Recent complaints brought by the Antitrust Division of the U.S. Department of Justice (“DOJ”) against several major California tech, software, and entertainment companies serve as a reminder to employers that nonsolicitation agreements can go too far and unlawfully restrain competition, resulting in a violation of antitrust laws.
Just last week, DOJ announced that it had entered into an agreement with Lucasfilm Ltd., the studio that helped create the Star Wars series, that prohibited Lucasfilm from agreeing with its competitor, Pixar, not to “cold call” the other’s employees to try to hire them. DOJ’s action against Lucasfilm to stop companies from agreeing to solicit each other’s employees was the last of a series of cases DOJ brought this fall for the same type of conduct. In an earlier suit and settlement, DOJ charged that Adobe, Apple, Google, Intel, Intuit, and Pixar had agreed in many instances among and between themselves not to cold call or solicit the other’s employees.
In bringing these suits, DOJ sought to enforce the Sherman Act, 15 U.S.C. § 1, which prohibits “every contract ... or conspiracy in restraint of trade or commerce among the states,” and to apply it to employer practices that restrain or interfere with employee hiring. According to the Competitive Impact Statement filed by DOJ, “no cold call agreements are facially anticompetitive because they eliminated a significant form of competition to attract high tech employees, and ... substantially diminished competition of the affected employees who were likely deprived of competitively important information and access to better job opportunities.” The final judgment entered against the companies addresses more than just cold calling agreements, and “more broadly enjoins agreements regarding solicitation, recruitment and other methods of competing for employees...”
The lessons from DOJ’s settlements can extend and apply to the most common “restrictive covenants” that prevent solicitation of or competition for employees or customers; these too can qualify as unlawful restraints of trade under federal law if they are not supported or aimed at protecting a legitimate business interest. Stated more simply, employers cannot simply act to prevent a departing employee or a competitor from competing in the market place. Prohibitions against such anticompetitive conduct are not limited to just federal law. For example, as is common in many states, Florida law declares invalid any contract in restraint trade, F.S. § 542.18, and it carves out an exception for restrictive covenants as long as they are reasonably necessary to support the protection of a legitimate business interest. F.S. § 542.335. Consequently, employers should refrain from agreements with competitors not to hire or call upon each other’s employees or their customers. And, in preparing any noncompetition or nonsolicitation agreement, employers should be prepared to justify these restrictions by identifying business interests that such restrictions are aimed to protect.