Lessons Learned: The DOJ's Crackdown on Hiring Practices

Over the past several months, the Department of Justice (DOJ) has begun investigating several leading technology companies for possible violations of the antitrust laws. One focus of the DOJ's multi-faceted investigation is whether certain companies have violated antitrust laws by agreeing among themselves not to recruit one another's employees. As has been reported by several news sources, Silicon Valley companies are alleged to have “gentleman's understandings” that actively recruiting a competitor's employees is off-limits. Critics of such agreements claim that they stifle competition for employees by restricting free movement in the job market, thereby suppressing employee wages. On the other hand, the limited use of narrowly drafted no-hire agreements may be reasonable restraints originating from the settlement of legitimate disputes over the misappropriation of intellectual property by poaching a competitor's employees.

While a company's independent decision not to recruit from a competitor isn't likely to constitute a violation of antitrust laws, when two or more companies actively agree not to pursue each others' employees, the antitrust laws need to be considered. The DOJ has argued that where employers covenant not to poach a competitor's employees, such agreements may enable a company to monopolize a market in violation of Section 2 of the Sherman Act or, by harming a competitor's ability to hire the most qualified candidates, create an unreasonable restraint of trade in violation of Section 1. Although the DOJ investigation is currently focused on the technology industry, where intellectual property disputes are frequently litigated, the DOJ may expand its scrutiny to other industries. Therefore, in-house counsel in all areas of the economy should take time to examine and revise employee hiring and retention policies to avoid running afoul of antitrust laws.

Lessons for Employers Across Industries

Drafting legally enforceable non-disclosure, non-compete, non-solicitation, and anti-raiding agreements is only one avenue companies in all industries should utilize in protecting their vital secrets and information while steering clear of potential antitrust violations. The more obvious, but often overlooked approach, requires purposeful collaboration between legal counsel, C-level executives, and human resources personnel to develop clear internal strategies to ensure that the entity is not susceptible to poaching efforts by competitors, instead of relying on potentially violative agreements.

Have a Good Playbook: Draft Employment Agreements Carefully

Without question, careful drafting of employment agreements is imperative given the current enforcement environment and market conditions. Although covenants not to compete are common in employment contracts, in light of the DOJ's new focus on enforcing the antitrust laws, such agreements have become a significant antitrust issue. Companies have traditionally viewed these agreements as a way of either protecting trade secrets and intellectual property from competitors, or as a way of retaining its best employees. However, the Antitrust Division appears to believe that in the current economy such agreements potentially restrict employee mobility and suppress wages. Because of this increased scrutiny by the DOJ, in addition to traditional drafting considerations for non-competes (i.e., ensuring that the restrictive covenant places reasonable geographic, temporal and other limitations, and comports with applicable state law), companies should ensure that these limitations do not unreasonably restrain competition in the relevant product and geographic markets.

Corporate counsel tasked with drafting employment agreements should be aware that covenants not to compete have been typically analyzed under a rule of reason test. Aydin Corp. v. Loral Corp., 718 F.2d 897, 900 (9th Cir. 1983) (“Employee covenants not to compete or interfere with the employer's business after the end of the employment relationship should not be tested under the per se rule.”). Moreover, courts have recognized that under the rule of reason, “[g]enerally such covenants [not to compete] are valid if reasonably limited in time and geographically.” United States v. Empire Gas Corp., 537 F.2d 296, 307 (8th Cir. 1976). A court is more likely to find such employment restrictions reasonable and non-violative if “the employee was in a position to obtain valuable personal contacts or trade secrets because of his employment which might be lost to the employer if the employee entered into competition.” Id. Because such agreements are not per se violations of the antitrust laws, as long as corporate counsel understands the rule of reason standard and gives careful consideration to the reasonability and necessity of each restriction imposed, the result will be a well-drafted covenant not to compete that is less likely to trigger antitrust scrutiny.

