No-Poach Agreement as Per Se Violations of the Antitrust Law

By: Laurie E. Leader EDITOR-IN-CHIEF, BENDER'S LABOR AND EMPLOYMENT BULLETIN

The United States Department of Justice (DOJ) is aggressively prosecuting employers who enter into no-poach agreements¹ under the antitrust laws. Until 2021, DOJ enforcement was civil in nature. 

A SEA CHANGE OCCURRED ON JANUARY 7, 2021, WHEN the DOJ announced that it indicted Surgical Care Affiliates, LLC and SCAI Holdings, LLC (together, SCA) on charges
of orchestrating an antitrust conspiracy with two other healthcare providers, also operating outpatient medical centers—United Surgical Partners International, Inc. (USPI) and DaVita, Inc.² Notably, these indictments closely followed on the heels of the DOJ’s first criminal wage-fixing indictment based on alleged agreements among competing therapist staffing companies to set lower wages for physical therapists and their assistants.³

In In re Medical Center Employees Antitrust Litigation,⁴ former SCA senior employees filed a civil class action in the U.S. District Court for the Northern District of Illinois following announcement of the DOJ indictments issued against SCA, USPI, and DaVita.⁵ The complaint sets forth a single antitrust conspiracy claim under Section 1 of the Sherman Act,⁶ alleging that SCA, USPI, DaVita, and unnamed Doe defendants “entered into an overarching conspiracy to restrict competition for Plaintiffs’ and other senior employees’ services by agreeing to refrain from proactively soliciting or hiring each other’s current employees.”⁷ Notably, in denying a motion to dismiss for failure to state a claim and for lack of standing, the district court held that no-poach agreements are illegal per se under the Sherman Act.⁸ The DOJ has assumed a similar stance in criminally prosecuting employers engaged in wage-fixing or no-poach schemes.⁹ The Medical Center case is instructive on the elements for pleading per se antitrust violations in connection with no-poach agreements.

Earlier DOJ Prosecutions and Guidance on the Illegality of No-Poach Agreements

No-poach agreements originated in the Silicon Valley. They came to the forefront in 2011 when a lawsuit was filed alleging that Apple, Google, Intel, and Adobe Systems, Inc. agreed not to poach each other’s employees, thereby restricting employee mobility and freezing employee salaries.¹⁰ The no-poach agreement was based on a series of emails between Apple co-founder Steve Jobs and the CEO of Google, Eric Schmidt, that outlined a plan designed to avoid the poaching of high-level engineers at each of the companies.¹¹ The case ultimately settled for the hefty price tag of $415 million.

Since that time, no-poach agreements have been on the rise, notwithstanding prosecutions of offending employers by the DOJ’s Antitrust Division. Currently, the DOJ has made no-poach agreement prosecutions a priority, prosecuting such cases both criminally and civilly.¹²

In October 2016, the DOJ and the Federal Trade Commission jointly published a primer on no-poach agreements and the antitrust laws for human resource professionals entitled “Antitrust Guidance for Human Resource Professionals” (Guidance).¹³ The Guidance highlighted the DOJ’s civil enforcement actions against no-poach agreements in the healthcare and technology sectors. Again, since the Guidance was published, the DOJ has expanded its prosecution of no-poach agreements into the criminal realm.

In re Outpatient Medical Center: Standing to Sue Under No-Poach Agreements and Alleging Related Violations of the Sherman Act

The Outpatient Medical Center class action decision provides a clear analysis of how no-poach agreements and antitrust law intersect. In addition to SCA, USPI, DaVita, and several unidentified Doe defendants, the alleged conspiracy also involved defendants Andrew Hayek and Kent Thiry, the former chief executive officers of SCA and DaVita, respectively. UnitedHealth Group, Inc., the current parent of SCA, and Tenet Healthcare Corp., the current parent of USPI, were also named as defendants.

