Merger & Acquisitions

Entering Into a Naked No-Poach Agreement? Bring a Lawyer.

A wrong move can have serious consequences.

Employers and business owners who wish to protect themselves when employees leave for new positions -- taking with them valuable knowledge that competitors would love -- need to be careful how they go about building their defenses because doing it wrong can mean both civil and criminal charges against corporations and individuals.

Critical questions need to be answered in employment agreements and business deals. Is the employer – such as a franchisor – trying to stop intramural poaching within its own system, effectively causing vertical restraint? Or is it trying to legitimately protect itself from losing employees to competitors, or horizontal restraint? (For those of you not versed in this area of law, agreements entered into without the cloak of legitimate competitive concerns by employers are called “naked” no-poach agreements.)

In 2016 the Department of Justice and Federal Trade Commission offered joint guidance on the issue and the standards it said should apply. “Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws. That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects. Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.” For these legitimate ventures the DOJ advocates the “rule of reason” or “quick-look analysis.”

The DOJ said in an October 2016 press release, that it “intends to proceed criminally” against naked wage-fixing or no-poaching agreements. “These types of agreements eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been criminally investigated and prosecuted as hardcore cartel conduct. The DOJ said that if it uncovers naked agreements it will bring felony charges against the participants, including individuals and companies.

No-poach agreements are a hot topic as of late and for good reason.

Many employers don’t realize that these type of arrangements can be considered anticompetitive or that their employment agreements could create antitrust issues at all when, in fact, they can be quite problematic. Imagine your M&A deal craters when a buyer discovers you have a no-poach agreement with competitors.  You might not have seen it as problematic until your prospective buyer walks away because of the risk and your once promising deal is over.

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