Additionally, although the DOJ's current investigation is focused on non-compete agreements, companies should understand that non-solicitation and anti-raiding clauses in employment agreements could also garner DOJ attention. Non-solicitation agreements prevent former employees from soliciting business from a former employer's customers or clients. Similarly, anti-raiding agreements prohibit an ex-employee from soliciting former coworkers to join a new business venture. Both types of agreements may protect legitimate business interests, but, as with covenants not to compete, they too can be scrutinized under the antitrust laws and, therefore, corporate counsel must pay close attention to the drafting of these types of clauses as well.

The Best Offense Is a Good Defense

In addition to protecting a company's interests in lawful employment agreements that limit the inappropriate activities of current and former employees, emphasis should also be placed on recognizing and retaining the top talent in its workforce. Instead of engaging in potentially predatory practices, including collusion with competitors or aggressive raiding of key talent, many companies would be better served by focusing on developing internal employee retention programs. Strategically developing ways to shield your employees from potential poachers is particularly vital in this ever-changing economy, as many companies have realized that the best candidates are frequently already employed by a competitor.

Game Plan: Know Who Competitors Are Likely to Target

To develop a “game plan” capable of protecting the company from employee poaching, that company must be diligent in assessing its employees' attitudes and should constantly evaluate which employees are most likely to be targeted by competitors. Employees might be vulnerable to potential poaching: 1) by nature of their specialized skills, knowledge, talents, and abilities (“SKTA”); 2) because of variances in pay and benefits within a job field, market, or industry; 3) because of disruptions or changes within the company itself (i.e., changes in management personnel, work distribution, expectations, etc.); 4) as a result of consistent contact from potential recruiters and/or would-be employers; and/or 5) for myriad other reasons that may only be evident after deliberate and systematic investigation and understanding of your organization's current culture and relative appeal to both current and potential employees.

Make Sure C-Level, HR, and Legal Work Together

Despite the fact that many in-house counsel regularly interact with C-level and top human resources professionals to tackle the daily legal issues facing a business, there is often a dearth of true collaboration in deciding what actions a company should take to maintain its competitive advantage in terms of its employees. Beyond the traditional legal advice and input in-house counsel can offer in terms of drafting key employment-related agreements, they should also contribute to the company's overall employee composition, development, and retention plans.

Determining the best “Poaching Avoidance Strategy” for each business requires a partnership of the key players mentioned above. Human resources is likely the primary possessor of data and information regarding employee SKTA, wage and benefit pressures (both internal and external), disruptions to employee loyalty and overall job satisfaction, and employee vulnerability to the recruitment efforts of competitors. C-level executives understand market forces impacting the company, individually, as well as the entire industry, and can use that insight to forecast the company's future market position. Legal counsel needs the insight of both these groups to navigate employment issues because it cannot facilitate and implement the most effective and cost-conscious legal strategies without a comprehensive understanding of all aspects of the company's current and projected strategic position.

It's Game Day: Now, Execute the Plan

After true collaboration has occurred, in-house counsel, together with C-level executives and human resources personnel, can then evaluate both the legal and business legitimacy of the company's proposed Poaching Avoidance Strategy. Each potential option must be evaluated in the context of the company's specific business backdrop, culture, and strategic plan. Moreover, because multiple legal issues can arise at any time, careful attention during the planning and execution stages of any of the following strategies is necessary.

Blocking and Monitoring

For some organizations, blocking employee access to certain recruiting and would-be employer websites or blocking outbound ability to contact such companies during working hours, provides a reasonable deterrent to poaching-type activity. Similarly, monitoring employee phone, internet, and email correspondence with would-be employers may work well within some organizations, but could detrimentally impact employee loyalty in others. To the extent that a blocking or monitoring plan is initiated, careful attention must be paid to ensure that employee privacy rights are not violated, that any blocking or monitoring is managed in a way that does not violate equal employment laws (i.e., that employees are treated the same regardless of their inclusion or non-inclusion in a protected category), and that internet privacy laws, such as the Stored Communication Act, are not violated.

