Labor market enforcement is here in full force
The US Department of Justice Antitrust Division (DOJ) created a stir in 2016 when it (with the Federal Trade Commission (FTC)) released the Antitrust Guidance for HR Professionals and pledged to criminally pursue no-poach and wage-fixing agreements as per se violations of the antitrust laws. Over three years of inaction followed, leading practitioners to wonder whether robust criminal enforcement would ever come. That wait is over. The DOJ finally brought its first criminal wage-fixing case in December 2020 and a steady stream of cases has followed ever since (see also our previous post on how the DOJ’s approach relates to the approach taken in other jurisdictions).
Theories of harm
- No-poach agreements are agreements among employers not to hire each other’s employees.
- Wage-fixing agreements are agreements among employers to lower or maintain employee wages at artificially low levels.
The DOJ contends that these agreements are per se violations of the antitrust laws because they work to allocate the market and fix prices in the same way as traditional price fixing and market allocation agreements in markets for goods.
Per se vs. Rule of reason
- Rule of reason is the default analysis under the Sherman Act and applies to “ancillary restraints” i.e., agreements that are ancillary to a legitimate business purpose. Under the rule of reason, courts balance the anticompetitive effect of the agreement against any pro-competitive benefit or legitimate business justification. Some restraints can be considered reasonable—and therefore do not violate the antitrust laws—if the benefits outweigh the harms.
- Per se treatment is reserved for “naked” restraints of trade that have no pro-competitive benefits and serve only to limit competition. Horizontal market allocation, price fixing and bid rigging are examples of per se illegal conduct that the US courts have determined cannot be justified by any legitimate business purpose. In these cases, proof that the conduct occurred is sufficient to prove a violation of the antitrust laws. The DOJ criminally prosecutes only per se conduct and treats rule of reason conduct civilly.
DOJ is seeing early successes in court
For the first time, courts in criminal cases have held that no-poach and wage-fixing agreements are per se illegal.
- In US v. DaVita, the court on January 28, 2022 ruled that no-poach agreements can be analyzed as horizontal market allocation and do not require a novel interpretation of the Sherman Act. The court did not rule, however, that all no-poach agreements are per se unlawful, finding that some agreements may not lead to market allocation and should therefore be analyzed under the rule of reason.
- In US v. Niraj Jindal, the court on November 29, 2021 ruled that the DOJ adequately alleged a per se violation of the antitrust laws under the theory that wage fixing is simply another form of price fixing, which has long been per se illegal. The court acknowledged that this was not the typical price-fixing case but found that the antitrust laws “fully apply to the labor markets” and that price-fixing agreements among buyers (i.e., employers) are prohibited by the Sherman Act.
New sectors and new theories
The first wave of criminal cases focused on the healthcare sector, but enforcement is now expanding to aerospace engineering and other sectors. The DOJ brought charges in December 2021 against a former Pratt & Whitney manager for allegedly maintaining a hub-and-spoke no-poach conspiracy among five engineering firms that contracted with Pratt & Whitney.
The affidavit in support of the complaint alleges that the Pratt & Whitney manager orchestrated the market allocation conspiracy by having the firms agree not to recruit each other’s employees. The manager was allegedly able to serve as the central enforcer because the threat of losing Pratt & Whitney’s business was enough to ensure compliance from these firms that relied on Pratt & Whitney as their primary customer.
The hub-and-spoke nature of the alleged conspiracy is the most interesting feature of the case and raises the question of how the courts will analyze this conduct. Vertical agreements—such as those between Pratt & Whitney and its suppliers—traditionally are not per se illegal (unlike horizontal agreements). Thus, even though naked no-poach agreements have been found per se illegal, the vertical relationship gives the defense stronger arguments that this case should be analyzed under the rule of reason. There are plausible pro-competitive justifications for vertical agreements not to recruit employees, and rule of reason treatment would make it difficult for the DOJ to maintain criminal charges as it has a long tradition of only pursuing criminal prosecution against per se violations of the laws.
Non-compete clauses under the microscope
We expect the pace of enforcement in labor markets to continue as the DOJ’s investigations expand to more sectors and to new theories of harm. Non-compete and non-solicitation clauses in employment contracts or those included in auction contracts or joint venture agreements are likely to be the next area of scrutiny.
It will be interesting to see whether enforcement in this space will be driven by the DOJ’s investigations alone or through coordination with the FTC. In recent remarks at the DOJ and FTC’s joint workshop on promoting competition in labor markets, AAG Jonathan Kanter and FTC Chair Lina Khan said that the agencies were committed to collaborating on labor markets issues, with Khan specifically citing non-competes as an area of focus for the FTC. But it remains to be seen whether enforcement might stem from a closer look at employment-related clauses in merger or joint venture agreements that are submitted to the agencies through the premerger notification program.
Non-competes and non-solicitation agreements are ancillary restraints that would traditionally be analyzed under the rule of reason. Companies should consider the business justifications for using these clauses and work with counsel to ensure that the clause is reasonable in duration and geographic scope.