Since the fall of 2016, when the Antitrust Division of the Department of Justice (DOJ) announced that from that point forward, it intended to proceed criminally against naked no-poach or no-hire agreements, the private sector has continued to navigate shaky ground.[i]

At its most basic level, a no-poach agreement involves an agreement with another company not to compete for each other’s employees, such as by not soliciting or hiring them. No-poach agreements are naked if they are not reasonably necessary to any separate, legitimate business collaboration between the employers. Naked no-poach agreements are per se unlawful because they eliminate competition in the same incurable way as agreements to fix product prices. Naked no-poach agreements present issues because employees benefit from competitive labor markets. When companies agree not to hire or recruit one another’s employees, they are agreeing not to compete for those employees’ labor. Like the sale of goods and services, competition for employees drives the labor market, and workers, much like consumers who buy/sell goods and services, are entitled to the benefits of a competitive market. Depriving employees of a competitive labor market robs them of job opportunities and the ability to leverage competing job offers to negotiate better terms of employment.

At a granular level, and practically speaking, determining whether a no-poach agreement is naked and per se unlawful has been anything but straightforward. In recent months, the DOJ filed three amicus briefs in five pending civil actions in federal courts in North Carolina, Pennsylvania, and Washington challenging no-poach agreements, and on March 1, 2019, Deputy Assistant Attorney General Michael Murray delivered remarks relating to the agency’s position on the issue.[ii] The amicus briefs and Mr. Murray’s remarks provide some clarity relating to the agency’s position on the legal standards governing no-poach agreements as follows:

First, no-poach agreements among employers that compete with each other for employees (even if their products or services do not compete) are still per se unlawful if naked and will be pursued criminally by the DOJ if the activity began or continued after October 2016.

Second, no-poaching agreements are not always unenforceable. An ancillary no-poach agreements should not violate the antitrust laws if they are reasonable in scope and duration and are reasonably necessary to further the interests of the legitimate collaboration, i.e. the rule of reason. For instance, mergers or acquisitions, contracts with consultants, and settlements of legal disputes may constitute a legitimate business transaction.

Third, up until March 2019, the emerging issue regarding no-poach agreements was the effect that the DOJ’s position on such agreements would have on franchise agreements. However, it is now clear that no-poach agreements among entities that do not compete for employees and are vertically related in their industry, such as most franchisors and franchisees, will also be analyzed under the rule of reason. Note, however, that a franchisor and its franchisees can form a horizontal relationship. For example, if a franchisor owns and operates its own stores, then any no-poach agreement between these entities may presumptively be analyzed as a per se restraint. Thus, with regard to franchise agreements, the DOJ advocates for a “ heavy burden” on a franchisor to show that a no-poach provision satisfies the ancillary restraint doctrine.

Fourth, state and federal antitrust laws may differ. In other words, a court applying state law could find that no-poach provisions in franchise agreements are per se unlawful despite their validity and enforceability under the Sherman Act.

Although the three amicus briefs and Mr. Murray’s remarks have provided some clarity, there is no doubt that there is still much to be explained regarding no-poach agreements and how the federal, state, and private enforcers should approach such agreements. Even so, it is clear that entering into or continuing to engage in a naked no-poach presents significant risk of criminal penalties and civil treble damages under federal law. Taking steps to understand naked no-poach agreements, ancillary agreements and the rule of reason will certainly aid in avoiding such penalties. In all cases, entities considering entering into no-poach agreements must weigh the risks and must be prepared to justify the necessity of these restraints on competition.