The MoFo Competition Podcast: Antitrust & The Workplace – A Conversation on No-Poach and Non-Compete Agreements Part 1

In the first episode of this two-part MoFo Perspectives podcast, MoFo Global Antitrust co-chair Lisa Phelan and of counsel Rob Manoso speak with Employment & Labor partner Andrew Turnbull, along with special guest Matt Bester, Director of Competition Law at Accenture, to discuss the current and emerging trends between antitrust and employment law. Our panel of experts will explore the major developments from 2022, insights toward the coming year, and how companies can mitigate throughout this very uncertain climate. 

Listen to Part 2

Transcript

Speaker: Welcome to MoFo Perspectives, a podcast by Morrison Foerster, where we share the perspectives of our clients, colleagues, subject matter experts, and lawyers.

Lisa Phelan: Hello, and welcome to MoFo Competition, a Morrison and Foerster podcast series, exploring current and emerging trends in antitrust and how to navigate today’s shifting competition landscape. I’m Lisa Phelan, co‑chair of MoFo’s Global Antitrust practice, and today we would like to provide an update on the recent developments at the intersection of employment and antitrust.

This is the first installment of a two-part episode, wherein we will plan to discuss one of the most active areas in competition policy and enforcement in the U.S. and, increasingly, around the world. In many ways, today’s labor market reflects the volatility and uncertainty of the broader economy, much of which is still recovering from the lingering effects of the pandemic.

Employee turnover is up, and the low unemployment rate puts pressure on wages. Companies are reluctant to invest in training and to share confidential information with employees, including their executives, that might not be sticking around. These challenges provide the backdrop for an unprecedented focus on competition for talent that is happening among state and federal legislators and antitrust enforcers.

The Biden administration has made clear that protecting workers and maximizing competition for talent is a very high priority on its agenda. In the United States in recent years, the U.S. DOJ has been criminally prosecuting companies and their high-level executives that make agreements with other companies not to hire or solicit each other’s employees, or that make agreements on wages and compensation.

Today, we want to explore major developments from 2022, provide some insights on what could happen this year, and discuss how companies can mitigate, given this very uncertain climate. And with me today is just the group to do it. With me to help in this discussion are two of my colleagues, Andrew Turnbull and Rob Manoso.

Andrew is a labor and employment partner at MoFo. A significant focus of his practice is drafting these types of restrictive covenants and then litigating restrictive covenants, employee mobility, and trade secrets. Rob is an antitrust attorney with significant experience assisting companies on managing risk as it relates to antitrust and HR issues.

In addition, we have a very special guest today, Matt Bester, the director of Competition Law at Accenture, which is of course, a Fortune 500 global professional services company, which specializes in strategy, consulting, technology, and interactive services. During my decades as a prosecutor at DOJ’s Antitrust Division, I had the pleasure of working with Matt on some cartel matters.

So with this great group, let’s dive in.

Andrew Turnbull: Well, thanks, Lisa. So, this is Andrew. Rob, as the employment lawyer in the room, I have to be familiar with a lot of laws, but I wouldn’t put the Sherman Act or other antitrust laws at the top of the list. Can you help us understand how antitrust laws apply in the employment?

Rob Manoso: That’s a fair question. The Sherman Act is one of several U.S. antitrust laws that protect competition. Specifically, Section 1 of the Sherman Act prohibits agreements that reduce competition. Competition here includes competition for talent—employees, and so that competition laws apply to competition for employees the same as it would apply to other goods and services.

Importantly, companies can compete for the same workers even if they aren’t competing for the same customers. Today, we really want to focus on two types of agreements between employers that limit competition, what we refer to as no-poach agreements and wage fixing agreements. When we’re talking about no-poach, we mean agreements not to compete for workers,

which can include no-hire restrictions or non-solicitations. These are sometimes referred to as “allocation agreements.” When we’re talking about wage fixing, we’re talking about any agreement related to employee compensation or benefits.

Matt Bester: So, Lisa, maybe you could talk a little bit about how we got to where we are today, and in particular, the potential for criminal liability for some of these agreements.

Lisa Phelan: Sure. Matt, let me give a little bit of a brief history lesson here. Historically, the DOJ and its agency, the FTC, really didn’t focus very much on competition for talent and certainly not criminally focus on it. The chips started in 2010, when the DOJ reached a civil settlement with six high-tech companies over their alleged agreement not to solicit each other’s employees.

