Hospitality Industry Should Be Aware of No-Poach Agreements
By Steven D. Weber Managing Partner, Stark Weber PLLC | December 23, 2018
A no-poach agreement is an agreement between two or more employers that may, among other things, restrict a party to the agreement from hiring the employees of the other party. Such an agreement might limit the movement of employees between competitors and help to retain their employees – even if their employees wish to move elsewhere. Hospitality players may find such an agreement to be attractive in a crowded hospitality market where hospitality players are competing to hire the same employees.
While such an agreement sounds beneficial to the hospitality players, it may run afoul of antitrust laws and expose a hospitality player to liability. Recent action by the Department of Justice ("DOJ") evidences the risk to hospitality players associated with such agreements. Hospitality players should be aware of this risk when considering whether to enter into no-poach agreements.
On April 3, 2018, the DOJ announced a settlement between Knorr-Bremse AG ("Knorr") and Westinghouse Air Brake Technologies Corporation ("Westinghouse"). Approximately three months later, on July 11, 2018, the United States District Court for the District of Columbia entered a final judgment in the associated lawsuit United States v. Knorr-Bremse AG, et al. (the "Final Judgment"). By the lawsuit, the United States alleged that the two defendants were the world's largest rail equipment suppliers and each other's top rival for the certain passenger rail applications. They allegedly competed with another and with other firms to attract, hire, and retain skilled employees.
The United States alleged a violation of antitrust laws because, among other things, Knorr and Westinghouse allegedly entered into an unlawful agreement not to poach each other's employees. The United States alleged that they entered into a series of agreements not to solicit, recruit, hire without prior approval, or otherwise compete for employees. The DOJ cited to one example in its press release announcing the lawsuit settlement: "For example, in a letter dated January 28, 2009, a director of Knorr Brake Company wrote to a senior executive at [Westinghouse's] headquarters, "[Y]ou and I both agreed that our practice of not targeting each other's personnel is a prudent cause for both companies. As you so accurately put it, 'we compete in the market.'"
As part of the settlement with the United States, Knorr and Westinghouse agreed to be bound by the Final Judgment. The Final Judgment defined a "No-Poach Agreement" or "No-Poach Provision" as "any Agreement, or part of an Agreement, among two or more employers that restrains any person from cold calling, soliciting, recruiting, hiring, or otherwise competing for (i) employees located in the United States being hired to work in the United States or outside the United States or (ii) any employee located outside the United States being hired to work in the United State." As part of the of the Final Judgment, each of the defendants "is enjoined from attempting to enter into, entering into, maintain, or enforcing any No-Poach Agreement or No-Poach Provision."
The Final Judgment does not prevent the defendants from "attempting to enter into, entering into, maintaining, or enforcing a reasonable Agreement not to solicit, recruit, or hire employees that is ancillary to a legitimate business collaboration." For hospitality players, the Final Judgment should serve as a warning that the DOJ intends to prosecute improper no-poach agreements. Hospitality players should heed this warning and take steps to mitigate the risk of running afoul of the law.
To educate players on no-poach agreements and anti-competitive behavior, the DOJ provided guidance. For example, in the DOJ's Antitrust Guidance for Human Resource Processionals, the DOJ stated that:
"An HR professional should avoid entering into agreements regarding terms of employment with firms that compete to hire employees. It does not matter whether the agreement is informal or formal, written or unwritten, spoken or unspoken. An individual likely is breaking the antitrust laws if he or she:
- agrees with individual(s) at another company about employee salary or other terms of compensation, either at a specific level or within a range (so-called wage-fixing agreements), or
- agrees with individual(s) at another company to refuse to solicit or hire that other company's employees (so-called "no poaching" agreements). Even if an individual does not agree orally or in writing to limit employee compensation or recruiting, other circumstances – such as evidence of discussions and parallel behavior – may lead to an inference that the individual has agreed to do so."
Accordingly, even agreements that are not in writing may run afoul of the law.
Improper no-poach agreements may be prosecuted under the Sherman Act. Section 1 of the Sherman Act, 15 U.S.C. § 1, prohibits "[e]very contract, combination...or conspiracy in restraint of trade or commerce among the several States." At least some courts have found that "to state a claim under Section 1, a plaintiff must allege (1) a contract, combination, or conspiracy between two or more entities; (2) in unreasonable restraint of trade; that (3) affects interstate commerce."
