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Avoiding Antitrust Violations In Avoiding Antitrust Violations In Employment Recruiting

Leveraging Guidance on Non‐Solicitation Agreements from Recent DOJ Consent Decree

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURS DAY, FEBRUARY 3, 2011

Today’s faculty features: David T . Blonder, Counsel, Akin Gump Strauss Hauer & Feld, Washington, D.C. Logan M. Breed, Attorney, Hogan Lovells, Washington, D.C. Molly S . Boast, Deputy Assistant Attorney General for Civil Matters, U.S. Department of Justice, Antitrust Division, Washington, D.C.

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Antitrust Challenges in Employment Recruiting

Strafford Publications Inc.

February 3, 2011

Molly S. Boast, Deputy Assistant Attorney General for Civil Matters United States Department of J ti A tit t Di i i Logan M. Breed Attorney Hogan Lovells logan.breed@hoganlovells.com 202 637 6407 David T. Blonder Attorney Akin Gump Strauss Hauer & Feld, LLP dbl d @ ki Justice Antitrust Division Molly.Boast@usdoj.gov 202-353-4651 202.637.6407 dblonder@akingump.com 202.887.4023

Overview of DOJ Enforcement Actions Overview of DOJ Enforcement Actions

 U.S. v. Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc and Pixar (Sept 24 2010) Intuit, Inc., and Pixar (Sept. 24, 2010)

• United States v. Lucasfilm Ltd. (Dec. 21, 2010)
• Represent continued effort to investigate and challenge under antitrust

laws employment agreements and practices between competitors without p y g p p any procompetitive justification

• Consent Decrees provide significant guidance on avoiding potential

antitrust violations in recruiting practices

• Reaffirm DOJ view that unilateral efforts and practices of companies will
• Reaffirm DOJ view that unilateral efforts and practices of companies will

likely not attract DOJ antitrust scrutiny

• Enforcement actions are limited to facts and do not encompass all

potential situations

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US v. Adobe, et al. US v. Adobe, et al.

 Investigation focused on series of separate but similar bilateral agreements (5 in total) between 2005 and 2008 that Apple had with agreements (5 in total) between 2005 and 2008 that Apple had with Google, Adobe and Pixar, and that Google had with Intel and Intuit.  Characteristics:

• Agreements directly and explicitly established by senior executives and
• Agreements directly and explicitly established by senior executives and

companies implemented internal policies banning direct solicitation or “cold-calling” of employees

• Included “Do Not Call” lists and companies that were deemed “Off-Limits”

A d t b i t d d t d it t f t i d

• Appeared to be intended toward recruitment of computer engineers and

scientists or “highly skilled technical employees” but not limited by geography, job function, product group, or time period

• Complaints of breaches, and Executives and HR staff altered conduct to

f t t f t conform to terms of agreements

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US v Lucasfilm US v. Lucasfilm

 Restraint broader than Adobe – Practices more “pernicious” in the aggregate aggregate  3 Part Protocol restricting recruiting efforts between rival digital animation studios

■ Lucasfilm and Pixar agreed to not cold call the other firm’s employees ■ Lucasfilm and Pixar agreed to not cold call the other firm s employees ■ Agreed to notify each other when making an offer to employee of other firm ■ Agreed not to counter-offer above initial offer

 Companies agreed upon protocol, Pixar drafted terms of agreement and communicated terms to Lucasfilm and communicated terms to Lucasfilm  Communicated to management and enforced through HR department

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Prohibited Conduct Prohibited Conduct

For 5 years following the entry of judgment:

Parties cannot enforce existing agreements Parties prohibited from entering into or attempting to enter into non- solicitation agreement with any other person g y p Parties cannot request or pressure any other person to refrain from cold calling, soliciting, recruiting, or otherwise competing for employees

• f another person.

