With DOJ's focus on wage fixing and no poach agreements, non-compete and antitrust laws collide

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The DOJ logo is pictured on a wall after a news conference in New York
The Department of Justice logo in New York. REUTERS/Carlo Allegri

August 23, 2021 - Many business executives have at least a passing familiarity with restrictive covenants, which generally come in two flavors: non-competes (which preclude an employee from working for a competitor for a set period of time) and non-solicits (which preclude an employee from soliciting clients or other employees once they depart). These agreements are made directly between an employer and an employee, and it is likely that many of these same executives have been subject to one at some point in their career.

In the last few years restrictive covenants have received scrutiny from some states, and even the federal government, but that scrutiny generally has been focused on the enforceability of restrictive covenants with lower-level employees (often measured by salary thresholds).

Far more serious scrutiny has been paid to agreements between companies not to hire (or "poach") each other's employees or to fix the compensation of those employees. While restrictive covenants are generally enforceable in most states to the extent that they are narrowly tailored to protect a legitimate interest — like protecting the employer's goodwill or confidential information for a reasonable period of time — wage fixing and so-called "naked" no-poach agreements (agreements without legitimate, legal justifications) are generally viewed as purely anticompetitive behavior.

In addition to not being enforceable, the Department of Justice and Federal Trade Commission brought civil enforcement actions against companies like Lucasfilm, Pixar, Adobe, Apple, Google, eBay, Intel and Intuit arising out of these types of agreements. Those civil enforcement actions typically resulted in promises by the companies to end such agreements and institute compliance or monitoring programs, but no penalties.

In 2016, during the final months of the Obama administration, the U.S. Department of Justice Antitrust Division (DOJ) and the Federal Trade Commission (FTC) issued joint "Antitrust Guidance for Human Resources Professionals" asserting the illegality of, and potential penalties for, entering into agreements to

(1) fix the salary or other terms of compensation, whether at a specific level or within a range, for employees (wage fixing agreements); or

(2) preclude companies from hiring or soliciting each other's employees without justification (no poaching agreements).

The Antitrust Guidance emphasized that wage fixing agreements and no poaching agreements could subject companies and individuals to criminal, as well as civil, actions.

There has been a marked change in the federal government's approach to wage fixing agreements and no-poach agreements in the wake of the Antitrust Guidance. The DOJ was clear in its 2016 Antitrust Guidance that it intended to proceed criminally against "naked wage fixing or no-poaching agreements" and that it would "criminally investigate allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each other's employees." See Antitrust Guidance at 4.

Several such investigations were announced during the Trump administration, with charges being filed in the final days of the administration. As the DOJ warned, criminal charges were brought not just against companies, but against allegedly culpable individuals as well.

In December 2020 the DOJ indicted Neeraj Jindal, the former owner of Integrity Home Therapy, a physical therapy staffing company, under Section 1 of the Sherman Act (15 U.S.C. § 1) for price fixing and antitrust conspiracy. See U.S. v. Jindal, 20-cr-00358-ALM-KPJ (E.D. Tex. 2020). The DOJ alleged that the company entered into agreements with competitors to suppress competition by agreeing to fix prices by lowering the pay rate of physical therapists.

A month later the DOJ brought a criminal action against Surgical Care Affiliates, an operator of outpatient surgical facilities, alleging that an agreement with competitors not to poach each other's senior executives violated the same provision of the Sherman Act, this time styled as a conspiracy in restraint of trade to allocate employees. See U.S. v. Surgical Care Affiliates, LLC, et al., 21-cr-00011-L (N.D. Tex. 2021).

As part of the alleged conspiracy, the DOJ claimed that between 2010 and 2017, Surgical Care Affiliates and other companies not named in the indictment had refrained from reaching out to each other's senior employees — though it appears that employees could be interviewed if they previously had informed their supervisor they were looking for a new job, and then applied for a position on their own. According to the DOJ, this was per se unlawful.

Surgical Care filed a motion to dismiss that was joined by the U.S. Chamber of Commerce as amicus curiae. The DOJ filed a superseding indictment earlier this month, maintaining the per se illegality theory of liability.

The Biden administration seems poised to ramp up the use of criminal indictments against companies that enter into naked no-poach agreements. On July 14, 2021, the DOJ brought charges against DaVita Inc., another health care company, and its former CEO Kent Thiry for allegedly participating in the Surgical Care Affiliates conspiracy. See U.S. v. DaVita Inc. et al., 21-cr-00229-RBJ (Dist. Colo 2021).

This is just part of the Biden administration's focus on restrictive covenants. Just a few days prior to the DaVita indictment, the Biden administration released an Executive Order on Promoting Competition in the American Economy. The Executive Order signals a "Whole-of-Government Competition Policy" that will use various federal laws, including the Sherman Act, to promote competition and (where necessary) break up monopolies. The Executive Order, among other things, directs the Attorney General and the Chair of the FTC to consider revising the 2016 antitrust guidance to better protect workers from wage collusion.

As explained in the Fact Sheet accompanying the Executive Order, the Executive Order encourages "the FTC and DOJ to strengthen antitrust guidance to prevent employers from collaborating to suppress wages or reduce benefits by sharing wage and benefit information with one another" and further encourages the "FTC to ban or limit non-compete agreements."

It remains to be seen how far such guidance, and prosecutions, will go — but decision makers should navigate these new waters carefully. It is now more important than ever that employers, especially those in highly concentrated markets with fewer competing businesses, have a clear understanding of the boundary between legitimate restrictive covenants and anti-competitive behavior.

This article has been corrected to reflect that Kent Thiry is the former CEO of DaVita Inc.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.

Alex Malyshev is a partner at Carter Ledyard & Milburn LLP and the chair of its cannabis, hemp and CBD industry group. He contributed the chapter, "Banking and Investment Considerations for Cannabis Businesses" in "Health Care and the Business of Cannabis: Legal Questions and Answers" (American Health Law Association 2021). He is based in New York. He can be reached at malyshev@clm.com.

Jeffrey S. Boxer is the Chair of the Trade Secrets and Restrictive Covenants Group at Carter Ledyard. He focuses his practice on employment law, non-compete agreements and other restrictive covenants, and the protection of trade secrets. He can be reached at boxer@clm.com.