The Department of Justice announced, on May 1, a settlement of its antitrust lawsuit against eBay, Inc. over that company's no-poaching agreement with Intuit, in which the companies agreed not to hire or solicit each other's employees.
Companies often enter into agreements with business partners that they will not hire employees of the other company. For example, a company that retains a third party service provider might promise, as part of its contract, that it will not hire, for a limited period of time, the service provider's employees who worked on the contract, and the service provider might agree not to hire employees it worked with in providing the services.
As part of due diligence in a potential merger, the target and acquiring companies may agree not to hire each other's employees.
The no-poaching agreements at issue in eBay (and in related, recently settled litigation involving other Silicon Valley companies), are a little different. These secret arrangements were allegedly made not in pursuit of a legitimate business interest, but only to squelch competition.
Despite the significant brouhaha, though, the settlement is far from a death knell for no-poaching agreements. And interestingly, other agreements between companies around non-competes, such as the "Broker Protocol" (entered into, at last count, by over 600 brokerage firms), seem untouched by this settlement.
In announcing the settlement, the chief of the Department of Justice's antitrust division, Assistant Attorney General William J. Baer, described the alleged agreement between eBay and Intuit as "blatant and egregious." What was the key evidence? Email, of course.
Baer quoted an email from former eBay CEO Meg Whitman to Intuit's founder and executive committee chair Scott Cook, in which she brought to his attention a recruiting flyer Intuit had sent to an eBay employee. She allegedly asked him "to remind your folks not to send this stuff to eBay people," and Cook responded, "Meg my apologies, I'll find out how this slip up occurred again."
Initially, in a motion to dismiss filed in January 2013, eBay argued that the government had not alleged an actionable conspiracy or harm to competition. But the Justice Department took the position that the agreement constituted a per se violation of the Sherman Act and that therefore the department did not need to prove that any anti-competitive effects, such as reduced wages or benefits, actually took place. The district judge agreed with the Justice Department, and the case proceeded.
Simmering in the background of the Justice Department's pursuit of eBay are other civil and criminal cases against Intuit, as well as other Silicon Valley giants Apple Inc., Google Inc., Adobe Systems Inc. Intel Inc. and Pixar.
Apart from the above-mentioned emails (and similar examples), the agreements do not appear to have been formalized in a written instrument. The companies simply (allegedly) agreed not to solicit the others' employees. In the case of eBay and Intuit, eBay allegedly agreed, for one year, not to hire any Intuit employees at all.
In 2010, the Justice Department settled a case against the companies (but not eBay) with their agreement not to enter into such no-hire deals, or "do-not-call lists."
The 2010 settlement did not preclude private litigants who were injured by the agreement to sue for treble damages as a result of the antitrust violation. Thus, on April 24, 2014, Intuit, Apple, Google, and Adobe settled for $324 million an employee lawsuit over claims they conspired to suppress salaries by not recruiting one another's workers.
It is possible, of course, that civil lawsuits against eBay will follow this Justice Department settlement. At least at this point, though, the monetary penalty to eBay seems modest: In the Justice Department accord, eBay agreed to pay $3.75 million to the state of California (which had brought its own antitrust case against eBay).
eBay also agreed that it would be "enjoined from attempting to enter into, entering into, maintaining or enforcing any agreement with any other person to in any way refrain from, requesting that any person in any way refrain from, or pressuring any person in any way to refrain from hiring, soliciting, cold calling, recruiting, or otherwise competing for employees of the other person."
What is perhaps most interesting, though, is what is excluded from the prohibition—eBay is permitted to enter into a "no-direct solicitation provision," so long as it is in a lawful context. Thus, the settlement permits these agreements in employment or severance agreements with eBay employees. It permits them where they are "reasonably necessary" for mergers or acquisitions, investments, or divestitures, including due diligence.
They are also explicitly permissible where reasonably necessary for contracts with consultants and similar third parties; for the settlement or compromise of legal disputes; or for the function of a legitimate collaboration agreement, such as joint development, technology integration, joint ventures, joint projects (including teaming agreements), and the shared use of facilities.
Thus, as the eBay settlement suggests, no-hire agreements that are ancillary to a legitimate business interest are generally permissible. But to be enforceable, employers should incorporate them into the broader agreement, so that the business related context is clear. They should, like all non-competes, be narrowly tailored—they should not be imposed on broad swaths of employees, but only those whose competitive activities, in the context of the agreement, need to be limited, and of course, they should be narrowly tailored as to time, geographic scope, and duration.
The Broker Protocol
The Broker Protocol's intent seems to be the opposite of anti-competitive, and it is a good illustration of ways that companies can use lawful intra-company agreements to avoid the expense of non-compete litigation.
The Protocol was adopted in August 2004 by three major investment houses—Citigroup Global Markets Inc. (or Smith Barney), Merrill Lynch, and UBS Financial Services, Inc. According to the Protocol, "registered representatives" (individuals licensed by the SEC to sell securities, hereinafter RR) may depart from a member firm without liability to the firm she left merely because she took certain account information: client name, address, phone number, email address, and account title of the clients that they had serviced.
While the Protocol began with only the above three houses, there are now more than 600 signatories, and interest seems to grow, with 37 firms joining in the first four months of 2014 alone.
The Protocol prohibits RRs from taking any documents or information other than that identified above. It also requires fairly open communication between the two houses involved in the transition: The resigning RR must deliver her resignation in writing to her employer's local branch management and must include a copy of the client information that the RR is taking. The RR list also must include the account numbers for the clients serviced by the RR.
The prior firm is required, within two business days of its receipt of the departing RR's authorization, to provide the new firm with detailed information regarding the transferring clients, including their account numbers and/or most recent account statements.
The Protocol also permits RRs, prior to their resignation, to provide another firm with information related to the RR's business, other than account statements, so long as that information does not reveal client identity.
So long as the RR exercised good faith in assembling the client list and substantially complied with the requirement that she take with her only information related to the clients she serviced while at the firm, she will be deemed in compliance with the Protocol, even if her former employer disagrees with the disclosure.
The irony of the Protocol's success is that, while it was initially entered into by the major brokerage houses in order to avoid successive, expensive and repetitive litigation over clients and non-compete agreements—and, possibly, to avoid any common law erosion of the "trade secret" status of certain client information—its success may now be working to the disadvantage of the larger trading houses.
Indeed, membership was fairly flat until the financial crisis. Since then, smaller firms have increasingly joined the Protocol, and they have taken advantage of the agreement's ease in recruiting to build their own businesses.
eBay makes clear the danger of no-poaching agreements (sub rosa or otherwise) without a business purpose. Not only are these per se unenforceable—they may draw the wrath of a state or federal attorney general, as well as employees whose opportunities for advancement were allegedly hindered by these deals. Employers are not without options if they wish to minimize the potential for litigation surrounding restrictive covenants, but these arrangements are not a good option.
Philip M. Berkowitz is a shareholder and U.S. co-chair of Littler’s International Law Practice Group. He is based in the firm’s New York City office. This article is reprinted with permission from the May 8, 2014 issue of the New York Law Journal. © ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.