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Compliance and Disclosure Obligations Compliance and Disclosure Obligations

 Compliance training and monitoring of relevant employees involved in recruitment efforts  Filing of annual statement identifying and providing copies of certain types of permitted agreements, including

D t il d d i ti di th i t f k

• Detailed descriptions regarding the circumstances of any known

violations or potential violations known to any officer, director, human resources manager, or senior manager supervising recruitment efforts

 DOJ compliance inspections upon request, including inspection

• f documents and interviews of employees

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Permitted Conduct Permitted Conduct

 Severance agreements g  Reasonably necessary for, and ancillary to, legitimate procompetitive collaborations

• Merger and Acquisition activity, investments, including related due diligence

activities

• Contracts with consulting services, outsourcing vendors, recruiting agencies

and temporary or contract employees

• Settlements of legal disputes
• Settlements of legal disputes
• Contracts with resellers, OEMs and service providers
• Legitimate joint ventures or collaboration agreements

 For last 2, must identify agreement, be narrowly tailored, identify For last 2, must identify agreement, be narrowly tailored, identify participating employees to extent possible, have a reasonable termination date, and be signed.

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Theory – Per Se Illegality under Sherman Act §1 Theory Per Se Illegality under Sherman Act §1

 Buyer side “market allocation” of high tech employees  Disrupted, but did not eliminate, normal state of competition for employee talent depriving affected employees of information and access to better job opportunities  Agreements not related to or part of legitimate pro competitive  Agreements not related to or part of legitimate pro-competitive collaboration or venture  Simple “naked restraint” of trade, relying on past DOJ enforcement/judicial precedent: enforcement/judicial precedent:

• U.S. v. Ass’n of Family Practice Residency Doctors (1996) (DOJ per se

challenge of no-solicitation in medical residency programs)

• U.S. v. Cooperative Theaters of Ohio (movie theater booking agents

customer no solicitation agreement deemed per se violation as customer customer no-solicitation agreement deemed per se violation as customer allocation scheme) (6th Cir., 1988)

• U.S. v. Brown (agreement restricting competition for procurement of

billboard leases) (9th Cir., 1991)

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Parties’ Argument – Rule of Reason Should Apply Parties Argument Rule of Reason Should Apply

 No precedent for application of the per se rule to bilateral non- solicitation agreements solicitation agreements

 This is outside the narrow scope of conduct that, based on “considerable” judicial and economic experience, has been shown to have “no purpose except stifling of competition.” White Motor Co. v. United States, 372 U.S. 253 263 (1963) 253, 263 (1963)

 Courts have consistently applied the rule of reason to more restrictive no-hire agreements

 Bogan v Hodgkins 166 F 3d 509 515 (2d Cir 1999)  Bogan v. Hodgkins, 166 F.3d 509, 515 (2d Cir. 1999)  Nichols v. Spencer Int’l Press, Inc., 371 F.2d 332, 337 (7th Cir. 1967)  Union Circulation Co. v. FTC, 241 F.2d 652, 657 (2d Cir. 1957) ( )

 DOJ even recently acknowledged that non-solicitation agreements are subject to rule of reason treatment in a brief it submitted to the Supreme Court. See Brief for the United States as Amicus Curiae Supporting Petitioner at 20 & n 10 Am Needle Inc v Nat’l Football

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Supporting Petitioner, at 20 & n.10, Am. Needle, Inc. v. Nat’l Football League, No. 08-661 (U.S. Sept. 25, 2009).

Parties’ Arguments and DOJ response: Parties Arguments and DOJ response:

 Claims of legitimate collaborative projects and agreements related to agreements, but:

• Agreements not tied to specific collaboration, overbroad and extended to

all firm’s employees, regardless of involvement in collaboration

• Lack of necessity: Companies collaborated successfully with other
• Lack of necessity: Companies collaborated successfully with other

companies without similar agreements, or with narrowly tailored agreements

 Extensive business relationships, some common board b hi memberships

• Generalized relationships not sufficient to justify overly broad restraints on

competition

 Unilateral decision by each company to not solicit  Unilateral decision by each company to not solicit

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Other Conduct – Exchanges of Salary Information Between C tit Competitors

 Competitors exchanging salary information may violate S ti 1 Section 1  Rule of reason analysis applies  DOJ/FTC 1996 healthcare policy statement defines an p y “antitrust safety zone” for written wage, salary or benefit surveys that meet three conditions

• the survey is managed by a third party
• the information provided by the survey participants is more

than three months old

• there are at least five employers reporting data for each

t ti ti ith l ti th 25 t statistic, with no one employer reporting more than 25 percent

• f any statistic, and no single employer may be identified with

any specific information

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Exchanges of Salary Information Between Competitors Exchanges of Salary Information Between Competitors

 Leading case is Todd v. Exxon, 275 F.3d 191 (2d Cir. 2001)

