Nonsolicitation Agreements Face Antitrust Scrutiny

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In recent years, the US government and courts have been more aggressively scrutinizing labor restrictions and non-solicitation agreements. The sharpened focus raises questions as to whether such agreements, which are commonly used in teaming agreements and subcontracts between government contractors, could be considered anti-competitive under some circumstances.

The most recent evidence of this trend is United States v. DaVita Inc., the first-ever criminal case brought by the US Department of Justice based on an alleged “no poach” agreement. In that case, kidney dialysis company DaVita Inc. and its former CEO were charged with maintaining an agreement with another healthcare company to not recruit each other’s senior-level employees, as well as with reaching agreements with unnamed companies to not solicit DaVita employees.

In April, DaVita and its CEO were acquitted on all counts by a federal jury. The not-guilty verdict could be seen by some as a positive development for industry – but in the future some of the court’s rulings in the case may be relied on by the government as it continues to focus on non-solicitation and no-poach agreements.

The legal standard applied by the court

Early in the DaVita litigation, the district court rejected a motion to dismiss the charges, ruling that the defendants’ conduct could be deemed per se unlawful (and therefore subject to criminal prosecution) if the defendants intended to allocate a market. Consistent with that ruling, as the case proceeded to trial, the district court issued jury instructions which stated that “non-solicitation agreements are not per se violations of the Sherman Act, but non-solicitation agreements aimed at allocating markets are.”

Thus, according to the court, to the extent that the agreements were employed to allocate a market, the agreements may be deemed per se unlawful. In contrast, if non-solicitation provisions are ancillary to a pro-competitive collaborative venture, the “rule of reason” would apply. Under the “rule of reason” standard, the trier of fact considers all of the circumstances surrounding the agreement in deciding whether the agreement is an unreasonable restraint on competition. If so, there potentially could be civil liability, but criminal charges would not be pursued.

Part of a broader trend of scrutinizing non-solicitation agreements

The DaVita case is part of the broader trend of the government’s focus on non-solicitation agreements and provisions. Indeed, following the not-guilty verdict in DaVita, the head of the Antitrust Division of the Department of Justice reinforced the government’s commitment to pursuing such actions, stating that DaVita was a “legally sound” case and that the Department is “going to continue to bring” such cases.

Other notable recent developments include:

Since its inception in late 2019, the Procurement Collusion Strike Force has trained over 17,000 special agents, opened more than 35 investigations, and added over 500 members. Members of the Strike Force have indicated that non-solicitation agreements are an area of focus.
In December 2021, the Department of Justice brought criminal charges against multiple executives in connection with an alleged agreement among six aerospace and engineering companies to not recruit each other’s employees.
In March 2022, the US Department of Treasury issued a 73-page report entitled “The State of Labor Market Competition.” The report stated that the Department of Justice, Antitrust Division, and the Federal Trade Commission are working to update their joint Antitrust Guidance for Human Resource Professionals to reflect “recent case experience and research that have shown that information-sharing, particularly in concentrated markets, may have potentially significant anticompetitive effects even when purportedly anonymized.” This signals a continued focus on allegedly anti-competitive behavior in labor markets, and the updated Guidance document may shed further light on appropriate boundaries for non-solicitation agreements.
What this means for government contractors

Given the developments in this area, government contractors should consider reviewing and updating their subcontract and teaming-agreement templates, as well as performing a case-by-case assessment of their use of non-solicitation clauses.

This assessment should consider matters such as the need for and scope of the restrictions, the procompetitive benefits of the restrictions, and whether the benefits can be achieved through alternative means. The answers to those questions, of course, depend on the specific circumstances surrounding each non-solicitation agreement.

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