DOJ's Aggressive Pursuit of 'No Poachers'
On January 28, 2022, the United States District Court for the District of Colorado declined to dismiss a criminal antitrust indictment alleging a dialysis operator, DaVita Inc. (“DaVita”), and its former CEO colluded with competitors by agreeing not to recruit or “poach” each other’s’ employees. The same day, the Department of Justice (“DOJ”) announced yet another “no-poach” indictment — this time accusing four owners and managers of home health care agencies of allegedly conspiring to fix the rates paid to their workers and to refrain from hiring each others’ employees. These events are the latest in a string of criminal enforcement actions brought by the DOJ for alleged “no-poach” agreements and emphasize the DOJ’s focus on competition in labor markets and effects on workers.
Over the past decade, scrutiny of federal antitrust enforcement has taken center stage in the national discourse. Where before antitrust was a topic only lawyers and economists bantered about, increasingly it has become a topic of interest for many. The Biden administration capitalized on this increased national interest and is focusing heavily on antitrust enforcement, specifically the way antitrust statutes can be used to effectuate labor interests. In his July 9, 2021 Executive Order on Promoting Competition in the American Economy, President Biden affirmed his commitment to enforce the antitrust laws in labor markets and denounced the consolidation of “corporate employers, making it harder for workers to bargain for higher wages and better work conditions.” The Biden administration has made good on this promise in a variety of ways, including a recent suit to block the merger between major book publishers Penguin Random House and Simon & Schuster because of alleged negative effects on author pay and benefits. However, the tip of the labor antitrust enforcement spear has taken the form of a series of criminal indictments brought by the DOJ’s Antitrust Division for alleged “no-poach” agreements between companies that compete for employees. With one motion to dismiss already decided and more hanging in the balance, these indictments present important questions with potentially wide-ranging effects on criminal antitrust enforcement. Below is a comprehensive review of the current, as of February 2022, landscape around “no-poach” agreements, and following we analyze certain open questions and their potential for shaping the future of antitrust enforcement.
Background: How did we get here?
What is a “no-poach” agreement? The term “no-poach” is used to encompass a variety of agreements between companies regarding the hiring and recruiting of employees. On one end of the spectrum are non-solicitation agreements, in which companies agree to refrain from directly soliciting one another’s employees. Non-solicitation agreements typically do not prohibit a company from interviewing or hiring an employee of another company if that employee applies to the position on his or her own. On the other end are no-hire agreements, in which companies agree to a complete ban on hiring one another’s employees. From the government’s perspective, no-hire agreements are more severely restrictive on employees in that they limit an employee’s ability to change jobs, regardless of how she or he learns about the position.
Historically, no-poach agreements have been common in industries with highly specialized labor, such as health care, tech, and aerospace, where companies invest heavily in recruiting, developing, and retaining top level talent, and where such labor is limited in supply. Relatedly, wage-fixing agreements occur when companies in the same general commercial space agree to set the wages of a specific job type, or position, at a specific rate or to provide set benefits. The overall purpose is to avoid competing with one another to provide better and higher wages and benefits, which would negatively impact each company’s bottom line by increasing their respective labor costs.
Enforcement of no-poach agreements first made headlines in 2010, when the DOJ’s Antitrust Division (the “Antitrust Division”) brought a series of civil enforcement actions against multiple high profile tech companies that had agreed not to cold call or directly solicit one another’s software engineers, digital animators, and certain other types of specialized employees.1 The federal enforcement actions — none of which involved criminal allegations — ended with consent orders prohibiting the future use of “no-poach” agreements, which then spurred plaintiff lawyers to file follow-on class-actions seeking compensatory and treble damages on behalf of current and former employees of the defendant companies. The class actions were resolved via settlements totaling more than $400 million.2
The first time the DOJ publicly claimed that “no-poach” conduct could be subject to criminal penalties was in a 2016 joint report issued by the Federal Trade Commission (“FTC”) and the Antitrust Division (collectively “the Agencies”) entitled Antitrust Guidance for Human Resources Professionals (“2016 Guidance”). The 2016 Guidance was published by the Agencies “to alert human resource (HR) professionals and others involved in hiring and compensation decisions to potential violations of the antitrust laws.” In it, the Agencies affirm that antitrust laws apply with equal force in labor markets as they do in traditional markets and outline certain kinds of conduct, such as “no-poach” and wage-fixing agreements, that the Agencies believe violate antitrust laws. Importantly, the Agencies assert that “[n]aked wage-fixing or no-poaching agreements among employers . . . are per se illegal under the antitrust laws” and announced that “[g]oing forward, the DOJ intends to proceed criminally against naked wage-fixing or no-poaching agreements.”
