Court Dismisses DOJ Case Targeting No-Poach Agreement

​A federal court ruling on April 28 offered some reassurance to HR professionals and employers that use no-poach agreements.

The U.S. District Court for the District of Connecticut dismissed an antitrust case, U.S. v. Patel, which involved a jet-engine manufacturer that had a no-poach agreement with several outsourcing firms that competed for the manufacturer's projects.

"While we remain concerned about the risk of applying antitrust laws too broadly, this decision is an encouraging signal," said Emily M. Dickens, SHRM chief of staff and head of public affairs. "HR professionals depend on a high degree of certainty and predictability to carry out their responsibilities. The court's decision to dismiss the charges in U.S. v. Patel provides some relief and clarity on the application of antitrust laws to everyday business practices."

SHRM previously filed a friend-of-the-court brief because it was concerned about the government criminalizing actions by HR professionals and business executives that traditionally have been viewed as normal business practices.

"There are a myriad of legitimate business considerations that are necessary to having certain procedures related to hiring in place, such as workforce continuity, minimizing disruption, encouraging collaboration among business partners, investment in employees and increased hiring in the market to fulfill the client's demands," SHRM stated.

Background

In general, it's illegal for a group of businesses to agree to suppress wages or not compete for certain employees, even if their motivation is to reduce labor costs, according to federal guidance on the topic.

The U.S. Department of Justice (DOJ) brought criminal charges against a group of Connecticut HR executives for restricting the hiring and recruiting of aerospace engineers. The grand jury indictment alleged that six executives in the aerospace industry conspired to uphold illegal no-poach agreements between their companies from 2011 to 2019 in violation of the federal Sherman Act, a federal antitrust law that outlaws agreements that unduly constrain trade or commerce.

The indictment claimed that a manager chastised suppliers who recruited another company's employees and that he threatened to punish those suppliers by taking away access to projects. It also said the group of companies recognized the mutual financial benefit of this no-poach agreement, including reducing labor costs.

Rule of Reason

In some situations, the rule of reason can be applied to allow no-poach agreements. Mergers, acquisitions and large collaborative projects are examples of when the rule of reason may apply. SHRM has said that no-poach agreements are sometimes lawful when attempting to partner with multiple staffing firms for the same project.

The DOJ argued that the rule of reason didn't apply in this case because the no-poach agreement constituted a horizontal market allocation, where competitors at the same market level structure a labor market in order to minimize competition. However, the corporate executives said it wasn't a horizontal market allocation because it involved a vertical commercial relationship between the manufacturer and its outsourced providers.

The court concluded the no-poach agreement was not illegal because the hiring restrictions frequently changed and allowed for exceptions, which suggests that often hiring was permitted, sometimes on a broad scale. "No reasonable juror could conclude that there was a cessation of meaningful competition," the court stated.

The analogy between market allocation and no-poach agreements sometimes hasn't held up in court. The DOJ has brought several cases that allege per se illegal no-poach activity, but has had a few high-profile court losses, noted Jessica Maurer, an attorney with Mayer Brown in Chicago. She said this is not the first or the last criminal case that will be seen in this area of the law in the future.

"I think the DOJ's lack of success in these criminal prosecutions shows that judges and juries have a hard time seeing [the analogy] in practice," said Brandon Bigelow, an attorney with Seyfarth in Boston.   

To avoid federal agency enforcement actions, employers should make sure HR professionals get training to stay updated on changes in federal law.

It's a good idea to include antitrust training in their programming for senior executives, sales and human resource staff, so they are aware of potential traps for the unwary, Bigelow said. "Forewarned is forearmed."