, they were brought to the forefront of restrictive covenants law in late 2016 when the U.S. Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) issued guidance to human resources departments about the illegality of, and potential penalties for, improper no poaching and wage fixing agreements (the Antitrust Guidance).[1]

The Antitrust Guidance is reviewed below, before considering how non-compete and non-solicit agreements with employees can fit into the overall scheme.

A. What Activities Do The Antitrust Laws Prohibit?

As the Antitrust Guidance explains, employers may not enter into agreements with their competitors that: (1) fix the salary or other terms of compensation, whether at a specific level or within a range, for employees (wage fixing agreements); or (2) preclude the companies from hiring or soliciting each other’s employees (no poaching agreements).[2] The DOJ and the FTC take the position that such wage fixing and no poaching agreements, either express or tacit, or intermediated through a third-party, are per se illegal.[3] That means that the agreements are illegal without any inquiry as to the competitive effects of the alleged behavior.

Prior to issuing the Antitrust Guidance, the DOJ and FTC undertook a number of civil enforcement actions against employers who entered into wage fixing or no poaching agreements, including:

  • A 2007 civil enforcement action against the Arizona Hospital & Healthcare Association asserting that acting to set a uniform bill rate schedule that the hospitals would pay for temporary and per diem nurses was an illegal wage fixing agreement;[4]
  • A 2011 civil enforcement action concerning no poaching and wage fixing agreements between Lucasfilm and Pixar in which the companies agreed (1) not to cold call each other’s animators; (2) to notify each other when making an offer to an animator employed by the other firm; and (3) that the firm making the offer to the other firm’s employee not counteroffer above its original offer;[5]
  • A 2011 civil enforcement action concerning a no poaching agreement (an agreement not to cold call each other’s engineers) between Adobe, Apple, Google, Intel, Intuit, and Pixar;[6] and
  • A 2012 civil enforcement action concerning a no poaching agreement between eBay and Intuit regarding their respective employees.[7]

Notably, no individual executives were named in these cases, and none resulted in criminal charges or direct financial penalties. Instead, the companies agreed to end their agreements, promise not to do it again, and institute compliance or monitoring programs. In its 2016 Antitrust Guidance, the DOJ did not mince words in announcing a policy change, stating that:

Going forward, the DOJ intends to proceed criminally against naked wage fixing or no-poaching agreements. These types of agreements eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been criminally investigated and prosecuted as hardcore cartel conduct. Accordingly, the DOJ will criminally investigate allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each other’s employees. And if that investigation uncovers a naked wage-fixing or no poaching agreement, the DOJ may, in the exercise of its prosecutorial discretion, bring criminal, felony charges against the culpable participants in the agreement, including both individuals and companies.[8]

Thus, the Antitrust Guidance put companies, and executives, on notice that the DOJ and the FTC take wage fixing and no poaching agreements very seriously. It was recently reported that the DOJ has a number of active investigations involving Wage Fixing and no poaching agreements in which criminal charges could be filed for the first time.[9] The mere suggestion of entering into such wage fixing or no poaching agreements may be sufficient to constitute a separate violation of the antitrust laws.[10]

B. How Do Restrictive Covenants Figure Into The Analysis?

Very broadly, the Federal antitrust laws (and their state-law analogues), in addition to deterring monopolization, prohibit agreements and conduct that unreasonably restrain trade.[11] U.S. antitrust laws treat so-called “vertical” agreements – i.e. agreements with customers, suppliers, or employees – very differently from “horizontal” agreements – i.e. agreement with competitors. Restraints in vertical agreements are analyzed under the “rule of reason,” which weighs the legitimate purpose for the restraint against any anti-competitive effects. Horizontal agreements are viewed far more skeptically and are often considered illegal per se under the antitrust laws, potentially subjecting the violator to criminal as well as civil liability.

Non-compete and non-solicit agreements with employees also may restrain trade or depress the wages of employees (the very same harm identified in the Antitrust Guidance). However, while restrictive covenant and antitrust law may intersect, the focus of the two areas of law is different, and that difference is a good place to start the analysis.

Taking New York as an example, a restrictive covenant may be enforceable if it (1) is no greater than is required for the protection of the legitimate interest of the employer, (2) does not impose an undue hardship on the employee, and (3) does not injure the public.[12] Thus, a court employing a restrictive covenant analysis would look to weigh the interests of the employer, the employee, and the public. On the other hand, in a traditional antitrust analysis, a court will focus on the effect of the restraint on competition by analyzing (1) the relationship of the parties; (2) their dominance within a particular market; (3) the nature of the restraint; (4) the geographic market; (5) the effect of the restraint on competition within those markets; and (6) whether the restraint is reasonably related to a legitimate purpose.[13] Thus, while some of the elements overlap (like the need to protect a legitimate business interest like proprietary information or customer relationships), other elements do not (since the antitrust analysis focuses on the harm to competition, not on harm to a particular employee).