The Current Landscape: A Proliferation of No-Poach Indictments
For decades, per se treatment and criminal prosecution of Sherman Act violations have been reserved for three long-established categories of “hard-core cartel activity”: price fixing, bid rigging, and market allocation.3 However, in the 2016 Guidance, the Agencies announced that “no-poach” conduct is merely a form of market allocation in which competing employers allocate the market for employees, and thus, that per se treatment of such agreements is proper. The Agencies declared that “no-poach” agreements “eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been criminally investigated and prosecuted as hardcore cartel conduct.” Consistent with the Antitrust Division’s theory that prosecuting individuals is an effective deterrent of corporate antitrust crimes, the 2016 Guidance warns that felony charges may be brought against “both individuals and companies.” Indeed, all of the recent no-poach indictments have charged individuals with antitrust crimes.
Despite the enthusiasm for “no-poach” criminal enforcement exhibited by the 2016 Guidance, it was not until January 2021 that the DOJ made good on its promise and brought the first “no-poach” criminal indictment. In United States v. Surgical Care Affiliates,4 a grand jury returned an indictment alleging that Surgical Care Affiliates (“SCA”) and two other then-unindicted companies had “engaged in a conspiracy to suppress competition between them for the services of senior level employees by agreeing not to solicit each other’s senior-level employees.” The indictment characterized the conduct as a “per se unlawful, and thus unreasonable” restraint of trade that violated Section 1 of the Sherman Act. After this first indictment, the DOJ continued its war on “no-poach” conduct by bringing indictments in four other cases over the past year: United States v. Hee,5 United States v. DaVita (indicting DaVita as an alleged co-conspirator of SCA),6 United States v. Patel,7 and United States v. Manahe.8 In Manahe, the most recent of these indictments, the DOJ indicted only individuals — bringing charges against four owners and managers of home health care agencies for allegedly conspiring to fix the rates paid to their workers and to refrain from hiring each-others’ employees — and not naming a single corporate defendant. These cases demonstrate the DOJ’s renewed commitment to antitrust white-collar enforcement generally, and in labor markets specifically given the Biden administration’s spotlight on labor as a key priority.
A Look Ahead: Where Do We Go From Here?
Most of the defendants ensnared in the recent prosecutions have filed motions to dismiss, making forceful arguments as to why “no-poach” conduct is, at the very least, not criminally prosecutable.
As of February 2022, the only “no-poach” motion to dismiss that has been ruled upon is in DaVita, where the court rejected DaVita’s arguments that the indictment is improper.9 The DaVita court announced a three-part test to analyze whether allegedly new anticompetitive conduct could be subject to per se treatment or whether the Rule of Reason was required.10 Under the test, the first step is to determine whether the conduct alleged fits into one of the traditional per se categories of price fixing, bid rigging, and market allocation. Second, if the conduct does not fit into one of the three categories, the next step is to determine whether to create a new category of per se unreasonableness. Based on these first two steps, if the conduct neither fits into the three-part framework nor warrants a new per se rule, then the Rule of Reason must apply. If, however, per se treatment is seemingly appropriate under either of the first two steps, then the third step is to assess whether the conduct constitutes a “naked” restraint of trade or is ancillary to a procompetitive purpose. In applying this test, the DaVita court concluded that the alleged conduct fell into the “market allocation” bucket on step one of the test. Accordingly, the court did not find it necessary to move to step two and determine whether a new per se rule was required and did not analyze whether the agreement was ancillary rather than naked.
The DaVita decision was issued in federal court in Colorado. Motions to dismiss other no-poach indictments are pending in federal courts in Texas and Nevada, and it remains to be seen whether the Antitrust Division will similarly prevail in those jurisdictions. It will very likely be some time — months or years — before federal appellate courts weigh in on this issue and give more guidance as to whether no-poach conduct should, in fact, be treated criminally. Unless and until a significant court decision strikes down its approach, companies should expect that the Antitrust Division will continue to investigate and criminally pursue no-poach agreements. In other words, these cases are not going away anytime soon.
Can “no-poach” conduct be prosecuted criminally?
The question that takes center stage in all of the criminal motions to dismiss is whether “no-poach” conduct can be prosecuted criminally under Section 1 of the Sherman Act at all?