Specifically, that agreement alleged that they had focused on software engineers. And DOJ saw this as limiting the ability of those engineers to get promotions and raises by switching between the big-tech companies, and that was being restricted by this type of an agreement. I was actually at the DOJ at that time, and this sort of raised this issue of competition for talent that led ultimately to the DOJ and the FTC jointly announcing that they were going to think differently about whether this type of agreement was really the same as things they were already prosecuting as criminal, per se, offenses.

Was a wage agreement equal to a price agreement? Was a no-hire agreement essentially a market allocation agreement? DOJ and FTC came to the conclusion that the answer was yes. In 2016, they put out what was called The Antitrust Guidance for HR Professionals. It was a policy document intended to provide guidance on DOJ’s view of, and their intended treatment going forward of, the labor space.

Importantly, DOJ used this guidance as an opportunity to announce it would treat what it called naked, no-poach wage fixing agreements—which we’ll talk about exactly what naked means in a minute—but that they would treat these types of agreements as criminal antitrust violations. Despite this announcement, because antitrust cases take a while to build, it was still four years before DOJ brought its first criminal case, and that happened in December of 2020, they brought their first wage fixing. That was followed pretty quickly by the first no‑poach case, which DOJ filed in early 2021.

Now, that was a big deal for an antitrust enforcer, but Matt, do you remember when this guidance first came out? Did it have a big impact on you as in-house counsel?

Matt Bester: Well, I do remember when the guidance first came out, certainly, but I wouldn’t say it had a big impact on the way that we approached the issue.

We saw those Silicon Valley cases that were occurred a few years before the guidance came out and really took that seriously and knew that this was, but certainly looked to be, a shift in the way the enforcers look at this issue. So, we reacted in kind and really started a pretty comprehensive training program to get our people up to speed, to make sure they were clear about what they can and can’t do in this space.

Andrew Turnbull: That’s interesting, Matt. You know, I wouldn’t think that all no-hire or non-solicit agreements between competing employers are illegal. So, can you tell us what’s the difference between a naked no-poach agreement and a legitimate non-solicit agreement?

Matt Bester: So I think there’s a couple of key differences. One is naked agreements typically are something that’s done outside of a contract.

So it might be a kind of off-the-books side agreement, a gentleman’s agreement between two companies to restrict hiring. Whereas a legitimate agreement is in writing. It has legitimate scope attached to it in terms of who’s covered and is time-limited, so that there is an endpoint to the hiring restriction.

Those are some of the really key differences between what’s typically considered a naked agreement, which is, per se, illegal, and an agreement that may be legitimate, where companies do have a legitimate interest that’s been recognized by the law in how they limit hiring between two companies that are otherwise doing business.

I remember, from my DOJ certainly, that penalties for criminal Sherman Act offenses are stiff. What type of penalties are we really talking about here, Lisa?

Lisa Phelan: The criminal side penalties can be quite steep. For companies, the maximum penalty under the statute, the Sherman Act statute, is $100 million per offense.

Conviction can also mean—which, for some industries and some types of companies, is as much or more significant—conviction can mean debarment from being able to participate in government procurement programs. Individual executives that are involved in this type of conduct have the added risk of imprisonment.

And again, under the statute, that could be a maximum of 10 years, in addition to receiving personal fines. Now, in a typical price fixing case, these penalties would be calculated based on what’s called the volume of commerce affected by the conduct. Basically, if a company was found to be involved in a price fixing agreement for two years, then the fines and the jail terms would be calculated by DOJ based on total sales or total revenue during that time period. But in agreements that limit hiring, it’s really unclear whether the volume of commerce would be, say, the salaries of all employees at all the companies involved? Or would it be just the salaries of those who had actively sought to change jobs during that relevant period? Or some other basis? Since no criminal case in this space has been yet to the stage of a contested sentencing, we don’t know either what position the DOJ is going to take on this issue, or how a court would react, and what a court might be willing to impose.

Rob Manoso: That’s right, and that’s just their criminal penalties. Just like in other contexts, criminal prosecutions will inevitably lead to civil lawsuits as well. In this context, we are referring to class actions of employees that think they were affected by one of these types of agreements. And courts will have to wrestle with the same issues when they’re trying to actually calculate what the damages might be for these affected workers. Because it’s an antitrust lawsuit, that means treble damages, in addition to attorney’s fees.

So let’s talk about some updates from 2022 in this space, particularly on the DOJ’s focus on labor market prosecutions. In 2022, the DOJ’s first cases went to trial, but with mixed results. We’re specifically talking about the DOJs trial losses in the Jindal and DaVita cases.

