Employers in all sectors use restrictive covenants to guard against the loss of institutional knowledge, relationships and training. These restrictive covenants come in three forms: ânon-competeâ, ânon-solicitationâ and âno-poachingâ agreements.
Non-competition agreements: A non-compete agreement is usually a contract between an employer and an employee that will prohibit the employee from working for or owning a business in direct competition with the employer for a defined period of time in a particular geographic area after the departure of the employee. the employee. employment with the employer.
Non-Solicitation Agreements: A non-solicitation agreement is generally a contract between an employer and an employee that will prohibit the employee from soliciting business from his or her
its former clients for a specified period after the employee has left employment with the employer.
No-poaching agreements: A no-poaching agreement is usually a contract between an employer and an employee that will prohibit the employee from hiring other employees of the employer for a set period of time after the employee leaves their employment with the employer. . These agreements are sometimes referred to as “non-solicitation” agreements, but to avoid confusion with agreements prohibiting the solicitation of customers, this article calls them “non-poaching” agreements. A variation of these agreements can also be found between two companies, such as when a company hiring an outside consultant for a particular project agrees not to hire the employees of the consulting firm directly.
The legal and regulatory framework
The Sherman Antitrust Act prohibits “trade or commerce restriction” contracts, 15 USC Â§ 1, and the Fair Trade Commission Act prohibits “unfair competitive practices” and “unfair or deceptive business practices”. 15 USC Â§ 45 (a) (1). Two federal agencies, the DOJ and the FTC, are authorized to enforce antitrust laws; the Supreme Court has ruled that any violation of the Sherman Act necessarily violates the Fair Trade Commission Act. FTC c. Indiana Fed’n of Dentists, 476 US 447, 455 (1986). This means that the FTC can prosecute companies for behavior that violates Sherman Law and other business practices it deems “unfair.” Additionally, Sherman Law violations can result in criminal prosecution as well as civil actions, and the FTC can refer Sherman Law violations to the DOJ for criminal investigation. In addition, private plaintiffs aggrieved by violations of antitrust laws can bring civil actions for damages, and state attorneys general can also bring actions under state laws similar to federal antitrust laws.
Strengthening of DOJ enforcement against “no-poaching” agreements
Since 2010, the DOJ Antitrust Division has pursued âhorizontalâ no-poaching agreements under Sherman Law. In antitrust terms, a “horizontal” agreement is between two competitors, while a “vertical” agreement is between companies at different levels of distribution in the supply chain. Notably, in September 2010, the Department of Justice announced that it had reached an agreement with several large technology companies that had pledged not to âpoachâ the employees of others. See Justice Department Demands Six Tech Companies To Stop Entering Anti-Competitive Employee Solicitation Agreements | OPA | Department of Justice. The DOJ has also targeted filmmakers for using no-poaching deals. See Justice Department Demands Lucasfilm Stop Entering Anti-Competitive Employee Solicitation Agreements | OPA | Department of Justice.
In October 2016, the DOJ and the FTC released joint guidelines for human resources professionals. See Antitrust Guidelines for Human Resources Professionals (ftc.gov). In those guidelines, the FTC and DOJ indicated that agreements between employers not to recruit certain employees or not to compete on pay were per se illegal, unless it was reasonably necessary for a broader legitimate collaboration between employers. This does not mean that legitimate venturers, or employers sharing workspaces, cannot enter into non-poaching agreements, but they must ensure that these agreements are actually necessary to protect legitimate business interests.
Employers should be aware that these guidelines are not just a sword. In January, a federal grand jury in the Northern District of Texas rendered an indictment of two counts against a company that owns and operates ambulatory health care centers across the country. See healthcare company accused of labor market collusion | OPA | Department of Justice. The defendant, in this case, was accused of having agreed with its competitors not to hire high-level employees from each other. The grand jury handed down real bills on charges of violating the Sherman Act and conspiring to violate the Sherman Act. These charges could result in corporate fines of up to $ 100,000,000 and individual fines of up to $ 1,000,000, as well as jail time of up to 10 years. And, of course, soon after the grand jury indicted the company, civil lawsuits began: a former employee filed for class action status in the Northern District of Illinois, alleging violations of the law. Sherman. See Case No 1: 21-cv-620 (ND Ill. February 3, 2021), ECF No 1. Since this filing, three other former employees have also filed a lawsuit, two of their cases being consolidated in the original .
Executive Decree 14036
On July 9, 2021, President Biden signed Executive Order 14036, 86 Fed. Reg. 36987. As part of this decree, President Biden “encouraged” the president of the FTC to “exercise the
statutory regulatory authority under the Federal Trade Commission Act to restrict the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit the mobility of workers. Identifier. to 36992. The administration published an “information sheet” at the same time as the executive decree, explaining that “[t]Millions of Americans, including those working in construction and retail, are required to sign non-compete agreements as a condition of getting a job, making it harder for them to move on. better paying options. See FACT SHEET: Executive Order on Promoting Competition in the US Economy | The White House.
This âencouragementâ will likely be warmly welcomed by FTC President Lina Khan. Shortly before his appointment, then Professor Khan and FTC Commissioner Rohit Chopra wrote and presented an article stating that “the FTC may consider engaging in rule-making on [noncompete agreements]As a preferable alternative to piecemeal litigation under Sherman Law. Rohit Chopra & Lina M. Khan, The Case for âUnfair Methods of Competitionâ, 87 U. Chi. L. Rev. 357, 371â374 (2020). Khan and Chopra also argued that â[a] rule could clarify when
non-competition agreements are authorized or notâ¦ giv[ing] notice to a much larger set of market participants than dealing with non-competition through a decision. Identifier. at 374. It is likely that the FTC will move quickly to enact rules prohibiting at least some non-compete agreements, given the writings of the FTC Chairman and the FTC Commissioner on the subject.
Given the changing enforcement and regulatory environment, it is a good idea to review your company’s non-poaching, non-compete, and non-solicitation agreements to ensure that they
are fit for purpose and do not unduly restrict legitimate competition.
No-poaching agreements: While the Justice Department has focused on horizontal no-poaching agreements, the review may soon focus on vertical no-poaching agreements, such as those between a prime contractor and its subcontractors. One question to ask is whether a no-poaching agreement is really necessary to protect trade secrets, intellectual property and / or other confidential information.
Non-competition agreements: While the FTC has not started its rule-making process, there are some proactive steps that could mitigate regulatory risk. It may be possible to argue a
âpro-competitiveâ rationale for non-compete agreements with employees who have access to trade secrets and intellectual property, or who have received training broadly applicable to
at the employer’s expense.
Non-Solicitation Agreements: Given the Biden administration’s aggressive stance toward competition in the labor market, a proposed rule could also include non-solicitation agreements. For many sales employees, a non-solicitation agreement can have the same practical effects as non-compete agreements and may be subject to similar scrutiny.