Blog February 10, 2023
President Biden Signs "Protecting American Intellectual Property Act of 2022" Into Law
IP Law Essentials
A client is negotiating a software license agreement to license in some information technology (IT) services from a service provider. The IT services were going to be a quantum improvement for our client, and they were investing significant resources to obtain the services. For the service provider (Licensor, in this case) also, the IT services were a significant upgrade compared to services that they had previously offered so much so that the service provider had specifically hired and trained personnel to provide these services for our client. Recognizing the value of the personnel, the service provider asked to include a clause in the agreement whereby our client would agree to not hire away those personnel for the term of the agreement or for a short duration thereafter. Because our client has no intention of recruiting those personnel, they don't see any issue with the agreement having that clause. Nevertheless, out of an abundance of caution, they asked us if we see any issue with this clause. We're glad they asked, because there is an issue; a rather big one an antitrust issue.
What Is a "No-Poaching" Clause?
A "no-poaching" clause is a promise by a party or both parties to an agreement, either in writing or oral, not to compete for the other party's or either parties' employees, either during the term of the agreement or for a duration after the employees' termination. They may appear in agreements as "no-recruiting," "no-solicitation," "no-hire," or a similarly-named clause that affects an employee's ability to move from one company to another. In addition to agreements such as the one mentioned above (a software license agreement), the clause can also appear in settlements that resolve business disputes, during mergers and acquisitions, within franchise agreements, in service agreements, or even in customer purchase agreements.
No-poaching clauses are treated like price-fixing agreements because they are agreements among buyers (here, employers and potential employers) to buy services from sellers (employees) only on certain terms and/or to refuse to bid competitively for them. Like all price-fixing agreements, these arrangements are per se illegal. (A buyer's cartel is called a "monopsony" rather than a "monopoly"). Just as antitrust laws protect the competitive market for an employers' products or services, so too they protect the market for their employees to sell their services. Clients must remember, however, that in this context its competing buyers for services are not just its competitors in the markets for its goods and services, but also customers, suppliers, and others that would want to buy its employees' services.
U.S. Department of Justice (DOJ) and the U.S. Federal Trade (FTC) guidance ("Guidance") can be found on the DOJ's website. In its guidance, the DOJ states that "[a]n individual likely is breaking the antitrust laws if he or she ... agrees with individual(s) at another company to refuse to solicit or hire that other company's employees (so-called 'no poaching' agreements)."Id. at 3.The consequences of entering into a no-poaching agreement are substantial.On the same page, the DOJ declares that "no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws."Id.As with other per se violations, no-poaching agreements are targeted for enforcement action, including criminal prosecutions of the entities and individual decision-makers involved. The Guidance made clear that, while it will consider criminal prosecution, so far it has only brought civil enforcement actions for no-poaching agreements.
These warnings from the DOJ are not idle threats. DOJ has brought civil antitrust enforcement actions against several technology giants. Id. at3-4.The DOJ has also gotten involved in private "no-poaching" antitrust litigation. In Seaman v. Duke University, Duke ended up paying $54.5 million to settle a class action alleging a no-poaching agreement between Duke and the University of North Carolina. DOJ filed a statement of interest in the litigation and the settlement included provisions for the DOJ to monitor compliance and enforce its terms. A significant problem for DOJ targets is the likelihood of "follow on" class action lawsuits. For example, the DOJ's April 2018 complaint against Knorr-Bremse AG (a German manufacturer of train-related equipment) resulted in $48.95 million in settlements by February 2020. In Re: Railway Industry Employee No-Poach Antitrust Litigation, MDL No. 2850 (W.D. Pa.).
The governmental hostility toward no-poaching agreements also extends to state enforcers. In early 2018, Washington state's Attorney General announced an agreement with seven fast-food chains (including Arby's, Carl's Jr., McDonald's, and Jimmy John's) requiring them to drop or no longer enforce no-poaching clauses in existing franchise agreements and refrain from adding such clauses to future contracts. In July 2018, the Attorneys General of California, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York (whose law governs the draft SLA), Oregon, Pennsylvania, Rhode Island, and the District of Columbia announced an investigation into the no-poaching practices of other restaurant chains.