Pay and Benefit Analysis

Particularly in light of the recent Lilly Ledbetter Act, which among other things essentially expands the statute of limitations for unequal pay-type claims, legal counsel and upper management should already be in the process of auditing the company's pay structures to identify areas of inequity. This process, however, should be expanded to include an evaluation of how the company's wages and benefits compare to its competitors. Too often companies offer a going market-rate for the entry-level position in each job category, but fail to reevaluate and adjust wages for existing employees. It would be a mistake for any company to assume that only regular cost-of-living adjustments will keep employee recruiting and retention efforts competitive.

Revive Employee Loyalty

Regardless of the industry, measures to ensure employment branding and employee pride in and commitment to the organization are extremely important. Such efforts might include expanding and internally promoting whatever it is that renders the business unique. Surprisingly few companies develop a retention strategy and the majority consistently fail to remind their employees of why the business was an attractive place for them to work in the first place. The same defining characteristics that assist in your recruiting efforts, can also be the centerpiece for your retention platform (e.g., the company's unique history and business story, people-management philosophy, commitment to promotion from within, leadership development initiatives, commitment to philanthropy and/or important community and social projects, awards for excellence, etc.). Finally, managers and supervisors must be trained to be a central part of any company loyalty campaign.

Companies Should Act Now

Whatever strategy a company ultimately chooses, in light of the DOJ's intent to monitor employment agreements, not only must in-house counsel understand the potential legal ' especially antitrust ' ramifications of no-hire agreements, they must also work together with other company executives to develop a cohesive game plan to recruit and, ultimately, retain the best employees. In-house counsel should begin this process as soon as possible'a company cannot afford to do anything else.

Danielle Alexis Clarkson ([email protected]) is a senior associate in the Dallas office of Fulbright & Jaworski L.L.P. Ben Mitchell ([email protected]) is an associate in the firm's Houston office.

Over the past several months, the Department of Justice (DOJ) has begun investigating several leading technology companies for possible violations of the antitrust laws. One focus of the DOJ's multi-faceted investigation is whether certain companies have violated antitrust laws by agreeing among themselves not to recruit one another's employees. As has been reported by several news sources, Silicon Valley companies are alleged to have “gentleman's understandings” that actively recruiting a competitor's employees is off-limits. Critics of such agreements claim that they stifle competition for employees by restricting free movement in the job market, thereby suppressing employee wages. On the other hand, the limited use of narrowly drafted no-hire agreements may be reasonable restraints originating from the settlement of legitimate disputes over the misappropriation of intellectual property by poaching a competitor's employees.

While a company's independent decision not to recruit from a competitor isn't likely to constitute a violation of antitrust laws, when two or more companies actively agree not to pursue each others' employees, the antitrust laws need to be considered. The DOJ has argued that where employers covenant not to poach a competitor's employees, such agreements may enable a company to monopolize a market in violation of Section 2 of the Sherman Act or, by harming a competitor's ability to hire the most qualified candidates, create an unreasonable restraint of trade in violation of Section 1. Although the DOJ investigation is currently focused on the technology industry, where intellectual property disputes are frequently litigated, the DOJ may expand its scrutiny to other industries. Therefore, in-house counsel in all areas of the economy should take time to examine and revise employee hiring and retention policies to avoid running afoul of antitrust laws.

Lessons for Employers Across Industries

Drafting legally enforceable non-disclosure, non-compete, non-solicitation, and anti-raiding agreements is only one avenue companies in all industries should utilize in protecting their vital secrets and information while steering clear of potential antitrust violations. The more obvious, but often overlooked approach, requires purposeful collaboration between legal counsel, C-level executives, and human resources personnel to develop clear internal strategies to ensure that the entity is not susceptible to poaching efforts by competitors, instead of relying on potentially violative agreements.

