Last year the Antitrust Division of the U.S. Department of Justice filed suit against several technology sector companies over their mutual agreements not to recruit each other’s employees through the use of cold-calling. The DOJ contended that such agreements (sometimes called no-switching or no-poaching agreements) had the effect of reducing competition for high tech employees; limited employees’ opportunities to find work with competitors; and interfered with the price-setting mechanism for these employees’ wages, thereby depressing the wages the companies had to pay to retain their employees.

Each company was based in California where noncompetition agreements between employers and employees are unenforceable. Presumable to get around California state law prohibiting noncompetition agreements, the companies obtained similar results by agreeing with one another not to recruit each other’s employees through the use of cold-calls.  

The DOJ filed a complaint alleging that these agreements violated Section 1 of the Sherman Act (i.e., the law that forbids competitors for entering into most agreements that restrict competition).  Simultaneously with the filing of the DOJ Complaint, the government and the subject companies entered into a Final Judgment, Stipulation and Competitive Impact Statement whereby the companies agreed not to enter agreements that restrict their ability to cold call, solicit, recruit or otherwise compete for employees of a competitor except where the agreements are made for legitimate procompetitive collaborations.   Six weeks after the Agreed Final Judgment was entered, Google gave all of its employees a ten (10) percent pay increase.  Coincidence?

Based on the DOJ’s position in the Competitive Impact Statement, no-switching agreements might be permissible are areas where the competitors work as part of a joint venture.  As an illustration, Google and Intel might work together on a joint venture related to a new piece of hardware Google seeks to run its software and search applications. Similarly, certain energy companies may form joint ventures to explore and exploit energy resources in a particular geographic area. No-poaching agreements limited to these  types of joint collaborations would likely pass DOJ scrutiny in those situations whereas a blanket no-hire agreements between competitors would not.

Companies considering whether to enter into a direct agreement with a competitor over the recruitment and hiring of each other’s employees should be cautious.  Such agreements should describe the legitimate, joint interest shared by competitors giving rise to the need for the agreement; narrowly tailor the no-direct-solicitation provision to only apply to those employees likely to be directly involved in the joint venture; identify with reasonable specificity the employees subject to the no-direct-solicitation provision; and include a specific termination date or event to end the agreement. Those agreements should be carefully scrutinized by counsel and narrowly tailored so as to not draw unwanted attention from the Department of Justice.