Reed Smith Client Alerts

Since 2010, with its cases filed against a number of leading technology companies, the Department of Justice (DOJ) has shined a spotlight on the potential antitrust risks associated with employers’ use of “no-poach” agreements in which companies agree not to hire or solicit each other’s employees. Indeed, the DOJ and the Federal Trade Commission (FTC) issued joint guidelines in 2016 making clear that they would aggressively enforce the antitrust laws against such agreements between and among competitors as per se unlawful, including through criminal enforcement.  Yet, the DOJ recently filed Statements of Interest in several pending antitrust cases brought against franchisors, taking the position that the no-poach agreements at issue in those cases were not per se unlawful and should be analyzed under the more forgiving rule of reason test. As we discuss below, companies should not read the DOJ’s filings as reflecting a change in its enforcement policy when it comes to no-poach agreements. But the cases in which the DOJ staked out its position bear watching and could ultimately provide helpful guidance to franchisors, manufacturers who distribute through independent dealers, and other companies that may wish to use no-poach provisions in their vertical contracts.

Authors: Edward B. Schwartz Michelle A. Mantine Jennifer M. Thompson

Background

The DOJ’s recent enforcement campaign against no-poach agreements began when it brought a series of cases against a number of high-profile, technology companies, because of agreements between the companies not to cold call each other’s employees, and in some cases, agreements not to hire each other’s employees. These cases ultimately resulted in consent judgments. Then, in October 2016, the DOJ and the FTC issued their first “Antitrust Guidance for Human Resource Professionals” in which they, among other things, warned employers that “naked” no-poach agreements (that is, agreements that are not reasonably necessary for a separate legitimate business transaction or collaboration) were considered per se illegal under federal antitrust laws and that, going forward, the DOJ might seek criminal penalties against companies that enter into such agreements.1

Since then, the DOJ brought a civil antitrust lawsuit challenging a no-poach agreement as per se unlawful, which resulted in entry of a consent judgment; however, to date, the DOJ has not filed criminal charges challenging any no-poach agreement, in that action or otherwise.

Several states have followed the DOJ’s lead and launched their own investigations and, in some cases, challenges to the lawfulness of no-poach agreements, particularly in the franchisor-franchisee context. The Washington State Attorney General has been particularly active in this arena, and in October 2018, it filed a lawsuit against restaurant chain Jersey Mike’s, which had refused to remove a no-poach clause from its franchise agreements. The court recently denied a motion to dismiss filed by Jersey Mike’s, allowing the case to proceed.

In addition, private plaintiffs have commenced a flurry of civil class action antitrust litigation against franchisors related to the use of no-poach provisions, and to date, these actions have survived dismissal at the early stages of the proceedings. See, e.g., Arrington v. Burger King Worldwide, Inc., et al., No. 1:18-cv-24128 (S.D. Fla.); Butler v. Jimmy John’s Franchise, LLC, 331 F. Supp. 3d 786 (S.D. Ill. 2018). In those cases, the courts have focused on identifying the appropriate standard (per se, rule of reason, or quick look) to be applied in determining whether the allegations were sufficient to survive a motion to dismiss.