No Poach Agreements Explained
A "no poach" agreement is an agreement between an employer and another company (usually a competitor or ex-competitor) in which both parties agree not to "poach" each other’s employees if an opportunity arises. In an employer context, this agreement is made before any employees leave their employment and is generally based on speculation that an employee may be eligible to be brought into the workforce of a competing company – usually, and in its simplest form, a smaller company has an employee that the larger company wants to recruit. In a no poaching arrangement, the two companies basically agree not to recruit the other’s employees, and consequently everyone stays put. In other contexts , such arrangements may include promises not to hire away third-party contractors and/or suppliers. These agreements can also include other strings, such as a promise not to disclose confidential information and/or use it for an improper purpose.
No poaching agreements vary in form but are usually incorporated into a larger nondisclosure agreement ("NDA"). They can also be standalone agreements. Nevertheless, they are all similar to the extent that the parties promise not to poach away each other’s employees, but there is absolutely nothing to indicate that these types of agreements are per se illegal. They aren’t. While they are generally disfavored by antitrust regulators, there are federal and antitrust law defenses for no poaching agreements.
The Legal Landscape of No Poach Agreements
The legal framework surrounding no poach agreements is governed by both federal and state laws. At the federal level, there are a number of relevant statutes that govern no poach agreements with respect to their legality, enforcement, violations, and damages. The principal federal statute that governs private employer no poach agreements between alleged competitors is Section 1 of the Sherman Act, also known as the Sherman Antitrust Act, codified at 15 U.S.C. § 1. The Sherman Act states: "Every contract, combination…in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." 15 U.S.C. § 1. No poach agreements are considered per se violations of antitrust law under the Sherman Act, as they involve non-compete agreements that restrict employee mobility. Significantly, in Asvesta v. Peters, 505 F.3d 1, 7-8 (1st Cir. 2007), the First Circuit Court of Appeals noted that "explicit contractual agreements to refrain from competing are universally deemed per se unlawful," and that "no-poach employment agreements between rivals, that eliminate competition over key employees, are per se illegal" and can result in criminal penalties.
Another federal law that is relevant to severance agreements is the Older Workers Benefit Protection Act ("OWBPA"). The OWBPA requires waivers of age discrimination claims to be "knowing and voluntary in order to be effective," and "(1) provide the individual with a period of at least 21 days during which to consider the agreement…and (2) expressly refer to [the AWPA]". 29 C.F.R. § 1625.23(f). Violation of the OWBPA can result in civil damages.
A third relevant federal law is the National Labor Relations Act ("NLRA"), codified at 29 U.S.C. §§ 151, et seq. The Supreme Court has held that the NLRA grants former employees a right to organize in order to improve their collective bargaining position. National Labor Relations Board ("NLRB") v. Washington Aluminum Co., 370 U.S. 9, 16 (1962). Further, even before a collective bargaining relationship is established, an individual employee cannot be denied the right to organize. Id. Section 152 of the NLRA protects employees who "engage in other concerted activities for the purposes of…mutual aid or protection." 29 U.S.C. § 152. Likewise, it "protects employees from retaliation by their employer for exercising these rights." Pierre v. Advanced Health Sys. Inc., 8 F.4th 164, 173 (3rd Cir. 2021). Courts have held that "no-poach agreements restrict employees’ ability to solicit employment," which is a violation of the NLRA. Id. at 175.
Repercussions For Employees and Employers
For employees, no poach agreements can present a barrier to career advancement and mobility. In stagnant economies, the group of potential employers is finite, and the kind of restrictive measures seen in no poach agreements can perpetuate the protectionism originally stemming from the co-employment and sharing of confidential information concerns. This results in fewer viable options for workers in the same industry. In dynamic job markets, however, no poach agreements may constitute a non-issue. Employees, always in search for opportunities for career advancement that promise better pay and prestige, can and will move on from jobs in order to optimize their skills and career potential.