Have a Good Playbook: Draft Employment Agreements Carefully

Without question, careful drafting of employment agreements is imperative given the current enforcement environment and market conditions. Although covenants not to compete are common in employment contracts, in light of the DOJ's new focus on enforcing the antitrust laws, such agreements have become a significant antitrust issue. Companies have traditionally viewed these agreements as a way of either protecting trade secrets and intellectual property from competitors, or as a way of retaining its best employees. However, the Antitrust Division appears to believe that in the current economy such agreements potentially restrict employee mobility and suppress wages. Because of this increased scrutiny by the DOJ, in addition to traditional drafting considerations for non-competes (i.e., ensuring that the restrictive covenant places reasonable geographic, temporal and other limitations, and comports with applicable state law), companies should ensure that these limitations do not unreasonably restrain competition in the relevant product and geographic markets.

Corporate counsel tasked with drafting employment agreements should be aware that covenants not to compete have been typically analyzed under a rule of reason test. Aydin Corp. v. Loral Corp. , 718 F.2d 897, 900 (9th Cir. 1983) (“Employee covenants not to compete or interfere with the employer's business after the end of the employment relationship should not be tested under the per se rule.”). Moreover, courts have recognized that under the rule of reason, “[g]enerally such covenants [not to compete] are valid if reasonably limited in time and geographically.” United States v. Empire Gas Corp. , 537 F.2d 296, 307 (8th Cir. 1976). A court is more likely to find such employment restrictions reasonable and non-violative if “the employee was in a position to obtain valuable personal contacts or trade secrets because of his employment which might be lost to the employer if the employee entered into competition.” Id. Because such agreements are not per se violations of the antitrust laws, as long as corporate counsel understands the rule of reason standard and gives careful consideration to the reasonability and necessity of each restriction imposed, the result will be a well-drafted covenant not to compete that is less likely to trigger antitrust scrutiny.

Additionally, although the DOJ's current investigation is focused on non-compete agreements, companies should understand that non-solicitation and anti-raiding clauses in employment agreements could also garner DOJ attention. Non-solicitation agreements prevent former employees from soliciting business from a former employer's customers or clients. Similarly, anti-raiding agreements prohibit an ex-employee from soliciting former coworkers to join a new business venture. Both types of agreements may protect legitimate business interests, but, as with covenants not to compete, they too can be scrutinized under the antitrust laws and, therefore, corporate counsel must pay close attention to the drafting of these types of clauses as well.

The Best Offense Is a Good Defense

In addition to protecting a company's interests in lawful employment agreements that limit the inappropriate activities of current and former employees, emphasis should also be placed on recognizing and retaining the top talent in its workforce. Instead of engaging in potentially predatory practices, including collusion with competitors or aggressive raiding of key talent, many companies would be better served by focusing on developing internal employee retention programs. Strategically developing ways to shield your employees from potential poachers is particularly vital in this ever-changing economy, as many companies have realized that the best candidates are frequently already employed by a competitor.

Game Plan: Know Who Competitors Are Likely to Target

To develop a “game plan” capable of protecting the company from employee poaching, that company must be diligent in assessing its employees' attitudes and should constantly evaluate which employees are most likely to be targeted by competitors. Employees might be vulnerable to potential poaching: 1) by nature of their specialized skills, knowledge, talents, and abilities (“SKTA”); 2) because of variances in pay and benefits within a job field, market, or industry; 3) because of disruptions or changes within the company itself (i.e., changes in management personnel, work distribution, expectations, etc.); 4) as a result of consistent contact from potential recruiters and/or would-be employers; and/or 5) for myriad other reasons that may only be evident after deliberate and systematic investigation and understanding of your organization's current culture and relative appeal to both current and potential employees.