The purported conspiracy was evidenced by an email that USPI’s CEO sent to certain of USPI’s employees in May 2010, informing them that he and SCA’s then-CEO Hayek had reached an agreement not to proactively approach each other’s employees. USPI and SCA further agreed to alert each other to potential violations of their agreement. Consistent with the agreement, USPI’s human resources personnel told recruiters to avoid contacting SCA employees, since USPI could not hire SCA employees unless they had first informed SCA that they were actively pursuing other opportunities.¹⁴ A similar agreement was reached between SCA and DaVita. Eventually the alleged conspiracy was expanded to the Doe defendants.¹⁵

The complaint alleged that the defendants’ agreements constituted a per se violation of the Sherman Act and that, as a result, plaintiffs were “deprived of free and fair competition in the market for their service, which, in turn, caused the artificial suppression of their compensation.¹⁶

Defendants moved to dismiss the complaint for lack of standing and for failure to state a claim under Rules 12(b) (1) and 12(b)(6) of the Federal Rules of Civil Procedure.¹⁷ The district court denied the defendants’ motions in their entirety.

On the issue of standing, defendants argued that the plaintiffs failed to plead “antitrust standing,” specifically that they suffered an antitrust injury proximately caused by defendants’ conduct.¹⁸ Stated differently, defendants claimed that plaintiffs failed to provide specific facts demonstrating that defendants’ conduct actually suppressed their compensation or caused them to miss out on job opportunities. The court rejected that argument as well as the defendants’ related claim that plaintiffs’ damages were only speculative in nature.

Specifically, the court highlighted some of the plaintiffs’ “detailed allegations” explaining how they were injured by the defendants’ conduct. Noting that defendants are among the largest employers in the outpatient medical care market, that they compete with each other nationwide for a limited supply of senior talent, and that lateral hiring is a key form of competition in the industry and is particularly beneficial for hiring senior employees, the defendants’ agreements interfered with the free flow of information between employees and prospective employers and the proactive solicitation process generally. Along the same lines, “the mere possibility of losing an employee serves to pressure an employer to increase compensation preemptively to ensure that its employees feel properly valued and loyal” but “by agreeing with each other not to solicit senior employees proactively, Defendants had less reason to fear losing those employees and thus less incentive to take preemptive measures to retain them.”¹⁹ Accordingly, where the competition for employees is distorted, compensation is suppressed for all of them. Under the circumstances, the court found that plaintiffs adequately alleged that the defendants’ conspiracy caused them an injury-in-fact, thus allowing them to seek damages. The court further found that the plaintiffs plausibly alleged a substantial threat of future harm to satisfy the pleading requirements for seeking injunctive relief.²⁰

Not only did plaintiffs adequately allege an injury-in-fact to themselves, but—in the court’s view—they also alleged an antitrust injury, “as they allege that Defendants’ anticompetitive conduct has restrained competition for qualified outpatient medical services employees and artificially suppressed their competition” and link that injury to the purported conspiracy.²¹ Under all of these circumstances, the court held that plaintiffs satisfied the proximate-cause element of their antitrust conspiracy claim.²²

The court then considered whether plaintiffs adequately pled an antitrust violation, since only unreasonable restraints of trade are outlawed by Section 1 of the Sherman Act.²³ To state a claim under Section 1 of the Sherman Act, a plaintiff must allege: “(1) a contract, combination, or conspiracy; (2) a resultant unreasonable restraint of trade in the relevant market; and (3) an accompanying injury.”²⁴ Finding that plaintiffs alleged a common motive to conspire, outlining the existence of three bilateral agreements between the defendants and several “plus factors” from which a single overarching conspiracy could be inferred, the court focused its attention on the second element of a Section 1 violation, specifically, whether the alleged restraint of trade is unreasonable.