The Sherman Act Section 1 (“Section 1”) dictates “[e]very contract, combination . . . , or conspiracy, in restraint of trade or commerce . . . [is] illegal.”11 The key aspect of Section 1’s prohibition is the agreement between two or more business entities to unreasonably restrain trade.12 Thus, in order to determine whether conduct violates Section 1, courts must balance the alleged anticompetitive harms with any efficiencies or procompetitive justifications of the agreement at issue. There are multiple analytical frameworks that courts apply when scrutinizing agreements under Section 1. The presumptive mode of analysis in a Section 1 claim is known as the Rule of Reason, where the court engages in a balancing test to determine “whether the challenged agreement is one that promotes competition or one that suppresses competition.”13 However, certain types of agreements have been deemed by courts to be facially anticompetitive, as they always, or almost always, restrict competition rather than promoting it.14 In the case of these agreements, courts apply the per se rule in which the challenged conduct is treated as presumptively illegal, regardless of the impact (or lack thereof) on competition. As discussed above, the per se rule applies to a narrow set of naked, horizontal agreements: price fixing, bid rigging, and market allocation. Further, per se treatment is only proper “once experience with a particular kind of restraint” enables a court to predict with confidence that it is unlawful.15
The motions to dismiss in SCA, DaVita, and Hee, all make similar arguments. Primarily, defendants argue that “no-poach” conduct should be subject to the Rule of Reason because there are clear procompetitive justifications for the conduct and that the conduct does not fall into one of the three categories of agreements that warrant per se treatment.16 The defendants argue that “no-poach” agreements cannot be simply “rebranded” as market allocation and that it is necessary to analyze “no-poach” agreements as a new kind of restraint rather than just an application of a long-standing principle to a new market. They further argue that per se treatment is not proper because there is insufficient judicial experience with balancing the anticompetitive effects against the procompetitive justifications of “no-poach” agreements.17 The defendants also try to distinguish the different kinds of “no-poach” agreements from each other, contending that “non-solicit” conduct requires a different analysis than “no-hire” agreements and thus cannot be grouped into one single per se analysis. For example, SCA has continuously argued that “non-solicit” agreements are a wholly distinct kind of agreement from no-hire agreements because no-hire agreements actually prevent employees from switching employers whereas “non-solicit” agreements do not. In SCA’s view, this means that non-solicit agreements do not actually allocate the market and thus do not fit into the bucket of market allocation. Additionally, SCA points to cases in which courts found no-hire agreements to be subject to the Rule of Reason as evidence that the less restrictive restraint, a non-solicit, should not be subject to the per se rule.18
In each case, DOJ vigorously opposes the motions to dismiss, contending that “no-poach” agreements are merely a form of market allocation and that per se treatment is proper. Stressing that the determination of whether per se treatment should apply does not depend on the type of industry or market, but rather the type of agreement or restraint at issue, DOJ argues that no additional judicial experience is required to categorically condemn “no-poach” as unreasonable and unlawful.19 In support of its position that labor markets are subject to the antitrust, the Antitrust Division points to the recent Supreme Court decision in NCAA v. Alston.20 Importantly for the DOJ, in coming to its conclusion that some of the NCAA’s rules regarding athlete compensation were subject to — and not exempt from — antitrust scrutiny, the Court emphasized the Sherman Act’s application to labor markets, with Justice Kavanaugh emphasizing in concurrence that “price-fixing labor is price-fixing labor.”
The DaVita court struck a middle ground, finding that some, but not all, non-solicitation agreements could be subject to per se treatment and thus criminal prosecution. Primarily, the court rejected the contention that non-solicitation agreements were categorically different from market allocation and agreed with the DOJ that merely applying a type of agreement to a new market or industry was not sufficient to push it outside of the traditional bucket. In the court’s view, non-solicit agreements are merely a mechanism for achieving market allocation, not a different kind of agreement all together. The court emphasized that “as violators use new methods to suppress competition by allocating the market or fixing prices these new methods will have to be prosecuted for a first time.”
While the DOJ has racked up one win already, this fundamental question has the potential to stop the DOJ’s criminal enforcement train in its tracks. If other district courts find that “no-poach” conduct is subject to the Rule of Reason rather than the per se rule it could set up a circuit split to be later decided at the Supreme Court. Otherwise, if the DaVita court is overturned on appeal, then the indictments will be dismissed, and the DOJ would be limited to civil enforcement for future cases, absent contrary court rulings in the future or a legislative fix.
What kind of notice is required for a prosecution under the Sherman Act to satisfy due process?
