Can Non-Compete Agreements Lead to Jail Time?

 

Quick Hits

• The U.S. Department of Justice secured a guilty plea from a healthcare staffing company in a wage-fixing conspiracy case brought under the Sherman Antitrust Act.
• The Justice Department’s prosecution, which centered on the defendant company’s misuse of a no-poach agreement with a competitor, was part of the renewed, bipartisan effort at the federal level to crack down on non-compete agreements.
• President Biden’s Executive Order No. 14036, “Promoting Competition in the American Economy,” issued on July 9, 2021, called on the Federal Trade Commission (FTC) to “curtail the unfair use of non-compete clauses and other clauses or agreements that … unfairly limit worker mobility.” In January 2023, the FTC proposed a rule that would ban non-compete clauses in employment contracts.

Can non-compete agreements lead to criminal fines—or even jail time? Yes, they can. That is because violating the Sherman Antitrust Act can result in criminal charges, not just civil liability. For example, on September 1, 2022, VDA OC LLC (formerly called Advantage on Call, LLC)—an Ohio-based nurse staffing company—pled guilty in a criminal antitrust prosecution brought by the U.S. Department of Justice, and on October 27, 2022, a Nevada federal judge ordered the company to pay $134,000 in fines and restitution. The charges, which were also brought against the VDA manager at the center of the alleged conspiracy, stemmed from an agreement VDA had with a competing company—both of which were providing contract nursing services to the Clark County School District—not to hire each other’s nurses or to raise their wages. The agreement was evidenced by a series of emails and other communications between managers at the companies. One such email showed that, at one point, the companies’ executives agreed that if any nurses demanded a raise they would tell them to “kick rocks.”

The Justice Department argued that these types of “naked no-poach agreements” between horizontal competitors are per se antitrust violations. That is, they are conspiracies to suppress and eliminate competition through the agreed allocation of labor and fixing of wages, which is the type of anti-competitive practice the Sherman Antitrust Act is meant to punish. Only no-poach agreements that are ancillary to “legitimate business collaboration”—i.e., a “separate, legitimate transaction” that is “reasonably necessary to achieving that transaction’s pro-competitive purpose”—are lawful. Though VDA vociferously fought this novel argument, it ultimately won the day as the judge signaled to the parties that he intended to rule in favor of the Justice Department, thereby leading to VDA’s guilty plea.

Renewed Federal Government Interest in Non-Compete Agreements

The VDA case is part of a renewed, bipartisan effort by at the federal level to crack down on non-compete agreements. On July 9, 2021, President Biden effectively declared war on non-compete agreements by signing Executive Order (EO) No. 14036, “Promoting Competition in the American Economy.” The EO is part of President Biden’s pledge to “eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements.” The EO also called on the Justice Department and FTC to vigorously enforce America’s antitrust laws, focusing on key markets such as labor, agriculture, and healthcare, and encouraged the FTC to use its rulemaking power to reign in non-compete agreements, which the administration believes limit workers’ mobility.

This comes on the heels of the Justice Department filing a criminal antitrust case in January 2021 during the Trump administration—the first criminal antitrust case based on a no-poach agreement in the 130-year history of the Sherman Antitrust Act—against a healthcare provider that entered into an agreement with a horizontal competitor in which the parties allegedly agreed not to solicit senior-level employees from one another. In that case, not only was the company indicted, but, as in the VDA case, its chief executive officer (CEO) was also charged as a coconspirator. These cases create the prospect of potential criminal liability, not just for companies, but also for the individual executives who participate in the alleged conspiracies.

The Justice Department is not all smiles, however, having suffered back-to-back losses in two similar prosecutions on successive days in April 2022. The cases, both in the healthcare industry, involved allegations of a no-poach agreement and wage-fixing, respectively. In the no-poach case, the Justice Department made the same per se argument as in VDA and, like VDA, the judge ruled in the government’s favor. In the wage-fixing case, however, a jury disagreed and acquitted the company and its CEO.

What Is Legitimate Business Collaboration?

In 2016, the Justice Department and the FTC issued joint guidance for human resource professionals on how the agencies would analyze the legality of non-compete agreements. The guidance formalized the federal government’s application of the “rule of reason” test, which states that companies have the right to protect their legitimate business interests and pro-competitive activities. The guidance drew on prior federal court decisions in citing joint ventures and agreements related to potential mergers and acquisitions as examples of legitimate business collaborations. The Defend Trade Secrets Act (DTSA), which was signed into law by then-President Obama in 2016, expands employers’ legitimate business interests to include protecting their trade secrets.

Although the Justice Department did not expand the rule of reason beyond joint ventures and mergers and acquisitions in its filings in the VDA case, it has done so in prior cases. As recently as 2014, the Justice Department stated in court filings that non-solicitation restrictive covenants are lawful if they are: (1) contained within existing and future employment or severance agreements with employees; (2) reasonably necessary for mergers or acquisitions; (3) reasonably necessary for contracts with consultants; (4) reasonably necessary for the settlement or compromise of legal disputes; or (5) “reasonably necessary for contracts with providers or recipients of services [(e.g., subcontractors)] or joint ventures. It is unclear if this is the Justice Department’s current position on non-solicitation restrictive covenants, however.

Key Takeaways

Due to the regulatory and enforcement focus on non-compete agreements, including the FTC’s notice of rulemaking on January 5, 2023, which would ban most post-employment restrictive covenants, businesses may want to think twice before entering into any restrictive covenants, such as no-poach agreements, with competitors.

Ogletree Deakins’ Unfair Competition and Trade Secrets Practice Group will continue to monitor developments with respect to regulatory and enforcement measures regarding restrictive covenants and will post updates on the Unfair Competition and Trade Secrets blog as additional information becomes available. Important information for employers is also available via the firm’s webinar and podcast programs.