Employers can also be impacted by no poach agreements. These arrangements create unregulated barriers to entry and exit from certain employment situations, posing issues for newer and smaller companies. These restrictions limit the ability of firms to compete for skilled labor, which in turn limits the amount of innovation that such firms can bring to the marketplace. No poach agreements therefore create problems not only for employees in search of career growth, but also for employers who may be forced to accept sub-optimal talent relationships and reject better opportunities due to the threat of litigation.
Recent Cases and Settlements in No Poach Agreements
Several notable legal cases and settlements have addressed the issue of no poach agreements in the last few years. For instance, in United States v. Bustos, No. 17-CR-464, the government accused two sub-shop franchise owners in Wisconsin with entering into an unlawful agreement that restrained trade with respect to their employees by agreeing not to hire each other’s employees. In that case, the court authorized the prosecutors to proceed with its case against one of the defendants while dismissing the charges against the second defendant. The court then successfully convicted the remaining defendant at trial in March 2018, becoming the first federal conviction achieved in recent history for an anti-poaching violation under the Sherman Act. In September 2018, the defendant in Bustos was sentenced to six months in prison.
In another suit brought in March 2018, the U.S. Department of Justice sued four companies for entering into a no poach agreement. The subject of the government suit was a 2016 agreement among the four companies that they would not directly recruit or solicit senior-level talent from each other. The defendants reached a settlement on April 9, 2019, agreeing to refrain from making future no poaching agreements for five years and implement antitrust compliance plans that included training and record keeping requirements.
There are also a number of no poaching agreements cases pending in the hospitality sector, namely in the fast food and general fast casual restaurant industry. The plaintiffs in Wong et al. v. the Party Market Inc., et als., No. 18-cv-01865-CW, filed a proposed class action lawsuit in 2018 alleging that McDonald’s, Burger King, Wendy’s, and several other national restaurant chains and franchises entered into an agreement not to recruit each other’s hourly workers. The plaintiffs allege that by entering into this agreement, the companies have eliminated competition among themselves to hire the most qualified available workers and have therefore suppressed employee wages. The plaintiffs contend that under the no poaching agreements, restaurant employees would be effectively bound to their current jobs for a longer period of time and companies harmed those employees by charging higher prices for the service or product. Plaintiffs sued the defendants, seeking damages for civil conspiracy, violation of California and federal antitrust laws, interference with economic relationships, and unlawful sharing of confidential employment information. The case is set to go to trial in February of 2020.
A second case in the hospitality sector, which is also pending, is filed in the U.S. District Court for the District of Colorado, alleging similar behavior by fast food players. In Yang et. al v. McDonald’s Corp., No. 18-01116, the tenants who operate McDonald’s restaurants in Denver and Boulder claim that they lost job applicants in response to McDonald’s no poaching agreement with other franchise owners. The plaintiffs also claimed that they were harmed by disclosure of their business confidential information to other franchisees in violation of their franchise agreement. And, the plaintiffs assert claims for tortious interference with business relationships based on loss of potential hires, loss of profits, and harm to goodwill. The defendant McDonald’s has filed a motion to dismiss the case.