Another key question is what kind of notice is required under the Due Process Clause for a prosecution under the Sherman Act to be permissible?
The Fifth and Fourteenth Amendments guarantee that the federal government and the states may not “deprive any person of life, liberty, or property, without due process of law.”21 “To satisfy due process, ‘a penal statute [must] define the criminal offense with sufficient definiteness that ordinary people can understand what conduct is prohibited and in a manner that does not encourage arbitrary and discriminatory enforcement.’”22 While the relative vagueness of the Sherman Act has been recognized in the past, the Supreme Court has upheld criminal prosecutions under the Sherman Act against constitutional challenges on multiple occasions.23 However, because of the inherently common law nature of the Sherman Act, prosecutions usually proceed only when conduct is subject to the per se rule, as discussed above. Very little caselaw exists directly explaining the constitutional requirements for establishing a new category of criminally prosecutable agreements under the Sherman Act. This has led to disagreement between the DOJ and the defendants over what is necessary to comport with due process and fair notice in the context of criminal antitrust.
The defendants argue that prosecuting “no-poach” agreements at this time would violate due process and fair notice because there is no established precedent of per se treatment prior to this case to let the ordinary individual know that the conduct was unlawful. In SCA, for example, the defendants argue that no court has treated non-solicit agreements as per se unlawful and that doing so for the first time violates due process.24 Generally, the defendants argue in each of the pending motions to dismiss that no-poach conduct must be looked at under a Rule of Reason analysis and thus that there was not sufficient notice to satisfy due process. They argue that the DOJ must establish a line of civil cases with per se treatment in order to then bring a criminal prosecution against an individual and that the 2016 Guidance does not provide sufficient fair notice.
In contrast, the DOJ contends that the defendants are essentially arguing that the Sherman Act is unconstitutionally vague, which has been foreclosed by previous Supreme Court decisions.25 According to DOJ, a vagueness argument is merely an attempt by defendants to muddy the waters and distract the court. Further, the DOJ argues that no-poach agreements are not some novel construction requiring its own specific civil precedents before criminal enforcement may proceed. In support of its position that the defendants had “reasonably clear notice” that “no-poach” agreements cross the line of criminal liability, DOJ points to precedent establishing that market allocation agreements and customer “no-poach” agreements are categorically unlawful, and emphasizes that there is ample instances of “buyer-side” agreements being subjected to criminal antitrust scrutiny, even in labor markets.26 In any event, the DOJ further argues, regardless of any analogous cases in different contexts, the prior “no-poach” civil enforcement actions clearly provide notice to defendants that “no-poach” conduct is unlawful.
The DaVita court briefly addressed this issue in its decision denying the motion to dismiss. Specifically, the court found that the indictment was not prohibited by the Due Process Clause and that there was clear notice and fair warning that the alleged conduct could be subject to criminal prosecution.27 Noting that although non-solicitation agreements have “rarely, if ever, been prosecuted,” “the conduct proscribed by Section 1 is allocating the market, an action that defendants knew or should have known was illegal.” The court emphasized that allocating the market in a “novel way” does not change the fact that the defendants had “ample notice that entering a naked agreement to allocate the market would expose them to criminal liability.”
It is conceivable that another court looking at this issue could reach the opposite conclusion — finding due process insufficient. Like the question above, resolution of this issue could be dispositive to determining whether DOJ will continue being able to bring these criminal prosecutions in the long term.
Staying Afloat in Unsettled Waters: Compliance Tips to Minimize Exposure
It will likely be years before the question of whether no-poach conduct may be prosecuted criminally is settled. Unless and until it is judicially precluded from doing so, companies should expect DOJ to continue to vigorously pursue criminal enforcement of no-poach agreements. It is thus more important than ever that companies undertake deliberate efforts to minimize liability and prevent no-poach conduct before it happens.
At a high level, to maximize effectiveness, it is important to educate company executives, managers, and employees generally, about the possible antitrust risks inherent in their respective roles. The antitrust concerns for a member of the sales team are likely different than those for someone involved in the company’s recruiting efforts, for example. Each individual employed by the company should know the potential pitfalls that surround his or her tasks. In order to properly implement such a policy, companies should undergo a comprehensive review of the antitrust risks that each category of employee poses and tailor the antitrust compliance approach accordingly. More granularly, and specific to avoiding no-poach liability, it is crucial to develop a Human Resources antitrust policy that sets forth procedures for avoiding falling into the “no-poach” trap. Human Resources professionals, and others at the company involved in hiring and recruiting should undergo training from counsel on the topic of antitrust and “no-poach” issues. In order to minimize possible missteps, companies should have detailed policies regarding communications with competing employers regarding employee wages, benefits, and contract terms, as well as prospective employees and hiring strategies. Understanding the rules of the road is essential, as even offhand or casual conversations between competing employers may serve as evidence of an unlawful “no-poach” agreement.