Make Sure C-Level, HR, and Legal Work Together

Despite the fact that many in-house counsel regularly interact with C-level and top human resources professionals to tackle the daily legal issues facing a business, there is often a dearth of true collaboration in deciding what actions a company should take to maintain its competitive advantage in terms of its employees. Beyond the traditional legal advice and input in-house counsel can offer in terms of drafting key employment-related agreements, they should also contribute to the company's overall employee composition, development, and retention plans.

Determining the best “Poaching Avoidance Strategy” for each business requires a partnership of the key players mentioned above. Human resources is likely the primary possessor of data and information regarding employee SKTA, wage and benefit pressures (both internal and external), disruptions to employee loyalty and overall job satisfaction, and employee vulnerability to the recruitment efforts of competitors. C-level executives understand market forces impacting the company, individually, as well as the entire industry, and can use that insight to forecast the company's future market position. Legal counsel needs the insight of both these groups to navigate employment issues because it cannot facilitate and implement the most effective and cost-conscious legal strategies without a comprehensive understanding of all aspects of the company's current and projected strategic position.

It's Game Day: Now, Execute the Plan

After true collaboration has occurred, in-house counsel, together with C-level executives and human resources personnel, can then evaluate both the legal and business legitimacy of the company's proposed Poaching Avoidance Strategy. Each potential option must be evaluated in the context of the company's specific business backdrop, culture, and strategic plan. Moreover, because multiple legal issues can arise at any time, careful attention during the planning and execution stages of any of the following strategies is necessary.

Blocking and Monitoring

For some organizations, blocking employee access to certain recruiting and would-be employer websites or blocking outbound ability to contact such companies during working hours, provides a reasonable deterrent to poaching-type activity. Similarly, monitoring employee phone, internet, and email correspondence with would-be employers may work well within some organizations, but could detrimentally impact employee loyalty in others. To the extent that a blocking or monitoring plan is initiated, careful attention must be paid to ensure that employee privacy rights are not violated, that any blocking or monitoring is managed in a way that does not violate equal employment laws (i.e., that employees are treated the same regardless of their inclusion or non-inclusion in a protected category), and that internet privacy laws, such as the Stored Communication Act, are not violated.

Pay and Benefit Analysis

Particularly in light of the recent Lilly Ledbetter Act, which among other things essentially expands the statute of limitations for unequal pay-type claims, legal counsel and upper management should already be in the process of auditing the company's pay structures to identify areas of inequity. This process, however, should be expanded to include an evaluation of how the company's wages and benefits compare to its competitors. Too often companies offer a going market-rate for the entry-level position in each job category, but fail to reevaluate and adjust wages for existing employees. It would be a mistake for any company to assume that only regular cost-of-living adjustments will keep employee recruiting and retention efforts competitive.

Revive Employee Loyalty

Regardless of the industry, measures to ensure employment branding and employee pride in and commitment to the organization are extremely important. Such efforts might include expanding and internally promoting whatever it is that renders the business unique. Surprisingly few companies develop a retention strategy and the majority consistently fail to remind their employees of why the business was an attractive place for them to work in the first place. The same defining characteristics that assist in your recruiting efforts, can also be the centerpiece for your retention platform (e.g., the company's unique history and business story, people-management philosophy, commitment to promotion from within, leadership development initiatives, commitment to philanthropy and/or important community and social projects, awards for excellence, etc.). Finally, managers and supervisors must be trained to be a central part of any company loyalty campaign.

Companies Should Act Now

Whatever strategy a company ultimately chooses, in light of the DOJ's intent to monitor employment agreements, not only must in-house counsel understand the potential legal ' especially antitrust ' ramifications of no-hire agreements, they must also work together with other company executives to develop a cohesive game plan to recruit and, ultimately, retain the best employees. In-house counsel should begin this process as soon as possible'a company cannot afford to do anything else.

Danielle Alexis Clarkson ([email protected]) is a senior associate in the Dallas office of Fulbright & Jaworski L.L.P. Ben Mitchell ([email protected]) is an associate in the firm's Houston office.