DOJ Continues to Target Employment Non-Solicitation Agreements
Companies and human resources (HR) departments should be aware that the U.S. Department of Justice (DOJ) has drawn a clean line in the sand over which antitrust laws can come into play, particularly where salaries are depressed because of "non-poaching" agreements between companies or industry "salary" surveys.
The DOJ closed out 2010 settling another action alleging anticompetitive employment practices between competing companies. On December 21, 2010, the DOJ reached an agreement with Lucasfilm Ltd. (Lucasfilm) to settle its claim that Lucasfilm entered into an agreement with Pixar to restrain competition for highly skilled digital animators in violation of Section 1 of the Sherman Antitrust Act. United States v. Lucasfilm Ltd., No. 1:10-cv-02220 (D.D.C. filed Dec. 21, 2010). If approved, the settlement would be in effect for five years and would prohibit Lucasfilm from entering into any agreements that restrict competition for employees.
The Lucasfilm matter followed on the heels of a similar settlement reached by the DOJ in September 2010 with Adobe Systems, Inc. and five other defendants relating to their agreements to refrain from cold calling each other's employees. United States v. Adobe Systems, Inc., No. 1:10-cv-01629 (D.D.C. filed Sept. 24, 2010). The DOJ's ongoing investigation into potentially anticompetitive employment practices is not without legal precedent. In 2001, then Circuit Judge Sonia Sotomayor reversed a lower court's dismissal and held that defendant oil companies had violated Section 1 of the Sherman Act through an allegedly unlawful exchange of salary information. Todd v. Exxon Corp., 275 F.3d 191 (2nd Cir. 2001).
U.S. v. Lucasfilm
The DOJ alleged in its complaint that Lucasfilm and Pixar entered into an agreement (1) not to cold call each other's employees with offers of employment, (2) not to make employment counteroffers to each other's employees that were higher than the initial offers, and (3) to notify each other when making employment offers to each other's employees. The complaint asserted that Lucasfilm and Pixar competed for digital animators on the basis of salaries, benefits, and career opportunities and that their agreement disrupted the normal labor price-setting mechanisms. The complaint further alleged that the agreement was reached through explicit communications between the parties' executives.
In its Competitive Impact Statement filed with the Complaint and Proposed Final Judgment, the DOJ asserted that the "effect of this agreement was to reduce competition for highly skilled digital animators and other employees, diminish potential employment opportunities for those same employees, and interfere in the proper functioning of the price-setting mechanism that would otherwise have prevailed." In its analysis, the DOJ discussed several of its prior challenges to employment restraints and customer-related restraints, concluding that "[a]llocation agreements cannot be distinguished from one another based solely on whether they involve input or output markets... Hence, naked restraints on cold calling customers, suppliers or employees are similarly per se unlawful."
Central to the DOJ's analysis was its determination that the employment restraint between Lucasfilm and Pixar was not ancillary to another legitimate agreement between the parties. The restraint might have been found legal under a rule of reason analysis if it had been "ancillary to a legitimate procompetitive venture and reasonably necessary to achieve the procompetitive benefits of the collaboration." To be considered ancillary, the restraint "must be a necessary or intrinsic part of the procompetitive collaboration... [and it must not be] broader than reasonably necessary to achieve the efficiencies from a business collaboration." For example, it may be reasonably necessary to prohibit a seller of a company from attempting to hire back the employees of that company from the buyer for a certain specified time period. The agreement between Lucasfilm and Pixar, however, was not ancillary to any collaborative venture between the parties and it was overly broad as it extended to all employees of the companies and was not limited by geography, job function, product group, or time period.
Under the Proposed Final Judgment, Lucasfilm would be prohibited from entering into any agreement to refrain from cold calling, soliciting, recruiting, or otherwise competing for employees of another company. Lucasfilm would also be prohibited from entering into any agreement that restricts counteroffers or that requires notification of offers of employment to another company's employees. Lucasfilm would further be prohibited from pressuring another company into refraining from such actions. Importantly, the Proposed Final Judgment explicitly notes that a no-solicitation agreement ancillary to a legitimate agreement may be permitted, but would require Lucasfilm to identify with specificity the agreement to which such no-solicitation terms are ancillary, and to narrowly tailor the no-solicitation terms.
U.S. v. Adobe
In the DOJ's Adobe action in September 2010, a similar settlement agreement was reached with Adobe Systems, Inc.; Apple, Inc.; Google, Inc.; Intel Corporation; Intuit, Inc.; and Pixar over allegations of Section 1 violations stemming from five bilateral no cold-call agreements among the parties. As with the Lucasfilm action, the DOJ alleged in Adobe that the defendants competed for highly skilled technical employees and that the no cold-call agreements "reduced their ability to compete for employees and disrupted the normal price-setting mechanisms that apply in the labor setting."
Like in Lucasfilm, the DOJ placed significant weight on the fact that the agreements in Adobe were not ancillary to any legitimate collaboration between the defendants and were not limited by geography, job function, product group, or time period. The DOJ further reasoned in its Competitive Impact Statement that the no cold-call agreements were not reasonably necessary for any existing collaboration between the defendants because of the broad nature of the agreements, and because past collaborations had been successful without similar cold-call agreements.
Despite the narrower scope of the no cold-call agreements in Adobe as compared to the agreement in Lucasfilm, the DOJ's Proposed Final Judgment in Adobe nonetheless also contained the same broad prohibitions on agreements to refrain from competing for each other's employees as in Lucasfilm. The broader reach was intended by the DOJ to "provide a prophylactic protection against other activities that could interfere with competition for employees."
Todd v. Exxon
The DOJ's probe into employment agreements between competing companies is not without judicial precedent. The courts have also ruled that certain employment restraints violate the antitrust laws. In the Second Circuit's 2001 Todd v. Exxon case, a former employee brought suit alleging that fourteen major oil companies had regularly shared detailed compensation information through salary surveys and used that information to artificially suppress salaries. In reaching its decision, the court noted that the Sherman Act does not apply only to agreements among sellers, but also "to abuse of market power on the buyer side," where the oil companies were buyers of employee skills. 275 F.3d at 201. In these cases, the court found that the antitrust risk is that the "buyers will collude to depress prices, causing harm to sellers." Id. at 214. As with the DOJ's Lucasfilm and Adobe actions, the Second Circuit's analysis focused on the ability of employers as buyers of employee services to illegally restrain competition in order to suppress wages.
There are many industries and markets where benchmarking and salary "surveys" occur. Many businesses would prefer to "live and let live" with respect to "poaching" employees and executives. Companies and HR departments are encouraged to talk to a legal advisor if they have any questions.
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