All employers want to protect the investment they make in their employees. One strategy used to accomplish this goal is the use of non-competition and non-solicitation agreements. In closely integrated industries, some businesses have all but abandoned these agreements in favor of reaching a pact with competitors not to hire away one another employees. This has been especially pertinent in California, where non-compete agreements are unenforceable. But a recent lawsuit brought by the Department of Justice’s Anti-Trust Division has called this strategy into question, as well as the idea of non-compete agreements as a whole.
After more than a year of investigation, the DOJ filed a lawsuit against Adobe, Apple, Google, Intel, Intuit, and Pixar Animation on September 24, 2010. The lawsuit challenged the legality of a group of contracts entered into between the tech firms to protect their investment in highly skilled technical employees. By these contracts, each company agreed not to solicit the other companies’ employees via “cold calls.” On its face, this is a fairly standard non-solicitation provision. According to the DOJ, though, the non-solicitation contracts were not related to any collaborative work between the companies.
As a result, the DOJ contended that the contracts were attempts by the defendants to limit competition and keep down payroll costs and filed an antitrust complaint. The firms deny that the agreements had any impact on hiring practices. The DOJ and the firms reached a settlement agreement that would prohibit the firms from entering into any non-solicitation agreements for five years. So what does this lawsuit and settlement mean for you? There are several lessons that we can take away:
First, under Delaware law, an employer must demonstrate a legitimate business interest before he can restrict an employee’s ability to compete in the job market. It appears that the DOJ felt that this interest was missing where many large employers joined forces to restrict the job opportunities for highly skilled workers. The outcome would likely be different had the non-solicitation agreements been linked to collaborative work between the defendants.
Second, the breadth of the agreements is significant. The six businesses named in the DOJ lawsuit are large, powerful businesses that operate on the cutting edge of technological development. To restrict a skilled employee’s access to these businesses seriously restricts his or her ability to make a lateral career move. A more limited restriction, with a less severe impact on job opportunities, might not be interpreted as anti-competitive because employees would maintain access to other desirable opportunities in the job market.
Third, we don’t know how the courts will hold. The DOJ based its lawsuit on an analogy to other anti-trust lawsuits based on customer allocation schemes. This analogy is untested, and might not be upheld by the courts after a trial on the merits. As a result, the DOJ’s position should be taken with a grain of salt.
Nonetheless, if you have a non-solicitation agreement with other businesses that does not arise from cooperative work, you may want to reconsider the agreement with an eye toward the DOJ’s concerns. Agreements that are limited in scope, and related to a legitimate business interest are least likely to draw scrutiny.
For more on non-competition agreements, see our sister blog, The Delaware Noncompete Law Blog, as well as these prior posts: