2021 saw significant activity from both the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) in 2021. The DOJ, for example, finally acted on its warning / 2016 threat to investigate and potentially prosecute non-arrangements / poaching agreements between competitors. And, as previously commented by Benesch, the FTC is currently following up on President Biden’s executive order to examine the impact of covenants on the market. This article examines the role the DOJ and FTC played in the restrictive covenant space in 2021 and will likely continue to play in 2022.
A. GM becomes criminal over no-poaching deals
Several years ago, the DOJ investigated allegations that some Silicon Valley companies had a secret pact not to poach their employees. The investigation revealed that the allegations were true and a civil settlement was eventually reached whereby Apple, Google, Intuit, Adobe and Intel agreed to drop their secret no-poaching pact. The DOJ continued to investigate allegations of competitors in other industries with secret no-poaching agreements and, in 2016, warned that criminal charges, instead of civil penalties and fines, could be pending. view.
Five years later, on January 7, 2021, the DOJ followed up on this warning by indicting Surgical Care Affiliates LLC (“SCA“), a unit of UnitedHealth Group, for allegedly violating criminal antitrust laws by secretly conspiring with a Texas-based company from May 2010 to October 2017 and a Colorado company from February 2012 to July 2017, not to solicit the elder of the other level employees. The secret no-poaching pact was reportedly enforced by the CEOs of the companies. Notably, the companies in Texas and Colorado that were said to have been part of the no-poaching pact were not named in the indictment and have not been publicly identified.The case has been filed in the United States District Court for the North Texas District and is currently pending.
The DOJ ended 2021 with another non-poaching indictment, this time in the aerospace industry. Specifically, on December 16, 2021, a Connecticut federal grand jury released an indictment that accused a former Raytheon Unit director Pratt & Whitney of engaging in a secret no-poaching deal with five executives from an outsourced engineering supplier. The DOJ alleges in the indictment that the conspiracy was “long-standing” and affected thousands of engineers in the aerospace industry who provided services in the design, manufacture and maintenance of aircraft components. airplanes for commercial and military purposes. In its press release announcing the indictment, the DOJ noted that its investigation into the practices of the aerospace industry was “ongoing.” Unsurprisingly, the DOJ’s comments on an ongoing investigation have led both lawyers and industry experts to speculate whether more indictments are forthcoming in the first quarter of 2022.
It should also be noted that several state attorneys general have been active in this space for several years and, as a result, have urged national chains in the fast food and retail sector to stop including anti- poaching in their franchise agreements. State attorneys general have also been successful in getting these industries to abandon attempts to enforce non-poaching agreements that affect low-wage workers. More recently, the New York attorney general made a deal with Old Republic National Title Insurance Company that required Old Republic to stop making no-poaching deals with independent insurance agencies.
In her press conference touting the Old Republic deal and Old Republic’s payment of a $ 1,000,000 fine for “participating in anti-competitive activity,” New York Attorney General Laticia James said that his office “will continue to investigate no-poaching deals that could harm New York City.” York workers and [will] fight to put an end once and for all to these anti-competitive practices. Given these statements and the activity discussed above, we can expect state attorneys general and the DOJ to continue to investigate and prosecute companies that enter into non-poaching deals that prosecutors do. generals / DOJs consider “anti-competitive”.
B. FTC continues to review non-competition
As noted in previous articles, President Biden issued an Executive Order on July 9, 2021, which encouraged the FTC to analyze restrictive covenants and decide whether the FTC’s regulatory authority under the Federal Trade Commission Act allows the FTC to restrict “the unfair use of non-competition clauses or agreements that may unfairly limit labor mobility. Members of the Benesch Trade Secrets, Restrictive Covenants and Unfair Competition Group, along with 50 other domestic restrictive covenant lawyers, responded to President Biden’s executive order and the FTC on July 14, 2021 (A copy of the July 14, 2021 letter can be viewed here.) The letter recommended that restrictive covenant law be left to the states, as it has for over 200 years. Nonetheless, if the FTC were to regulate non-compete agreements (and there is considerable debate as to whether the FTC has the constitutional authority to do so), then the letter stressed that any regulation should be limited to addressing them. abuse of non-compete agreements and should not be a blanket ban on non-compete agreements.
The DOJ and the FTC hosted a “Competition Workshop” on December 6-7 this year. Although the workshop covered a wide range of “competitive topics”, much attention was paid to restrictive covenants and, in particular, non-competition agreements. Much of the discussion surrounding non-compete agreements has revolved around whether the FTC should create regulatory guidelines for non-compete agreements and, potentially, non-debauchery agreements, non-bribery agreements. -Disclosure and reimbursement agreements for training. During these discussions, several panelists characterized the non-competition agreements as “harmful” to competition and, in particular, to low-wage employees. These same panelists also argued that non-competition agreements are generally “take it or leave it” agreements that create an unfair advantage in the employer-employee relationship. Unsurprisingly, these panel members argued for an outright ban on non-compete agreements and backed their position with studies and scientific papers that denounce the use of non-compete agreements.
There was, however, a contrary view that non-competition agreements actually promoted competition and increased workers’ wages. In support of this position, several members noted a recent study by the Federal Reserve Bank of Philadelphia which found “little support for the widely held view that the application of non-compete agreements negatively affects the entry rate. new businesses or the rate of jobs created by new businesses. More specifically, the Bank’s study found “that increased application of non-competition had no effect on the entry rate of start-ups” and “a positive effect on job creation”. Appearing to support the Bank’s study, panel members also noted two cases of poaching bans, one in Florida involving McDonald’s and another in Washington involving Jimmy Johns, where “wages were higher before the elimination of poaching. poaching ban agreements and lower afterwards ”. Finally, and although it was not mentioned during the workshop (likely because it was published during the workshop), the United States Chamber of Commerce published a study concluding that no agreements -Reasonable competition does not stifle competition and “when used transparently they can benefit both employees and employers.” “
With so much conflicting information about the effect of non-compete agreements on the market, it is not surprising that no consensus has been reached or no decision has been taken regarding the measures, the if so, what the FTC should take in non-competition matters. or other restrictive conventions. The FTC and DOJ encouraged additional comments from outside sources following the workshop. So on December 20, Benesch’s attorneys joined 50 other restrictive covenant attorneys to complete the July 9, 2020 letter to the FTC and DOJ. (A copy of the December 20 letter can be viewed here.) The December 20 letter once again recommended that the restrictive covenant law be left to the states. He also provided the DOJ and the FTC with additional studies and analysis regarding the impact that non-compete agreements may or may not have on competition, and reminded the DOJ and the FTC that several of the original studies did not ‘have not assessed all the variables that have an impact on competitive activities. . As a result, the December 20 letter recommends that “lawyers, academics and regulators refrain from making strong causal claims” from existing research.
It is not known what action the FTC will take regarding non-compete agreements, but we will continue to monitor the FTC and provide relevant updates.
C. Take-out meals
Based on the activities of the Department of Justice and State Attorneys General, companies should be wary of entering into any type of no-poaching agreement with an outside party (competitor, vendor, supplier, etc.) unless the agreement involves the sale of a business or similar transaction. Restrictive covenants involving low-paid employees should also be carefully considered and should only be entered into or enforced in extremely limited circumstances.
So far, the Department of Justice and state attorneys general have not focused on restrictive covenants, including employee non-solicitation covenants, between companies and their unpaid employees. In addition, the FTC is still in its “investigative” phase of restrictive covenants and any action taken by the FTC is likely to face political and legal challenges. So, for 2022, companies should continue to focus on their covenants by complying with state laws that will govern and control the enforceability of covenants.