As Lisa mentioned, in December 2020, the DOJ brought its first criminal case against two owners of competing therapist staffing companies for their role in an alleged wage fixing agreement. The case was United States v. Jindal. The case went to trial in March 2022. After eight days of trial, the jury acquitted both defendants on the antitrust.

One defendant was convicted of a minor obstruction charge related to his conduct during the investigation, but both were acquitted on the substantive charge at the same time as this case was being tried. The DOJ began trial in a no-poach case in a Colorado federal court against DaVita, and its former CEO Kent Thiry.

The DOJ charged the defendants with participating in several no-poach agreements with other healthcare companies. That multiweek trial resulted in not guilty verdicts for both defendants. In October 2022, DOJ secured its first victory of sorts when a healthcare company known as VDA pled guilty for its role in a conspiracy to allocate and fix wages for contract nurses serving Las Vegas area schools.

VDA received a criminal fine of $62,000 and was ordered to pay restitution of $72,000. In addition to these criminal cases, in July of last year, the DOJ reached a civil resolution with a data analytics company and several poultry producers for their role in a conspiracy to share plant worker compensation information.

As part of the settlement, the producers agreed to pay $85 million in restitution, but the case ended with a civil resolution. Not a criminal resolution, because there was no evidence of an actual agreement, just an information exchange between the employers about what to pay poultry workers.

Matt Bester: Lisa, maybe you could talk a little bit about what you expect that we’ll see in this space in the upcoming year.

Lisa Phelan: DOJ certainly has some opportunities for, and I know that they’re really hoping for, some trial wins in this space in 2023. There are definitely several additional cases that are currently teed up with trial dates. One of those cases is scheduled for trial this March, and it is United States v. Manahe.

This case is pending in federal court in Maine, and it involves allegations that several home health staffing companies agreed to fix the hourly for home healthcare workers and to avoid hiring each other’s workers during the early days of the COVID pandemic. You might be noticing a trend here that several of the early cases that DOJ has brought in this space have involved the healthcare industry. But unless we think their focus is limited there, in March 2023, DOJ will start trial in another case involving allegations of a no-poach agreement in the engineering services space. It’s United States v. Patel, and it’s pending in Connecticut. An interesting thing about this case is there’s really a vertical aspect to it, which we have not seen in the other cases the DOJ has filed, and it’ll be interesting to see if this complicates their chances with the jury.

The DOJ may have a third trial this year in the no-poach space, and that’s United States v. SCA. Although no trial date has yet been set. The case has been pending before the judge for quite a while and is still awaiting a motion to dismiss decision, and then we can anticipate that trial will shortly thereafter be set.

So, despite the mixed results that Rob has walked us through of the trials that happened last year, DOJ is clearly undeterred and is completely committed to bringing prosecutions in the competition for talent space. And not only to bring it against companies dipped, but to pursue individual executives as well.

We see this commitment being renewed by them in virtually every speech by a high-level DOJ official. At the same time, though, the question remains how the DOJ is going to convince a jury that this type of agreement is the type for which a company should be required to pay a significant fine and, perhaps even more challenging, for which an individual should go to jail.

The DOJ will need to continue to look for cases that have what may be strong fact patterns in terms of potential jury concern or sympathy that involve particularly vulnerable workers, so that it has the ability to show that these types of agreements cause real harm, like for example, to school nurses getting reduced pay or not being able to move.

Matt Bester: I think one thing that’s also really important here to keep in mind is that multinational companies in particular really need to be monitoring how this issue is playing out internationally in terms of no-poach or wage fixing agreements across the globe.

Rob Manoso: That’s a really great point, Matt. There’s been a lot of activity, not just in the United States. Last year, for example, Canada amended its competition laws to expressly prohibit no-poach and wage fixing agreements.

We also expect investigations to increase in the EU and other jurisdictions, even when there is no criminal enforcement of competition laws like there is in the United States and Canada. The EC and national enforcers alike have both made clear that this is an enforcement priority. In May 2022, for example, the Portuguese Competition Authority handed down over 11 million euros in fines for no-poach agreements that involved 31 soccer (over there, football teams) and the National Soccer League.

This builds on similar fines handed down in Mexico, when Mexico’s competition authority also identified no-poach agreements affecting its national soccer league in late 2021. At the same time, in late 2021, a Chinese court found no-poach agreements and compensation related agreements to be illegal under that country’s competition laws, which should lay the groundwork for future investigations there. So, this scrutiny shows no signs of slowing down across multiple jurisdictions.

