All About Non-Poaching Agreements: The Complete Guide
What Exactly is a Non-Poaching Agreement?
Non-poaching agreements are essentially covenants not to compete, in which HiPo employers (those employers who compete for talent) agree amongst themselves not to recruit each other’s employees. They generally are used in two settings . First, they can be used by employers in a given industry, second, they can be used by a group of companies with a given geographic service area (e.g., a group of car dealerships in a metropolitan area). Over the past year, non-poaching agreements have come under increased scrutiny from the DOJ because of their potential anticompetitive effects.
The Law on Non-Poaching Agreements
In most countries, the legality of non-poaching agreements depends on whether they are horizontal or vertical restraints. In most jurisdictions, the general rule is that horizontal non-poaching agreements are per se illegal, while vertical non-poaching agreement are likely to be found legal, but they must pass the applicable competition law test.
1. Horizontal Non-Poaching Restraints
Horizontal interaction refers to agreements between competitors at the same level of commerce. Horizontal non-poaching agreement can take many forms but are typically associations or understandings between horizontal competitors. The application of antitrust laws to horizontal non-poaching agreements varies by charging authorities. In the United States, the Department of Justice enforces the Sherman Act. In one of its more high-profile cases, the DOJ challenged a broadly-worded no-poaching agreement between two technology companies which allegedly prevented the companies from hiring each other’s employees. The DOJ’s case resulted in the vacating of the companies’ no-poaching agreements. In Europe, horizontal non-poaching restraints have been caught by European Commission decisions and can also result in fines up to 10% of total annual group turnover.
2. Vertical Non-Poaching Restraints
In many jurisdictions, the application of competition law to vertical non-poaching agreements also varies by charging authorities. In the United States, the Federal Trade Commission can enforce the Federal Trade Commission Act. In 2014, the FTC announced an administrative complaint against three franchisors which, among other things, prevented franchisees from hiring each other’s workers. According to the FTC, horizontal non poaching agreements harmed workers by suppressing their wages. The FTC ultimately entered into consent orders with the franchisors requiring them to terminate their respectively non poaching agreements and cancel any unconsented agreements. In Canada, vertical non poaching agreements among franchisees of different franchisors have drawn the attention of the Competition Bureau. In Canada, franchisors must be aware of the restrictive covenant obligations imposed on franchisees under the Arthur Wishart Act (Franchise Disclosure Act, or the "Act"), which impacts the validity of non-poaching agreements.
3. International Response
The United States has taken a more active role than other countries in pursuing non-poaching agreements. Eli Lilly and Company, a pharmaceutical company, reached a settlement with the Iowa Attorney General over allegations that it had entered into non poaching agreements with various recruitment firms. After conducting an investigation, the New York Attorney General took action against six major tech companies alleging that the subject companies entered into general no poaching agreements. However, some U.S. politicians have recently urged the DOJ to relax its position on incentives for companies to sign no-poaching agreements with each other and have called no-poaching agreements a "critical business strategy."
Benefits of Non-Poaching Agreements
Some advantages of non-poaching agreements to companies are:
- Protecting trade secrets and confidential information: If employees have had access to proprietary company information, the non-poaching provision protects the company from giving access to a competitor through the employee’s activities in helping recruit his/her former co-workers.
- Maintaining investment in training and development of the organization’s human capital: In a highly competitive marketplace for talent, if a company has made an investment in recruiting, retaining, and developing employees through training programs and internal mobility initiatives, the company can create a valuable return on its payroll dollars by retaining its human capital. A non-poaching provision can help ensure that the investment stays within the four walls of the organization.
- Reducing high recruitment costs: Companies spend a significant amount of money on recruitment, onboarding, internal mobility and attrition programs. Where the possibility for employee leakage to competitors is factored in, companies with non-poaching provisions can reduce the amount spent on recruitment.
Possible Obstacles and Problems
If your organization is considering a non-poaching agreement, careful examination of the potential challenges and legal risks is essential. As mentioned above, non-poaching agreements can run afoul of antitrust laws if they unduly limit competition in the marketplace. In addition, state statutes sometimes require that non-compete and non-solicitation agreements be supported by consideration or other compensation for the employee. These statutes can present a substantial challenge since your key employees have likely already been compensated handsomely for any non-compete or non-solicit. In fact, your employees are often the ones dictating their terms and refusing to sign off on restrictive clauses without additional bonuses or severance payments. While there is no one-size-fits-all solution, a creative solution is often required.
Non-Poaching Agreements Compared to Non-Competes
Non-poaching agreements are often compared to non-compete clauses, and while there obviously are some similar features (i.e., a restriction on employees), they are in many ways very different. As is the case with most restrictions on employees, the initial analysis of a non-compete clause or a non-poaching agreement turns on whether it is enforceable (meaning, generally, whether it is reasonable under applicable law). Significantly, however, non-poaching agreements pose a unique enforcement issue that does not typically arise in the context of non-compete clauses.
In the context of enforcement, the terms of non-poaching agreements vary significantly from those of non-compete clauses. Non-compete clauses can include combinations of both restraints and requirements. For instance, such clauses can: (a) prohibit employees from working for a specified competitor; (b) prohibit employees from soliciting their former company’s current customers or clients or even customers of the former employer’s customers or clients; or (c) require employees to work for a specified competitor for an agreed period of time after their employment terminates. Moreover, employees can ‘compete’ against their former employer without violating the terms of a non-compete clause because competing does not necessarily include soliciting the former employer’s clients or customers. Thus, under certain terms of non-compete clauses, there is potential for an employee to compete against the former employer while still complying with the non-compete clause’s limits .