There are three methods of analysis to determine whether a particular restraint of trade is unreasonable: quick look, per se, and rule of reason.²⁵ Although antitrust violations are generally analyzed under the rule-of-reason approach, plaintiffs argued that the defendants’ no-poach agreements constituted per se violations of the Sherman Act, because the nature and necessary effect of the defendants’ agreements are “so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.”²⁶ Noting that “[t]ypically only ‘horizontal’ restraints—restraints ‘imposed by agreement between competitors’—qualify as unreasonable per se,” the court found that the agreements at issue could qualify for per se analysis on this basis.²⁷

But whether the restraint is horizontal does not end the inquiry as to whether the restraint is entitled to per se treatment. A horizontal restraint may escape per se treatment if the restraint is “ancillary” rather than “naked.”²⁸ “A restraint is ancillary when it may contribute to the success of a cooperative venture that promises greater productivity and output.”²⁹ By contrast, a “naked” restraint is one “in which the restriction on competition is unaccompanied by new production or products.”³⁰ If an agreement arguably promoted enterprise and productivity at the time it was adopted, the court must employ the rule-of-reason approach, which requires a plaintiff to show that “an agreement or contract has an anticompetitive effect on a given market within a given geographic area.”³¹ If the only effect of the agreement is the “stifling of competition,” by contrast, it is a “naked” restraint that is per se unlawful.³²

The court found that the defendants’ no-poach agreements plausibly alleged “per se unreasonable naked horizontal market allocation agreements.”³³ Noting that other courts applied per se treatment to naked agreements by which employers refrained from hiring a competitor’s employees, the court underscored that it legally makes no difference that the defendants were dividing employees as opposed to “territories, customers, or products.”³⁴ Because plaintiffs pled a plausible per se claim, the ultimate question of proof—left for a later date—is “whether the evidence will establish that the non-solicitation [no-poach] agreements do, in fact, nakedly allocate the market for outpatient medical care employees.”³⁵

Takeaways

The DOJ’s actions and words demonstrate a continued commitment to focus on anticompetitive conduct in labor markets. No-poach agreements are classic examples of a restraint of trade subject to antitrust scrutiny and prosecution. Companies should review their current non-solicitation and non-compete agreements to excise no-poach clauses and to establish a company antitrust compliance policy to detect potential violations. Although a bona fide compliance program will not avoid antitrust prosecution, it will mitigate against criminal charges if the company is targeted. 

Laurie E. Leader, formerly a clinical professor at Chicago-Kent College of Law, is a practicing attorney, author, certified mediator and principal of Effective Employment Mediation, LLC - Chicago, Northfield & Libertyville Offices (effectiveemploymentmediation.com). She has authored numerous articles and book chapters and two treatises and is editor-in-chief of Bender’s Labor and Employment Bulletin. Laurie earned an A.B. degree from Washington University in St. Louis and her J.D. degree from Cleveland State University.

