20 Sep, 2018

“Can (’t) poach this” – a new turning point between competition & employment law?

If you open the eighth edition of the Oxford Dictionary of Law and turn to page 461, poaching is defined as “taking game without permission from private land or from land on which the killing of game is restricted. Wild animals cannot usually be stolen […]”.  Although the current degree of development of human rights and basic human decency forbid referring to employees as “wild animals” (at least publicly), and killing is certainly considered a criminal offence, in the corporate world of today to poach someone means to hire an employee from another, often competing, undertaking.

Agreements among companies not to hire each other’s employees, often referred to as “no-poaching agreements” (also “no-hire agreements” and “no-poach agreements”) have become increasingly dangerous since the United States Department of Justice (“DOJ”) started placing greater interest in the topic.  While these agreements may be written or oral, public or secret, they are increasingly a common practice among competitors.[1]  However, they may amount to nothing more than gentlemen’s agreements, hidden under the vail of secrecy afforded by the lack of consumption of ink.[2]

The interest of the DOJ in no-poaching agreements started during the Obama administration, when the DOJ together with the Federal Trade Commission published the “Antitrust Guidance for Human Resource Professionals” with the aim of reminding companies and their HR departments that these agreements are in breach of antitrust law.  Furthermore, the DOJ made several announcements in 2016 that it intends to bring criminal charges against undertakings and individuals who entered into these types of agreements.  In an exercise of prosecutorial discretion, the Department will pursue as civil violations no-poach agreements that were formed and terminated before those announcements were made.

Indeed, the rationale for concluding no-poaching agreement from companies’ perspective is clear.  For instance, to enter highly skilled industries, such as the IT, legal or medical industry, workers need to have advance qualifications, such as specialized degrees or may need to sit specific exams that require a rather long time of preparation.  The prescribed industry qualifications create barriers to entry, which result in a low supply of skilled workers.[3]  Companies therefore have a strong interest in holding on to the talent they recruit.  Furthermore, highly specialized employees often acquire specific know-how from their employers.  Teaching and training employees is often a costly and time-consuming process, and employers may thus seek to protect their investment.  Moreover, despite confidentiality agreements, the specific know-how acquired in a company may be used against it should the employee sign with a competitor.

However, such agreements may fall foul of antitrust laws.  Below we give a short overview of the position taken by courts and practitioners from different parts of the world on non-poaching and wage-fixing agreements in the context of what is an emerging trend in global antitrust enforcement.

A competitive environment for employment: competition and employment go global

Issues arising from the intersection between employment and competition law are becoming a hot topic. In the last decades, competition law has focused on the protection of consumer welfare[4], since it seems that the main goal for many competition authorities is to protect consumer welfare.  However, it seems that competition issues in relation to employment, and employee welfare, are also becoming relevant for competition authorities in the European Union (“EU”) and the United States.

European Union

According to EU law, non-solicitation clauses are permitted if directly related and necessary to the implementation of a concentration (EU parlance for M&As)[5].  For example, in the Kingfisher[6] case Kingfisher plc acquired control of the German company Wegert-Großlabor GmbH. The European Commission (“EC”) considered non-solicitation obligations contemplated in the sale and purchase agreement for two managers of Wegert as ancillary restrictions (i.e.  restrictions directly related to and necessary for the proper functioning of the objectives envisaged by agreement) and cleared them. Similarly, in the ICI/Williams[7] case, where Imperial Chemical Industries PLC acquired the largest part of the Home Improvements Division of Williams PLC, the EC determined that the agreement not to solicit certain Williams’s  employees within two years of the closing of the transaction is “directly related and necessary to the implementation of the concentration”.

However, even if the EC might appear benevolent in this respect, the courts of EU Member States are mostly hostile towards no-poaching, wage fixing and non-solicitation agreements.  In the Netherlands, for instance in 2010, the Court of Appeals ruled that a non-solicit agreement among fifteen hospitals violated Dutch competition law, as it had not only the object, but also the effect, of restricting competition among anesthesiologists.  The arrangement also contained a covenant not to poach each other’s trained anesthesiologists, according to which an anesthesiologist who stopped working for one hospital adhering to the covenant could not switch to another adhering hospital for at least 12 months. Next, the National Competition Authority (“NCA”) of Spain in 2010, in the case VS/0120/08 – TRANSITARIOS, fined eight transportation companies EUR 14 million for an infringement of Article 1 of the Competition Act of Spain and Article 101 of the Treaty on the Functioning of the European Union. The companies involved in the anti-competitive behavior coordinated their strategies also in relation to the conditions for hiring workers. In addition, Italian and British NCAs have investigated anti-competitive measures taken by modelling agencies in their respective countries.  In 2016, the Italian NCA fined eight modelling agencies with EUR 4.5 million for wage fixing agreements, while in December of the same year its British counterparts fined five modelling agencies with GBP 1.5 million for collusion of prices.