Further, the heightened enforcement activity in the labor space highlights the importance of engaging experienced antitrust counsel to navigate the tight labor market and rising wages. Both before and after an investigation has begun, it is essential for businesses to ensure that their compliance systems are up to snuff and that procedures are regularly reviewed by outside counsel. Any discussions with competitors about issues regarding wages, recruitment, and hiring policies should be vetted by experienced counsel, and potentially problematic practices should be addressed directly and immediately. Otherwise, a company may find itself subject to conduct oversight and up to $10 million in penalties, while individuals may be subjected to up to ten years of jail time and up to $1 million in penalties.
Looking forward, there are significant open questions that will determine whether “no-poach” will truly become the next frontier of antitrust enforcement, or just a passing pitfall. Only time will tell if the DaVita court’s ruling will be the first domino to fall in the DOJs crusade against labor exploitation or merely a minor blip in a larger victory for antitrust defendants. Either way, in the near term, the unsettled landscape presents tricky compliance considerations that companies should move swiftly to address.
1 United States v. Adobe Systems, Inc., et al., No. 1:10-cv-01629 (D.D.C. 2010); United States v. Lucasfilms Ltd., No. 1:10-cv-02220 (D.D.C. 2010).
2 See In re High-Tech Employee Antitrust Litig., No. 11-cv-2509 (N.D. Cal. 2015).
3 See, e.g., Texaco, Inc. v. Dagher, 547 U.S. 1, 5 (2006) (“Price-fixing agreements between two or more competitors . . . fall into the category of arrangements that are per se unlawful.”); United States v. Topco Assocs., Inc., 405 U.S. 596 (1972).
4 Indictment, United States v. SCA, No. 3:21-cr-011-L (N.D. Tex. Jan. 5, 2021).
5 Indictment, United States v. Hee, No. 2:21-cr-00098-RFB-BNW (D. Nev. Mar. 26, 2021)
6 Indictment, United States v. DaVita, No. 21-cr-00229-RBJ (D. Colo. July 14, 2021).
7 Indictment, United States v. Patel, No. 3:21-cr-00220-VAB (D. Conn. Dec. 15, 2021).
8 Indictment, United States v. Manahe, No. 2:22-cr-00013-JAW (D. Me. Jan. 27, 2022).
9 See Order Denying Defendants’ Motion to Dismiss, United States v. DaVita, No. 21-cr-00229-RBJ (D. Colo. Jan. 28, 2022).
10 Id. at 9.
11 15 U.S.C. § 1.
12 See Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).
13 Nat’l Soc’y of Prof’l Engrs v. United States, 435 U.S. 679, 691 (1978).
14 Broad. Music, Inc. v. Columbia Broad. Sys., 441 U.S. 1, 19–20 (1979).
15 Arizona v. Maricopa Cnty. Med. Soc’y, 457 U.S. 332, 344 (1982).
16 See Defendants’ Motion to Dismiss at 9–15, United States v. SCA, No. 3:21-cr-011-L (N.D. Tex. Mar. 26, 2021) [“SCA MTD”]; Defendant’s Motion to Dismiss at 6–12, United States v. DaVita, No. 21-cr-00229-RBJ (D. Colo. Sept. 14, 2021) [“DaVita MTD”].
17 SCA MTD at 13; DaVita MTD at 7.
18 SCA MTD at 11.
19 See United States’ Opposition to Defendants’ Motion to Dismiss at 5, United States v. SCA, No. 3:21-cr-011-L (N.D. Tex. Apr. 30, 2021); United States’ Opposition to Defendants’ Joint Motion to Dismiss at 7, United States v. DaVita, No. 21-cr-00229-RBJ (D. Colo. Oct. 19, 2021).
20 141 S. Ct. 2141 (2021).
21 U.S. Const. Amends. V, XIV.
22 Skilling v. United States, 561 U.S. 358, 402–03 (2010).
23 Nash v. United States, 229 U.S. 373 (1913).
24 SCA MTD at 17.
25 Opposition to SCA MTD at 23.
26 Id. at 28.
27 Supra note 9, at 17–19.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.