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No-Poaching Agreements—Another Bad Approach to Non-Competition Agreements No-Poaching Agreements—Another Bad Approach to Non-Competition Agreements

No-Poaching Agreements—Another Bad Approach to Non-Competition Agreements

Employers hate losing good workers in this sellers’ market for employees. Such business needs often spawn reliance on non-competition/non-solicitation agreements sometimes designed to discourage workers from leaving.  

State legislatures correctly view such overreaching as often unfair and have been in the process of limiting employers’ ability to impose non-competes on lower-level workers. Indeed, the courts also recognize that the only legitimate basis for non-competition obligations on the part of employees stand rooted in trade secrets and customer relationships, not merely the desire to lock in employees as if they were indentured servants. As a matter of U.S. constitutional law, no legal basis exists for indentured servitude in any form—see the Thirteenth Amendment! 

What other options exist for the put-upon employer? Recent case law suggests one option worth avoiding involves “no-poaching” agreements.

What constitutes a no-poaching agreement? Answer: any agreement, written or otherwise, between competitors agreeing not to hire each other’s employees. Recently, both the government and the courts have made it clear that any companies vying for the same workers—whether they be “competitors” in the same industry, affiliated with one another, or completely independent—will not have the legal right to enforce such agreements, and that those agreements may even be illegal.

Burger King Corp.’s recent loss at the Eleventh Circuit over its no-poach agreements involving franchisees provides a road map for how the issue may be litigated and signals such pacts potentially run afoul of antitrust law. The U.S. Court of Appeals for the Eleventh Circuit declined to rule on whether Burger King’s agreements with franchisees that ban franchisees from hiring each other’s workers is presumed to be a violation of antitrust laws. But it remanded the former Burger King workers’ case, saying a district court judge erred in dismissing the lawsuit.

The ruling includes ample allegations from the plaintiffs that the agreement in question was a horizontal restraint of trade conducted among competitors, not by a single entity. Franchisors and other companies should also be aware that they might be opening themselves to antitrust scrutiny if they seek to avoid certain labor requirements by arguing they’re not direct employers of their workers. The decision is likely to encourage plaintiffs’ attorneys to redouble their scrutiny of franchise no-poach provisions across the country. Courts have yet to develop a consistent test to determine under which standard the agreements should be analyzed. The U.S. Department of Justice has reversed course from its Trump administration stance that the agreements should be subject to the more lenient rule of reason, now arguing that they are per se unlawful.

The order may not have dealt with the joint employer issue directly, but employers should be aware of the risks it implies. Gig companies such as Uber Technologies Inc. and Lyft Inc. may well find themselves in the cross hairs, when they argue that they work with independent contractors rather than employees. Currently, an antitrust case in California state court against the rideshare behemoths is being brought under a similar theory.

In Nevada, the government appears on the verge of securing its first successful criminal prosecution of a labor-side antitrust violation, after a health care staffing company said it plans to plead guilty to charges over an alleged scheme to suppress the wages of nurses working in Las Vegas schools. VDA OC LLC recently filed a notice in Nevada federal court saying it intends to change its plea to guilty over claims that it violated antitrust law through an agreement with a competitor not to raise the wages of nurses working in the Clark County School District and not to hire nurses from each other. The agreement was allegedly in effect from October 2016 until July 2017, when a new owner purchased the company.

The notice said the company did not reach a plea agreement and will litigate any sentencing issues. The maximum corporate penalty for criminal antitrust violations is a $100 million fine, which can be raised to double the gain derived from the crime or double the loss felt by the victims if either amounts to more than $100 million, according to the notice.

A guilty plea would mark the DOJ's first successful criminal prosecution of a labor-side antitrust violation, after having warned since 2016 that employment-related agreements restricting competition that are not tied to some broader collaboration can be prosecuted criminally, just as the government handles traditional price-fixing and other cartel conduct.

More twists and turns lie ahead, as the wheels of justice spin. HR departments must continue to remain vigilant on all fronts. Plainly, no-poach agreements constitute a very bad and dangerous alternative to non-competition and non-solicitation agreements.

For more information about any of the above topics, contact David J. Carr or any of Ice Miller’s Workforce Solutions Practice Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.
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