Lisa Phelan: Matt, can you speak a little bit about how Accenture has evolved its compliance efforts, now that we are seeing that enforcers are very serious about these investigations and prosecutions?

Matt Bester: We’ve always tried to maintain a really robust global compliance program that focuses on all the key antitrust issues, whatever they are at the moment.

And as we’ve seen, regulators focus on this. We’ve also turned our focus to this. We’ve been training on this issue and educating our people. As I mentioned earlier, long before the 2016 guidance came out from DOJ, because we could see that the regulators were interested in this case. We’ve certainly spent a lot of time just making sure that people understand how we all need to be looking at this, how the interpretation of the law is changing, and that our role here is to keep pace with that and make sure that we’re educating our employees and our business leaders across the company adequately.

Lisa Phelan: That’s great. That it sounds like you’re not new to the party on these issues. But for companies that might just be coming more aware of the risk here, any particular challenges you think those companies are likely to face in trying to adjust to this new normal?

Matt Bester: I think there is a learning curve and getting your teams to really understand that if you’re not already training on this issue and trying to shed light on this trend from regulators, I think you’ve got to start immediately. It’s really important to put in place processes and controls that help you mitigate this risk in a way that doesn’t in any way inhibit the regular business operation. And like any emerging legal issue, it absolutely takes time to shift people’s understanding. But we’ve certainly found success doing.

Andrew Turnbull: We often see clients struggle with non-solicit agreements.You know, as we discussed earlier, not all no-hire and non-solicit provisions between companies are unlawful. In fact, in some industries we do find that those provisions are fairly common. But one of the things that the companies really have to consider when entering these types of non-solicits, that they are really narrowly tailored and can be supported by legitimate business interests.

So, there’s a number of different considerations for companies to think about when they’re putting these types of agreements together. But you know, some of the more significant ones that come to mind is that non-solicits should only prohibit solicitation or hiring of employees that are directly related to the agreement.

When you start getting beyond that and covering the entire workforce of the company, it starts to look more like the naked no-poach type agreement and goes beyond the legitimate interest in protecting against unfair competition. Another consideration when putting together these non-solicits is to avoid having some type of perpetual non-solicit.

So certainly, during the term of the agreement is usually inbounds, but anything after that, it needs to be narrowly tailored. And usually if you start going over a year or more, it starts to look more like a naked no-poach agreement. Companies should also, as we discussed earlier, make sure that they include carve-outs in these non-solicits for employees who want to respond to general advertisements by companies.

So, it looks more like a legitimate non-solicit that the company’s trying to protect its business interest, but not really impact employee mobility. And also, it’s always important to have these non-solicit agreements in writing. Anything that’s a handshake agreement or oral agreement start to look more like a no poach agreement or some type of backdoor dealing.

And typically having some type of counsel that has experience with these issues review those restrictions just to make sure that they don’t go out of bounds is also a good idea, which we really see a lot of companies doing.

Lisa Phelan: Thanks Andrew, and thanks for reminding us. I know we’re being pretty doom and gloom, a bit here of what the landscape looks like, but thanks for reminding us that these are not total bans on non-solicits that with good counsel you can often craft these in a way that would not be considered naked by the DOJ or other enforcers.

Just one other side note, in addition to being smart about the use of non‑solicitation clauses, companies from our experience also have to be sure that they’re being careful treating their compensation information as confidential to avoid, again, even the appearance, as Andrew says, of an improper agreement related to employee pay.

I know in the context of comparing yourself to what’s happening in the market in terms of pay, you certainly want to know what’s going on, but you have to be really careful that you’re protecting the confidentiality of your own compensation information. And more broadly, I think a key takeaway here is that particularly with this aggressive enforcement environment, companies just need to take steps to ensure that their existing antitrust policies specifically include information about no poach agreements and about wage fixing so that employees are able to identify and avoid conduct that could be creating a risk for the company.

So this concludes our chat for today. We will be following this conversation with a part two shortly where we will be discussing non-competes and the FTC’s recently announced plan to ban all non-compete agreements between companies and employees. What should you be listening for, preparing for, and expecting?

Thanks to all of you for tuning in to MoFo Competition. Matt, thank you particularly very much for taking the time to join us and we hope you’ll stick around. We’ll be continuing to watch this issue closely and to provide updates as they come. We’ll see you in Part Two.

Speaker: Please make sure to subscribe to the MoFo Perspectives podcast so you don’t miss an episode. If you have any questions about what you heard today or would like more information on this topic, please visit mofo.com/podcast. Again, that’s mofo, m-o-f-o.com/podcast.