Unlike non-compete clauses, non-poaching agreements typically are used solely to restrict employees from soliciting their former employer’s current customers or clients. While a non-poaching agreement is being marketed as a mutual agreement, there is no real "reciprocity." The issue is that an employee cannot give up the right to compete but not give up the right to solicit the former employer’s former customers or clients. While, theoretically, an employee can give up both rights, the reality is that if a non-poaching agreement permits an employee to solicit former customers or clients, the agreement has the functional equivalent of a non-compete clause and could be deemed to be unenforceable by the courts in many jurisdictions.
The issue then becomes one of whether non-poaching agreements can be enforced against employees who solicit the former employer’s former customers or clients and the answer to that question depends on the applicable law governing restraints on trade. Under Michigan law, for example, the Michigan Supreme Court has held that "it is generally agreed that a total restraint on business, including even the right to solicit those customers or business leads not acquired through the employer’s efforts, invalidates the contract and precludes its enforcement, particularly where the restraint is indefinite in duration." See, Rhynus v Barber Colman Co., 370 Mich 344, 348; 121 NW2d 666 (1963).
That said, unless a non-compete clause contains both a restriction and a requirement, it is unlikely that, for most states, negative consequences will arise merely because of the comparison of a non-poaching agreement to a non-compete clause.
Creating a Non-Poaching Agreement That Checks All the Boxes
When drafting a compliant non-poaching agreement, there are numerous considerations, including subject matter, geographic scope, time frame, and whether to include an employee garden leave provision. Of primary concern is compliance with Section 1 of the Competition Act (the Criminal Code provision that prohibits agreements that prevent, inhibit or deny access to any market). This may involve confirming that the scope of the agreement meets the ancillary restraint exception, ensuring that the agreement is truly voluntary, and obtaining clearance under either the efficiencies defence or the single economic entity principle before entering into the agreement.
Although it can be difficult to argue that a non-compete restraint is ancillary when used among competitors to restrict high-level employees from encouraging others to defection, such reputational risk can be mitigated by including an expiry date in the agreement and considering whether the agreement should be limited to key employees and senior officers. It could also be argued that non-compete restrictions on employers hiring the key employees of another competitor are ancillary because the employer has no other option than to hire those key employees.
The law requires parties to provide each other with as much information as necessary for the other to assess the nature of the proposed restriction and determine whether to consent. The parties should consider exchanging written reasons for the agreement and carefully choose which persons are chosen to consult on the rationale and other contents of the agreement. The parties should consult with each other about optimizing the rationale to support the agreement. The agreement should include provisions requiring consent of the parties to any proposed amendments. Finally, each party should have its own counsel review the agreement.
Updated Developments and Examples
While non-poaching agreements have long been used, the more recent surge of interest in these types of agreements is also attributable to an increase in enforcement activity. For example, the Department of Justice ("DOJ") and Federal Trade Commission have focused on the labor market as a reasonable source of investigating companies for antitrust violations, recently expanding the prosecution of no-poaching and wage fixing antitrust violations. The DOJ has undertaken a concerted effort to prosecute no-poaching agreements, with three guilty pleas in this area by fast food restaurants.
In addition to the increase in government enforcement activity, monitoring by private plaintiffs of companies’ recruiting and hiring activities, including the contractual agreements of potential employers, has resulted in more lawsuits. The theory underlying these lawsuits is that non-poaching and wage fixing agreements can be per se illegal under the antitrust laws because they involve a type of horizontal agreement between competitors to fix terms and conditions of employment. This practice alone is subject to heightened scrutiny and may substantially impair competition in the affected labor markets. Add to that any amount of conspiracy or other collusive activity to restrict wages or enter into express no-poaching agreements and such practices will likely attract substantial government and private plaintiff scrutiny and enforcement.
In 2018, a case against various Silicon Valley companies was settled for $415 million on behalf of a class of software engineers who alleged that the companies agreed not to solicit one another’s employees. To further emphasize the current focus on non-poaching agreements, in 2019, the DOJ announced that it would prosecute, pursuant to antitrust violations, individual HR employees for non-poaching agreements involving the hiring or solicitation of employees. This could result in prison sentences for individuals.
Recent Non-Poaching Agreements
As both economic and legal considerations continue to evolve, so too will the use of non-poaching agreements. We are beginning to see new ways to limit a potential "destructive" impact of employees transitioning from one company to another that are both enforceable and in the best interest of both companies. It is likely these will be further developed and used by more companies in the future. For example, we may start seeing contracts requiring employees to get a mutually agreeable letter of reference before leaving one company for a competitor or other business.
Regulators can also have forceful impacts on restricting the use of certain agreements , particularly those that significantly limit a person’s ability to work in a particular industry or for a particular employer. We have seen this in the past with various bans on non-competition agreements. These passed or proposed restrictions on the use of certain agreements, such as federal antipoaching legislation contemplated by a recent House bill, can signal a changing future in the mechanisms by which turnover in high-demand industries or high-demand job functions is managed.