"no-poach" Agreements as Sherman Act § 1 Violations: How We Got Here and Where We're Going

• Publication year: 2018
• Author: By Jiamie Chen

"NO-POACH" AGREEMENTS AS SHERMAN ACT § 1 VIOLATIONS: HOW WE GOT HERE AND WHERE WE'RE GOING

By Jiamie Chen¹

I. INTRODUCTION

These days you can't talk to an antitrust lawyer for three sentences without hearing about no-poach. But it certainly wasn't always like that. The early cases challenging no-poach agreements as antitrust violations fought for each step into the courthouse, including to establish that horizontal agreements not to hire could in fact harm competition. Federal courts turned a corner in recognizing that the proper competitive harm analysis in no-poach cases should be aimed at competition in the labor market for the employees' services rather than competition among companies in the industry. The punctuated equilibrium of evolving antitrust law entered the current phase of rapid development in the 2000s, when the first no-poach antitrust class actions came before federal appeals courts, and the Department of Justice Antitrust Division ("DOJ") at the same time took a sudden and keen enforcement interest in no-poach agreements. This pace has only accelerated in the intervening years and placed no-poach at the forefront of developing antitrust jurisprudence. But to best understand where this is all going, we need to take a look back, at where we started and how we got here.

II. HOW DID WE GET HERE? THE EARLY CASES

The earliest federal antitrust cases involving no-poach agreements were brought by individual plaintiffs who were personally denied employment or terminated on the basis of the agreements. Because no authority had yet recognized no-poach agreements as unlawful, and the courts themselves expressed doubt as to the viability of an antitrust claim based on no-poach agreements, none of the defendants in these cases contested the existence of the agreements as alleged. Rather, the defendants challenged as a matter of law whether the no-poach agreements as alleged could even amount to an antitrust claim. Meanwhile, the courts, in analyzing competitive harm resulting from the agreements, focused on harm to the industry or to companies participating in the industry rather than to the employees subject to the agreements. Nonetheless, the early era of no-poach antitrust cases was buttoned in the beginning and at the end with two strong cases that each set the stage for the next phase of development in no-poach antitrust jurisprudence.

In perhaps its first encounter with a Sherman Act § 1 claim based on agreements directed at hiring practices, the Supreme Court in Anderson v. Shipowners' Association of the Pacific Coast paved the way for the line of antitrust litigation discussed herein.² The plaintiff, a seaman, alleged that the owners of substantially all registered merchant vessels on the Pacific Coast agreed not to employ any seamen unless certain conditions were met.³ The plaintiff further claimed that seamen who did not meet those conditions were excluded from employment as a result of the agreement, and he was in fact denied employment for that reason.⁴ In a surprisingly strong ruling on first impression, the Court held that prohibitions against unreasonable restraint of trade apply no less to individuals—particularly, to employees—than to products, as they are both instrumentalities of commerce:⁵

[Page 82]

If the restraint thus imposed had related to the carriage of goods in interstate and foreign commerce—that is to say, if each shipowner had precluded himself from making any contract of transportation directly with the shipper, and had put himself under an obligation to refuse to carry for any person without the previous approval of the associations— the unlawful restraint would be clear. But ships and those who operate them are instrumentalities of commerce, and within the commerce clause, no less than cargoes.

Reversing the lower court's dismissal of the complaint, the Court further held, with practically no explanation, that the "effect" of the of alleged agreement is "precisely" what is "condemn[ed]" by the Sherman Act's prohibition against '"undu[e] interfere[ence]'" with '"the right of freedom of trade.'"⁶ As discussed further below, this ruling arguably went further than any other Supreme Court or federal court of appeals opinion for the next 40 years.

