Recently, “no-poach” agreements—which commonly restrict the right of a person or company to recruit or hire another party’s employees—have become the subject of increased scrutiny from federal and state enforcement agencies. Whether set forth in stand-alone agreements, corporate acquisition agreements, or employment agreements, these types of restrictive covenants have become the subject of a recent flurry of government enforcement actions and private class actions, providing a warning to businesses about the potential civil and criminal liability they face for entering into agreements that have the effect of limiting employee mobility or suppressing wages.

The Department of Justice’s Position

Agreements between companies which compete for employees have always been subject to antitrust scrutiny. In October 2016, the Department of Justice published “Antitrust Guidance for Human Resource Professionals,” which took aim at agreements between companies “to refuse to solicit or hire [another] company’s employees.” The guidance explained that the DOJ views “naked” no-poach agreements (i.e., those that are not reasonably necessary to any separate, legitimate business collaboration between the employers such as a joint venture or acquisition proposal) as per se illegal; as such, the DOJ deems such agreements as violative of Section 1 of the Sherman Act without any inquiry into their competitive effects.

The guidance also warned that not only would companies be subject to civil antitrust liability for naked no-poach agreements, but they will also be the target of criminal felony charges. Recently, two of the world’s largest rail equipment suppliers—Knorr-Bremse AG and Westinghouse Air Brake Technologies Corp.—entered into a settlement with the DOJ to resolve a lawsuit alleging that they unlawfully maintained agreements not to compete for each other’s employees. The DOJ’s press release noted that the alleged conduct was discovered and terminated before the October 2016 Guidance, thus the DOJ addressed the conduct through civil action—a message reinforcing the DOJ’s stated intention to pursue criminal charges for violations that occur after October 2016.

Possible Private Civil Litigation

Governmental prosecution is not the only litigation risk posed by the use of no-poach agreements. Private lawsuits are often filed in direct response to governmental enforcement actions, sometimes specifically relying on allegations made and settlements reached in the DOJ’s antitrust case.

For example, the DOJ filed complaints in the U.S. District Court for the District of Columbia in September and December 2010, alleging that Adobe, Apple, Intel, Intuit and others violated Section 1 of the Sherman Act by entering into no-poach agreements. On the same day each suit was filed, the parties filed motions in support of settling the lawsuits. In May 2011, however, a proposed class action was filed in the U.S. District Court for the Northern District of California on behalf of more than 64,000 employees of these employers, alleging that the no-poach agreements had the effect of repressing the plaintiff-employees’ wages. In September 2015, Judge Lucy Koh signed an order approving a class-wide settlement that required the employers to pay the class a collective $435 million.

Not All No-Poach Agreements are Illegal

Despite the significant increase in litigation in this area, there are certain types of non-solicitation or no-hire agreements that remain permissible. Nonsolicitation agreements, for example, are commonly used in connection with the sale of a business to protect the value of the selling business. These agreements are still permissible so long as they are ancillary to a legitimate business transaction and contain reasonable limitations as to scope and duration. Additionally, where companies have begun exchanging information in the due diligence process, no-poach agreements are permissible if employed in connection with a legitimate proposal for a merger, acquisition, joint venture or other collaborative activity.

Avoiding the Potential Risks

The increased public and private scrutiny applied to no-poach agreements has motivated many employers to search for other potential methods to protect their workforce from competitor solicitation without the use of potentially risky no-poach agreements.

In Texas, employers can use noncompete and/or nonsolicitation agreements for employees who have access to the company’s confidential business information or who work in a sales capacity. For other employees, employers should consider paying a signing bonus to new hires and making repayment of the bonus conditioned upon a certain period of employment. For both options, however, employers should ensure that the restrictions are reasonable in duration and scope in order for the agreements to be enforceable.

Additionally, when exchanging information about employees in connection with a proposed corporate transaction, companies should anonymize the information to the greatest extent possible, either by aggregating the information or by presenting it by job title and not by employee name; the employer should also restrict access to such employee information from anyone in the other party’s HR department or recruiters and might consider using a neutral third party to manage the information exchange.

Conclusion

Employers considering the use of no-poach agreements should determine whether there are pro-competitive justifications that outweigh their potential anti-competitive effects. Even where justifications do exist, employers should keep in mind the DOJ’s position that “naked” no-poach agreements are illegal per se, meaning they will be deemed to violate the Sherman Act without any inquiry into the agreement’s potential or actual anticompetitive effect. Employers must also consider whether the potential benefits of restricting employee poaching are worth the risk of potential civil claims and criminal charges by government agencies, as well as the possibility of facing private class action lawsuits, or whether alternative methods may offer the necessary protections without the risks associated with no-poach agreements.

Stephen Fox is the co-managing partner of the Dallas office of Sheppard Mullin Richter & Hampton, and is board certified in Labor & Employment law by the Texas Board of Legal Specialization. Theanna Sedlock is an associate of the firm’s Labor & Employment practice group in the Dallas office.