Beyond governmental actions and investigations, this type of no-poaching agreement could expose a company to private civil class action lawsuits.In 2017 and 2018, class action attorneys filed a host of private lawsuits challenging no-poaching agreements. See, e.g., Deslandes v. McDonald's USA, LLC (N.D. Ill. 2017); Ion v. Pizza Hut, LLC (E.D. Tex. 2017); Butler v. Jimmy John's Franchise, LLC, et al. (S.D. Ill. 2018); Yi v. SK Bakeries, LLC, et al. (W.D. Wash. 2018); Ogden v. Little Caesars Enterprises, Inc., et al. (E.D. Mich. 2018); Michel v. Restaurant Brands Int'l Inc., et al. (S.D. Fla. 2018); Avery v. Albany Shaker Donuts LLC, et al. (S.D.N.Y. 2018); Newbauer v. Jackson Hewitt Tax Services, Inc. (E.D. Vir.); In re: H&R Block Employee Antitrust Litigation (MDL - N.D. Ill.).
Antitrust Comes To Human Resources Departments
Problems arise in the employment context in many of the same ways they arise with other illegal agreements regarding buying or selling products or services among competitors. Just as buyers may not agree to pay no more than a set price for raw materials, employers cross the line when they agree to put pay caps or ranges on employees. Price-fixing is often alleged where competitively-sensitive information on pricing is exchanged; it is also alleged when competitors swap details of employee compensation and that exchange is followed by parallel or coordinated conduct. The bottom line is that human resources departments have to be trained in antitrust compliance just as sales and purchasing groups have been in the past.
How To Legally Retain Employees and Protect Trade Secrets
Certainly, an employer can protect itself from not only losing a valuable resource (i.e., an employee), but also from the risk of that resource taking the employer's valuable trade secrets and inside information to a competitor. But a no-poaching clause with the potential future employer/poacher is definitely not the way to go!
Instead, the employer can include a non-compete clause in the employee agreement. While non-compete clauses can also come with antitrust baggage and are subject to statutes and case law that protect employees' freedom of movement, they provide the "first line" of defense from loss of trade secrets to direct competitors. State laws vary as to the "consideration" for non-competes, but typically an initial acceptance and continued employment is sufficient. An employer can consider more stringent non-competes for higher-level employees or those who work directly with important trade secrets, but further consideration is required. Generally, a pay raise with a promotion would provide the needed support for a more demanding non-compete.
As a practical matter, a careful non-disclosure agreement will also prevent competitors from poaching employees into jobs that would make it extremely difficult for the new hire to perform without using the former employer's confidential information. Non-disclosure agreements should be drafted not just to protect core or even non-core trade secrets, but any information a company treats as confidential, regardless of whether its competitors have access to the same information in the marketplace. And by including specific references to the types of trade secrets and confidential information an employee is required to protect from disclosure both during and after employment, a company makes clear to future employers that they cannot deploy former employees in the specific areas that concern the prior company. Non-disclosure agreements are not typically subject to the types of reasonableness restrictions that antitrust, other statutes, and case law put on non-competes.
A more costly and creative option is to require a paid "garden leave" at the end of employment but before new employment can begin. Most likely, courts would treat unpaid garden leave with tremendous skepticism, since judges appreciate that people need to work and get paid to support themselves and their families. But a paid vacation is unlikely to be met with the same level of skepticism. Clients may balk at the cost of a paid vacation, but consider that, while six months of garden leave might cost $100,000 for an engineer, legal fees for a trade secret misappropriation case or an injunction to enforce a non-compete would be equally or more expensive and could cause significant and costly disruption to the company.
Yet another creative idea is to have employment contracts require employees give their employers the right to counter-offer before they leave (and promise no retribution for an employee activating the clause). Companies should not require disclosure of the pending offer the employee has received, but should be able to negotiate even without knowing the specifics (as is done in many other situations). This is a competitive measure whereby a company is bidding up the price for its employee's services. As such, it would not risk an antitrust threat, so long as it is fairly and honestly implemented and not just "window-dressing."
Summary - In general, DOJ investigations are burdensome on companies, threaten individual decision-makers, and are very disruptive to the business, so the prospect of an investigation should be enough to cause any company to pause and take note of this risk. With this backdrop, turning back to our hypothetical, the safest approach for our client with respect to avoiding any antitrust scrutiny by the DOJ, FTC, State AG, or private plaintiff's attorney is not to permit a "no-poaching" agreement with a potential competitor for its employee's services, but rather to implement some of the alternative strategies mentioned above.
Let us know how we can assist you and your clients in this important area. Visit us at www.fr.com/ip-licensing/.
Authors: DJ Healey, Christian Chu, Sushil Iyer, Kevin Gray
The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.
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