• Second Circuit held a group of employees in the oil

industry pled a viable antitrust claim challenging their employers’ practice of exchanging salary information on an ongoing basis g g

• The court unequivocally stated that the Sherman Act

applies to competitor communications on the buyer side, including employers in the labor market

• The application of the rule of reason analysis to these

cases is a “mirror image” to the seller-side cases

• Exchanges of current and future cost information may be

particularly suspect because of their potential to facilitate particularly suspect because of their potential to facilitate price conspiracies

• Highly concentrated market with few competitors

controlling a large percentage of the market is most

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likely to raise anticompetitive concern

Salary Information Exchange – Recent Cases Salary Information Exchange Recent Cases

 Nurses brought antitrust class actions against major health systems in several cities, alleging that hospital employers in each market , g g p p y conspired to suppress nurses’ wages  Plaintiffs alleged defendants (1) made express agreements on what nurses would be paid or (2) exchanged confidential wage information either directly through informal communications among ti l i di tl th h thi d ti compensation personnel or indirectly through third parties  Plaintiffs claimed that as a result of these agreements and communication reduced compensation for nurses in the affected markets  Class certification is a difficult hurdle

• Common impact?
• Benchmark analysis may not be effective

 Reed v Advocate Health Care (N D Ill Mar 28 2007):  Reed v. Advocate Health Care (N.D. Ill. Mar. 28, 2007): nonstatutory labor exemption does not necessarily apply where defendant hospital gathered nurse wage information from competitor hospitals for the purposes of collective bargaining context merely because it happens to be a party to a CBA

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Significance of DOJ Enforcement Actions Significance of DOJ Enforcement Actions

 Potential signal to business community regarding DOJ knowledge of widespread conduct in labor markets and attempt to reign in widespread conduct in labor markets and attempt to reign in practice.  Where conduct lines will be drawn is not clear  Per se vs Rule of Reason Unclear in all cases whether this type of  Per se vs Rule of Reason - Unclear in all cases whether this type of conduct in every case would be per se illegal  Possible reflection of increased DOJ interest in buyer market power issues generally issues generally

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Guidance for Business Guidance for Business

 Opportunity to assess practices within your own organization and identify potential compliance issues identify potential compliance issues  Unilateral practices still acceptable and will not generally violate antitrust laws  Significant number of specific types of arrangements articulated in  Significant number of specific types of arrangements articulated in consent decree where non-solicitation agreements can be employed and which cover a range of ordinary course practices  Potentially applicable to other types of business relationships  Potentially applicable to other types of business relationships

• utside those of articulated in the complaint (input or semi-finished

products suppliers)  Cases are limited to facts, but could be extended to other areas, perhaps in more concentrated markets where specialized knowledge may be significant

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Assessing and Dealing with Risk Assessing and Dealing with Risk

 Business Necessity: Just because you can doesn't mean you should should  Pro-Competitive Justification: Clearly establish a pro-competitive business rationale and demonstrate the intrinsic benefits or efficiencies as part of the collaboration to justify the restriction efficiencies as part of the collaboration to justify the restriction

■ “Zone of Reasonableness” is the key concept ■ Restrictive Provision alone is insufficient to immunize from potential antitrust scrutiny

 Competition Dynamics

■ Areas of competition aren’t always obvious

• Upstream/Input, Not Downstream/Output: Do you compete for the same types of

employees/skill sets? (e.g. software or financial firms compete for sophisticated t h l ) tech employees)

 Transparency: Employees subject to agreements should be informed

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Implementing no direct solicitation restrictions Implementing no direct solicitation restrictions

• Specificity or “Custom Fitted”

Id tifi ti f th t ll b ti t ■ Identification of the agreement or collaborative venture ■ Narrowly tailored to the employees involved in the collaboration—identify to extent possible by name or product/subject matter expertise who bring the value to the collaboration ■ Reasonable in geographic scope ■ Reasonable in time: termination date or event and do not extend unreasonably beyond anticipated collaboration timeframe – No lengthy “tendrils” into the future

• Memorialize the Agreement and any modifications—Minimizes risk
• f unwarranted inferences that arise from oral-only agreements
• Explicit communication between Legal, Senior Management and

HR/Recruiting personnel particularly when involving specialized HR/Recruiting personnel, particularly when involving specialized employees in reasonably concentrated markets

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