The Second Circuit in Union Circulation Company v. Federal Trade Commission seemed to take a step back from the Supreme Court's ruling in Anderson.⁷Here, the petitioners, agencies that sell magazine and periodical subscriptions via door-to-door solicitation, allegedly agreed with each other not to hire any salesman who had been employed by another agency within the preceding year.⁸ The Second Circuit had no trouble holding that such "no switching agreements" as alleged categorically do not constitute per se antitrust violations.⁹ The court found that, unlike per se violations, "no-switching" agreements are not inherently anticompetitive because they are "directed at the regulation of hiring practices and the supervision of employee conduct, not at the control of manufacturing or merchandising practices."¹⁰ Along this line of reasoning, the court further stated as follows:

These agreements are not designed to coerce retailers, or other independent members of an industry, into abandoning competitive practices of which the concerted parties do not approve. Rather, they are ostensibly directed at 'housecleaning' within the ranks of the signatory organizations themselves. Because a harmful effect upon competition is not clearly apparent from the terms of these agreements, we believe them to be distinguishable from those boycotts that have been held illegal per se.¹¹

[Page 83]

Nevertheless, the Second Circuit found that the agreement at issue unreasonably restrained trade. The court recognized that "no-switching agreements could '"freeze' the labor supply" and "discourage labor mobility."¹² However, the actual competitive harm the court considered was that such agreements would foreseeably "impair or diminish competition between existing subscription agencies" and "prevent would-be competitors from engaging in similar activity," and that "the magazine-selling industry may well become static in its composition to the obvious advantage of the large, well-established signatory agencies and to the disadvantage of infant organizations."¹³

Thus, the court threw the cloak of antitrust protection over existing and potential magazine agencies rather than over the door-to-door salesmen in their employment opportunities and mobility, relegating them to "housecleaning" issues relevant to antitrust only to the extent they affect an agency's competitiveness in the industry.¹⁴

In Nichols v. Spencer,¹⁵ decided 10 years after Union Circulation Company, the Seventh Circuit seems to return to the fold of Anderson but ultimately maintains the focus of antitrust protection on the industry rather than on the employees. In Nichols, the defendants, two companies that sell encyclopedias and reference books, entered into a "no-switching" agreement where each company would not hire any employee of the other company for six months after termination of that employment.¹⁶ Again, defendants here did not dispute the existence of the agreement as alleged.¹⁷ Rather, the defendants argued that the "no-switching agreements" do not amount to an antitrust violation and that the plaintiff's "inability to obtain employment" did not constitute an injury to "in his business or property," as required for recovery under antitrust law.¹⁸ Addressing the second argument first, the Seventh Circuit took a clear stance: "[W]e readily conclude that one who has been damaged by loss of employment as a result of a violation of antitrust laws is 'injured in his business or property' and thus entitled to recovery under 15 U.S.C.A. § 15."¹⁹ However, court found determining the requisite violation of antitrust laws based on the admitted "no-switching" agreement to be "more difficult." Specifically, the court distinguished Radovich and other cases where "there were, or were assumed to be, a monopoly of an agreement in restraint of trade in the service or commodity supplied by the particular enterprises."²⁰ Here, by contrast, "the only allegedly unlawful agreement among defendants is the so-called 'no-switching' agreement[.]"²¹ But the defendants overreached by arguing that such agreements as a matter of law cannot amount to antitrust violations and prompted the court to issue this key holding:

[Page 84]

Granting that the antitrust laws were not enacted for the purpose of preserving freedom in the labor market, nor of regulating employment practices as such, nevertheless it seems clear that agreements among supposed competitors not to employ each other's employees not only restrict freedom to enter into employment relationships, but may also, depending upon the circumstances, impair full and free competition in the supply of a service or commodity to the public.²²

Nevertheless, in reversing the trial court's grant of summary judgment, Seventh Circuit, like the Second Circuit in Union Circulation Company, returned the focus of antitrust protection to the industry rather than the employees: "We cannot say, as a matter of law, that the effect of the 'no-switching' agreement, challenged in this case, upon the business of supplying encyclopedias and reference books is so negligible that the agreement is not a restraint of trade in such products."²³

Nine years after Nichols, the Fifth Circuit took up the issue in Quinonez v. National Association of Securities Dealers.²⁴ The Fifth Circuit, in a seemingly conflicted opinion, reached a strong legal holding that solidified Nichols while warning that the plaintiff's victory at this stage may be short-lived and ultimately empty. In Quinonez, the defendant securities companies reached a "no-switching" agreement analogous to the blacklisting agreement in Radovich and agreed that they would not hire any applicant who had been denied employment or been terminated by any...