However, enforcement in the area of no poaching and wage fixing agreements shows that the line can become blurred. Moreover, it is worth noting that the Antitrust Guidance explicitly states that anticompetitive behavior can be inferred from the circumstances even without an explicit agreement among competitors. An industry practice of imposing burdensome post-employment restrictions on employees may be an indicia of anticompetitive behavior (if, for instance, the employer is also dominant within a particular market, and the agreement is not used to protect a legitimate business interest).[14] Nevertheless, to be successful in challenging a non-compete clause on antitrust grounds an employee would need to (1) prove that the agreement has an adverse impact on competition in the relevant market; and (2) establish standing by alleging an injury to competition (in addition to establishing an individual injury).[15]

Therefore, potential antitrust exposure for the use of post-employment restrictive covenants is greatest where the employer has a significant market share in a particular region and uses restrictive covenants to stifle competition, rather than to protect its own legitimate business interests. One such example was the case the FTC brought against Renown Health in 2012 relating to Renown’s acquisition of two local cardiology groups. The FTC alleged that the acquisition (and use of non-compete agreements) reduced competition for the provision of cardiology services in a particular geographic market where Renown was based. As part of its settlement with the FTC, Renown agreed to release its staff of cardiologists from their non-compete agreements.[16] More recently, 21st Century Oncology (a Florida-based oncology practice) faced antitrust claims from a group of its own oncologists related to their non-compete agreements.[17] That action is at the motion to dismiss stage, and 21st Century Oncology has argued (among other things) that the doctors did not suffer an antitrust injury since there has been no injury to competition in the market, as opposed to harm to the doctors individually.

C. What Should Employers Do to Protect Their Restrictive Covenants from Antitrust Concerns?

In drafting non-compete and non-solicit agreement in highly concentrated markets with few competing businesses employers must recognize the boundary between legitimate restrictive covenants and anti-competitive behavior. Employers should enter into post-employment restrictions only with their employees, never with their competitors. Employers should carefully consider what legitimate business interests they seek to protect through restrictive covenants. Employers should identify reasonable lengths of time, geographic regions (if any) and scopes for their restrictive covenants, and should not use overly broad restrictions or boiler plate agreements that apply the same restrictions to all employees regardless of position, job responsibilities, experience or other factors. Finally, employers and their counsel should continue to monitor the DOJ’s and FTC’s enforcement efforts pursuant to the Antitrust Guidance.

* * * 


For more information concerning the matters discussed in this publication, please contact the authors Jeffrey S. Boxer (212-238-8626, boxer@clm.com), Alexander G. Malyshev (212-238-8618, malyshev@clm.com), or your regular Carter Ledyard attorney.


    

[1] Available at https://www.justice.gov/atr/file/903511/download (last visited April 22, 2019).

[2] Antitrust Guidance at 3.

[3] Id. There is an exception for “legitimate collaboration” between the employers (for example through joint ventures).

[4] See https://www.justice.gov/atr/case/us-and-state-arizona-v-arizona-hospital-and-healthcare-association-and-azhha-service-corp.

[5] See https://www.justice.gov/atr/case/us-v-lucasfilm-ltd.

[6] See https://www.justice.gov/atr/case/us-v-adobe-systems-inc-et-al.

[7] See https://www.justice.gov/atr/case/us-v-ebay-inc.

[8] See Antitrust Guidance at 4.

[9] See “DOJ Deputies Wan of Coming Antitrust Cases,” Law 360 (March 27, 2019) available at https://www.law360.com/articles/1143542/doj-deputies-warn-of-coming-antitrust-cases. Although the DOJ brought a case against rail equipment suppliers, Knorr-Bremse and Westinghouse Air Brake Technologies in April 2018, it decided not to bring criminal charges because the agreement in question was entered into (and terminated) prior to the 2016 issuance of the Antitrust Guidance. See “Knorr-Bremse, Wabtec Settle DOJ's Worker No-Poach Case,” Law 360 (April 3, 2018) available at https://www.law360.com/articles/1029313.

[10] See Antitrust Guidance at 6-7 (Q&A).

[11] See, generally, Sherman Act (15 U.S.C. § 1 et seq.) (Section 1), Federal Trade Commission Act (15 U.S.C. § 41 et seq.) (Section 5).

[12] See BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 388-389 (1999). See also, generally, “Enforceability of ‘Non-Solicit of Employees’ and ‘No-Hire’ Provisions Under New York Law,” Client Advisory (April 4, 2018) available at https://www.clm.com/publication.cfm?ID=5618&Att=172.

[13] State Oil Co. v. Kahn, 522 U.S. 3, 10 (1997).

[14] There are other examples of things that one might view as reasonable (or in fact desirable) that may run afoul of the DOJ’s and the FTC’s interpretation of those laws in the employment context. For instance, the DOJ and the FTC warn that companies should refrain from sharing information with competitors about the terms and conditions of employment for their employees. In the DOJ’s view, such information sharing could serve as evidence of an implicit illegal agreement though, in the DOJ’s view, it would likely result in civil (as opposed to criminal) antitrust liability because the sharing of information is not per se illegal. See Antitrust Guidance at 4-5. The First Amendment implications of such a policy position by the government are beyond the scope of this article. The Antitrust Guidance does outline what steps could be taken to share information in a way that is not anti-competitive. See Antitrust Guidance at 5 (for example, an information exchange may be lawful if (1) it is managed by a neutral party; (2) the information is relatively old; (3) the information is aggregated to protect the identity of the underlying source; and (4) enough sources are aggregated to prevent competitors from linking particular data to an individual source). The Antitrust Guidance also generally exempts the sharing of information in the context of merger or acquisition activity, where such information is obviously necessary. Id.

[15] See Sherman Act, § 1; Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 334 (1990).

[16] See https://www.ftc.gov/enforcement/cases-proceedings/1110101/renown-health-matter.

[17] See Dosoretz et al. v. 21st Century Oncology Holdings, Inc. 19-cv-00162 (M.D. Fla. 2019). It should be noted that Florida codifies its restrictive covenant jurisprudence in the very same title as its state antitrust law. See Florida Statutes Section 542.335 (“Valid restraints of trade or commerce”).



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2019 Carter Ledyard & Milburn LLP.
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© Copyright 2019 Carter Ledyard & Milburn LLP