Disputes and Controversies Surrounding No Poach Agreements
The controversies and criticisms surrounding no poach agreements range from their impact on job mobility, wage stagnation, and reduced bargaining power to issues of collusion and hit to market dynamics. Remarkably, a number of these arguments have come from the United States legal field. Legal experts have pointed to the underlying problem of wage versus lure strategies. In traditional economic theory, especially in the employment sector, luring from competition into one’s own company is a healthy practice that enables a company to scale by attracting the best people from its competition. The problem from a law perspective is one of whether this recruitment strategy is being applied in such a way that it creates a monopoly situation and operating environment for the employer concerned. The issue thus, within some legal circles, is one of legality versus morality. Is it legal to lure people from other companies? Yes; is it likely to wisdom in a competitive marketplace? Not unless one believes in monopolies, which few do. The train of thought behind this is that companies that take an aggressive hiring strategy to attract talent from competitors are actually forced to raise wages, if only slightly, thereby creating a minor upward pressure on wages throughout the market. If, however, all or most companies were to agree to impose a no poach arrangement on themselves, an undesirable static state would be created whereby wages become firmly fixed in place at the sum of the lowest common denominator of all companies involved. Thus, in limiting competition for employee talent, a no poach agreement will in fact, hamper competition in the labour market and create a far more static and unproductive environment where wages may not necessarily fall, but remain static – killing future innovation , causing brain drain when knowledge workers simply choose to leave the industry, or forcing innovation through expansion into other countries or market verticals. No poach arguments have also been presented by trade unions and labor rights organizations. These groups cite the cutting of career opportunities, damage to industries and markets, and lack of choice in the marketplace, as key reasons for opposing this restriction on the behavior of companies. The argument here is that no poach regimes essentially lock a company into a particular skillset-oriented state, and keep employees ‘safe’ from competitors who might otherwise employ them. This effectively poses a liability against the most talented employees, and creates risk to the continued development of the industry as a whole. By ‘business-proofing’ a company, a no poach clause also poses the threat of limiting the expansion possibilities of that company. Companies will not have as many options to pursue when one opportunity closes or becomes more costly to pursue (in situations where pooling occurs). As a result, companies might tend to look at other verticals to grow their business outside of their primary industry. While there is nothing inherently wrong with this thinking, it runs the risk of destabilizing the existing industry, and creating a cascading failure within an industrial sector. The impact of no poach clauses has also been to reduce choice. By not allowing candidates to consider each company as a potential employer, there are fewer differences in terms of value proposition to attract talent. This has resulted in educational institutions providing less emphasis on training people for that industry, since employers are no longer competing to attract new talent into the sector.
Alternatives to No Poach Agreements
In lieu of such no poach agreements, companies may be able to consider different strategies to enable or ensure open recruitment. For example, companies may seek to recruit through advertisements on open markets, rather than through tailored solicitation or recruitment efforts to competitors’ employees. They may also (consistent with antitrust law) offer incentives or engage in retention efforts for existing employees who might be courted by competitors. Additionally, companies can actively encourage those who have been poached from them to exercise their legal rights under federal antitrust law and the Computer Fraud and Abuse Act; both statutes create causes of action for improper solicitation of employees and for the unauthorized accessing of an employer’s computer systems.
Future Prospects and Trends
As no poach agreements come under more intense scrutiny from regulators, we anticipate that certain trends will impact the use of such agreements in both the non-compete and labor practice areas.
Legislation Amendments to the Antitrust Criminal Penalty Enhancement and Reform Act signed into law on December 12, 2018 may signal a trend to increased enforcement around no poach agreements. The law expands criminal liability under the Sherman Act and replaces the existing four-year statute of limitations that applies to criminal antitrust offenses with a five-year statute of limitations. It also makes foreign and naturalized citizens liable for committing crimes under the Sherman Act. For employers, these changes mean potentially increased exposure to criminal liability for naked no poach agreements, which are much riskier to enter than "ancillary restraints."
Reliance on Informants As we’ve already seen at the federal level, the DOJ is increasingly relying on informants to root out no poach agreements. The DOJ is incentivizing potential informants (i.e. , those who enter no poach agreements) to report the offending company by allowing leniency to one criminal participant. The DOJ has already offered leniency to companies, so there may be several home-grown "whistle blowers" about.
Civil Enforcement Courts views about the legality of no poach agreements have varied, and the outlook for these types of agreements remains uncertain. For example, Evidence: Architecture, Design, Art and More (2016), 114 Cal.Rptr.3d 109, 387 P.3d 784 (Cal. 2017). Courts will consider the procompetitive benefits of no poach agreements along with their anticompetitive effects in all contexts. But civil antitrust enforcement by the States through their attorneys general and private litigants could provide a significant avenue for enforcement of "no-poach" agreements.
Healthy Competition Because of the rising concerns about worker welfare and lack of competition in labor markets, we predict that obtainment of talent will become a more important consideration in corporate mergers and acquisitions (e.g., non-compete issues that can affect salary damages, or a target’s existing no-poach/limited no hire agreements that can affect ability to attract top talent going forward).