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1. A no-poach agreement is an illegal agreement between competitors in which they agree not to hire, recruit, or pursue each other’s employees or not to match offers made by competitors. The agreements may be verbal or in writing and are often made without the knowledge of the employees affected by them. 2. See In re Outpatient Med. Ctr. Emp. Antitrust Litig., 2022 U.S. Dist. LEXIS 173925, at **8-9 (N.D. Ill. Sept. 26, 2022), citing United States v. Surgical Care Affiliates, LLC, No. 3:21-cr-00011 (N.D. Tex. Jan. 5, 2021). 3. See United States v. Jindal, 2021 U.S. Dist. LEXIS 227474, at **1-6 (E.D. Tex. Nov. 29, 2021). The Jindal indictment charged the defendants with violating: Section 1 of the Sherman Act, 15 U.S.C.S. § 1 (antitrust price-fixing conspiracy); 18 U.S.C.S. § 371 (conspiracy to commit offense); and 18 U.S.C.S. § 1505 (obstruction of proceedings before the Federal Trade Commission). A Sherman Act violation was, similarly, alleged in In re Outpatient Med. Ctr. and the underlying indictments and, like in In re Outpatient Med. Ctr., the court in Jindal found the underlying agreements to be per se illegal conspiracies in restraint of trade. Specifically, the Jindal court found wage-fixing to be a form of price-fixing in violation of the antitrust laws. Jindal, 2021 U.S. Dist. LEXIS 227474, at **15-21. 4. 2022 U.S. Dist. LEXIS 173925. 5. 2022 U.S. Dist. LEXIS 173925, at *4. 6. 15 U.S.C.S. § 1. 7. 2022 U.S. Dist. LEXIS 173925, at *6. 8. 2022 U.S. Dist. LEXIS 173925, at *38-40. 9. See, e.g., United States v. DaVita, Inc., 2022 U.S. Dist. LEXIS 16188, at **24-28 (D. Colo. Jan. 28, 2022) (allowing the government to proceed under a per se theory against one of the employers involved in the SCA conspiracy); Jindal, 2021 U.S. Dist. LEXIS 227474, at **15-21 (endorsing the government’s position that the underlying wage-fixing scheme could be prosecuted under a per se theory as opposed to a rule of reason theory). The criminal case against the DaVita defendants proceeded to a jury trial in which DaVita and its CEO were found to be not guilty on all counts. See In re Outpatient Med. Ctr., 2022 U.S. Dist. LEXIS 173925, at *9 n.4. 10. See generally https://www.reuters.com/article/apple-google-ruling/u-s-judge-approves-415-min-settlement-in-tech-worker-lawsuit-idUSL1N11908520150903. 11. Id. 12. See https://www.justice.gov/atr/file/903511/download. 13. Id. 14. In re Outpatient Med. Ctr. Empl. Antitrust Litig., 2022 U.S. Dist. LEXIS 173925, at **6-7. 15. 2022 U.S. Dist. LEXIS 173925, at *8. 16. 2022 U.S. Dist. LEXIS 173925, at *10. 17. Fed. R. Civ. P 12. 18. 2022 U.S. Dist. LEXIS 173925, at *12. 19. 2022 U.S. Dist. LEXIS 173925, at *15. 20. 2022 U.S. Dist. LEXIS 173925, at **18-21. 21. 2022 U.S. Dist. LEXIS 173925, at **22-23. 22. 2022 U.S. Dist. LEXIS 173925, at *23. 23. 2022 U.S. Dist. LEXIS 173925, at **23-24, citing Ohio v. Am. Express Co., 138 S. Ct. 2274, 2283 (2018). 24. 2022 U.S. Dist. LEXIS 173925, at *24 quoting Agnew v. NCAA, 683 F.3d 328, 335 (7th Cir. 2012) (internal quotations omitted). 25. 2022 U.S. Dist. LEXIS 173925, at *30; see also Cal. Dental Ass’n v. FTC, 526 U.S. 756, 780 (1999). 26. 2022 U.S. Dist. LEXIS 173925, at *31, quoting Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 692 (1978). 27. 2022 U.S. Dist. LEXIS 173925, at **32-33, quoting American Express, 138 S. Ct. at 2283-84, and Bus. Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717, 730 (1988). 28. 2022 U.S. Dist. LEXIS 173925, at *33. 29. Polk Bros., Inc. v. Forest City Enters., Inc., 776 F.2d 185, 189 (7th Cir. 1985). 30. 776 F.3d at 188. 31. 2022 U.S. Dist. LEXIS 173925, at *34, quoting Cal. Dental Ass’n, 526 U.S. at 780. 32. 2022 U.S. Dist. LEXIS 173925, at *34, quoting White Motor Co. v. United States, 372 U.S. 253, 263 (1963). 33. 2022 U.S. Dist. LEXIS 173925, at *34. 34. 2022 U.S. Dist. LEXIS 173925, at **34-36. 35. 2022 U.S. Dist. LEXIS 173925, at *39, citing DaVita, 2022 U.S. Dist. LEXIS 16188, at **24-28.

This article was originally published in Bender’s Labor & Employment Bulletin, Volume 23, Issue No. 2.