One case prosecuted under the Sherman Act is the case United States v. eBay, Inc., Case No. 12-cv-05869. There, the United States District Court for the Northern District of California considered allegations that, among other things, there was an "alleged handshake agreement struck and occasionally refined by eBay executives, including then-CEO Meg Whitman, and Scott Cook, the founder and Chairman of the Executive Committee of Intuit, Inc. ('Intuit'), which restricted eBay and Intuit's ability to recruit or hire candidates from one another."
The court recited allegations that "According to Plaintiffs, eBay and Intuit reached and implemented an initial no-solicitation agreement by August 2006." It was alleged that eBay was considering hiring an Intuit employee to one of its subsidiaries. When approached about the hire, one of eBay's senior vice presidents allegedly stated that she would have a word about it with eBay's CEO, and that she was confident that the eBay CEO would allegedly "say hands off" because "Scott [Cook] insists on a no poach policy with Intuit." The court recited allegations that "although this candidate was ultimately hired, eBay and Intuit's agreement thereafter 'metastasized' into a no-hire policy." It was alleged that "eBay recruiting personnel understood that Meg [Whitman] and Scott Cook entered into the agreement (handshake style, not written) that eBay would not hire from Intuit, period." The court recited that the plaintiffs alleged that "Mr. Cook and Intuit...agreed that Intuit would not recruit from eBay."
In denying eBay's motion to dismiss to the case, the court found that "[a]n agreement among employers that they will not compete against each other for the services of a particular employee or prospective employee is, in fact, a service division agreement, analogous to a product division agreement." As a result, the court found "that the United States' allegations concerning the agreement between eBay and Intuit, taken as true, suffice to state a horizontal market allocation agreement." The court stated that such an agreement typically constitutes a per se violation of Section 1 of the Sherman Act. The court could not find, at this stage of the case, that as a matter of law the case should be dismissed.
In another case, In re Animation Workers Antitrust Litig., Case No. 14-cv-04062, former employees alleged antitrust claims against their former employers. The plaintiffs alleged that the "Defendants engaged in a conspiracy to fix and suppress employee compensation and to restrict employee mobility." In considering a motion to dismiss the case, the federal court found that the plaintiffs made sufficient allegations to allow the case to proceed.
Specifically, among other things, the court found "that Plaintiffs have sufficiently alleged facts showing that Defendants reached an agreement to conspire." The court stated that the plaintiffs "alleged that Defendants systematically shared information, agreed not to solicit each other's employees, and that the purpose of the information sharing and no-poach scheme was to suppress wages." The court found that those allegations raised "a plausible inference that Defendants entered into an express agreement to suppress compensation." The court thus found that the plaintiffs successfully alleged a single conspiracy.
Hospitality players should work with their human resources professionals and counsel to develop and implement safeguards to prevent unlawful no-poach agreements and other anticompetitive activity. Careful attention must be paid because, as discussed above, improper agreements do not need to be in writing and thus may be difficult to monitor. Even if an agreement is never actually created, the act of inviting a competitor to join a no-poach agreement may be unlawful.
The DOJ stated that "merely inviting a competitor to enter into an illegal agreement may be an antitrust violation – even if the invitation does not result in an agreement to fix wages or otherwise limit competition." According to the DOJ, "In antitrust terms, an invitation to collude describes an improper communication to an actual or potential competitor that you are ready and willing to coordinate on price or output or other important terms of competition." The DOJ stated that "[s]haring information with competitors about terms and conditions of employment can also run afoul of the antitrust laws." Hospitality players must be wary of the agreements they make and the information that they share with their competitors.
When seeking to retain their human employees, hospitality players should be wary of entering into an unlawful no-poach agreement. Such an agreement may, among other things, restrict hiring employees among competitors. As set forth above, the DOJ may take aggressive action against anticompetitive practices. Hospitality players should take steps to understand the agreements they can enter into and information they can share with their competitors. Training human resources professionals and working with counsel may mitigate the risk of hospitality players running afoul of the law.
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