United States

A  landmark case in the field of competition and employment law, also known as the High-Tech Employee Antitrust Litigation, involved several high-profile high-tech companies.  In 2010, the DOJ filed a civil antitrust complaint, along with a proposed settlement, in the US District Court of Columbia alleging violations of antitrust law against Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar (“High-tech companies”).  According to the DOJ, the High-tech companies entered into “no cold call” agreements to prevent the mutual recruitment of their employees.  A final judgment enforcing the settlement was adopted in 2011, witnessing the High-tech companies agreeing not to “attempting to enter into, entering into, maintaining or enforcing any agreement with any other person to in any way refrain from, requesting that any person in any way refrain from, or pressuring any person in any way to refrain from soliciting, cold calling, recruiting, or otherwise competing for employees of the other person“.

In a similar manner, the DOJ filled a lawsuit against eBay in 2012, alleging that senior executives and directors of eBay and Intuit entered into an agreement, beginning in 2006, that prevented each firm from recruiting employees from the other and that prohibited eBay from hiring Intuit employees that approached eBay.  In 2014, the DOJ announced that it has reached a settlement with eBay Inc. that prevents the company from entering into or maintaining agreements with other companies restraining employee recruitment and hiring.

On April 3, 2018, the DOJ announced its challenge against a no-poaching agreement, filing a civil antitrust lawsuit and a proposed settlement that would resolve competition issues. The challenge involved two of the world’s largest rail equipment suppliers, Knorr-Bremse AG and Westinghouse Air Brake Technologies Corporation and their agreement of 2009 not to “solicit, recruit, hire without prior approval, or otherwise compete with one another for employees”.  The reason behind the conclusion of such an agreement, as argued by the parties, is that companies operating in the rail industry often need months to hire individuals with requisite skills, training and experience for a specific role.

It seems, therefore, that no-poaching agreements are becoming one of the main targets of the DOJ concerning the interconnection between competition and employment law.

The Balkans: lessons to be learned

In 2015, the Croatian NCA initiated proceedings against Gemicro, an IT company, for an alleged abuse of dominant position.  According to the request of a competitor in the market submitted to the Croatian NCA, Gemicro concluded no-poaching agreements with leasing companies that were its buyers, with the provisions that prevented: (i) the employment of any former Gemicro employee and (ii) buyers from entering into agreements with competitors of Gemicro if their personnel were former employees of Gemicro.  Gemicro offered a commitment to eliminate the said constraints, which is a procedural option available to undertakings during the proceedings, and the Croatian NCA accepted such commitment.

Undertakings from Serbia should be careful due to a potential scrutiny by the Serbian NCA. Taking into consideration that the Serbian market is growing and that employment mobility is a frequent occurrence; undertakings operating in Serbia, which are engaging in no-poaching agreements, are treading on shaky ground, especially taking into consideration the criminal side of cartel enforcement per latest changes of the penal code.

Furthermore, the Serbian NCA is up-to-date with the current developments in competition law in the EU and the world, and it is possible, if not expected, that no-poaching agreements between undertakings operating in Serbia will come under the radar of the Serbian watchdog.

 

 

[1] Rochella T. Davis, “Talent can’t be allocated: a labor economics justification for no-poaching agreements criminality in antitrust regulation” 2017 12 Brook. J. Corp. Fin. & Com. L. available at <https://brooklynworks.brooklaw.edu/cgi/viewcontent.cgi?article=1271&context=bjcfcl> accessed on 10 September 2018

[2] As noted by the CEO of Intel Paul Ottelini discussing the company’s agreement with Google: “Let me clarify. We have nothing signed,” Otellini wrote. “We have a handshake ‘no recruit’ between eric and myself. I would not like this broadly known.” See Dan Levine, “Steve Jobs Google to stop poaching workers” (Reuters, 27 January 2012) available at < https://www.reuters.com/article/us-apple-lawsuit/steve-jobs-told-google-to-stop-poaching-workers-idUSTRE80Q27420120127?> accessed on 10 September 2018

[3] Supra note 1.

[4]See for instance: Svend Albæk, “Consumer Walfare in EU Competition Policy”, in Caroline Heide-Jorgensen (eds.), Aims and Values in Competition Law (DJØF Publishing, 2012) available at <http://ec.europa.eu/dgs/competition/economist/consumer_welfare_2013_en.pdf> and  Johannes Laitenberger, “Enforcing EU competition law: Principles, strategy and objectives Objectives” (Fordham University, 44th Annual Conference on International Antitrust Law and Policy) available at: <http://ec.europa.eu/competition/speeches/text/sp2017_11_en.pdf>

[5] Commission Notice on Restrictions Directly Related and Necessary to Concentrations OJ C 188 (04 July 2001) 2001/C 188/03 20

[6] Case No IV/M.1482 – Kingfisher/Großlabor (12 April 1999) para 24

[7] Case No IV/M. 1167 – ICI / Williams (29 April 1998) para 21

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