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DOJ Scrutiny of No-Poach Agreements: What is the Impact on M&A Transactions?

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A senior Department of Justice (DOJ) official recently remarked that the number of "no-poach" agreements between companies -- which can include agreements not to solicit or hire a competitor's employees -- in apparent contradiction of DOJ and Federal Trade Commission (FTC) guidance was "shocking" and that he was surprised at how prevalent the practice is.1 Other senior DOJ officials have repeatedly stated over the last year that the DOJ's Antitrust Division has a number of ongoing investigations in this area, and that it plans soon to issue indictments.2 Agreements regarding soliciting and hiring employees of competitors have become an enforcement priority for U.S. antitrust authorities, and potential parties to M&A transactions should take a fresh look at how they approach the issue.

The DOJ and FTC previously published Antitrust Guidance for Human Resources Professionals, a "plain English" resource designed to alert HR professionals of their responsibility to assist in preventing companies from implementing illegal no-poach agreements.3 The DOJ/FTC guidance included a reminder to HR professionals that it is generally illegal for competitors to agree not to recruit each other's employees or to refrain from competing on compensation and warned that, after the publication of the guidance, the agencies intended to seek criminal indictments for agreements that are per se illegal.4 That guidance noted, however, that properly tailored agreements not to solicit or hire another company's employees in the M&A context have been, and should continue to be, permissible. For example, buyers and sellers often will agree to mutual covenants in a preliminary non-disclosure agreement not to solicit the other party's employees during negotiations and, should the transaction fail to close after signing a definitive agreement, for a reasonable period following termination. The basis for these agreements is well established: a company might be less willing to negotiate with potential counterparties if in doing so a counterparty could later use information obtained during the negotiation and due diligence process to hire away the company's employees.

What about after a transaction closes? While it is often the seller that assigns greater value to a no-poach agreement prior to closing, a buyer may place significant value on a strong no-poach agreement that applies to a seller after closing. In this context, buyers should always be mindful that the DOJ may scrutinize the terms of such an agreement as part of a merger review or even as part of a larger investigation into the human resource practices of a party or industry.

The DOJ has historically applied a "rule of reason" balancing test when analyzing no-poach agreements in the context of M&A transactions. The rule of reason developed out of court decisions in the 20th century as the primary mode of analyzing restraints on competition and is applied by balancing anticompetitive effects with a restraint's pro-competitive benefits. It is important that the anticompetitive effects be ancillary to an otherwise lawful contract, and not a central element of or the purpose of an agreement, as has been the case with some of the no-poach agreements among competitors that have been prosecuted by the DOJ. A provision that is narrowly tailored to the facts and circumstances of a transaction will more likely to be viewed as ancillary to the transaction and better able to satisfy that balancing test.

When drafting a no-poach provision, some items for parties to consider include the following:

  • Scope of covered persons. Who are the parties primarily concerned with being at risk for poaching? A buyer may have a reasonable idea as to which transferred employees are important to the continuity of the acquired business after closing, but the seller will often have better knowledge as to which employees are valuable. Ensuring that a buyer will have sufficient time to evaluate transferred employees without interference from a seller can help facilitate a successful integration. Similarly, a seller will often want to protect its transition team, deal team and other related employees from poaching by the buyer (and transferred employees). Nonetheless, the DOJ may scrutinize more closely no-poach agreements that apply to all employees, particularly at large organizations, as well as categories of non-employees (e.g., former employees and consultants) when it is not apparent that there is a legitimate purpose for a no-poach agreement to apply to them.
  • Duration of the no-poach. Parties should ensure that the timeframe of a no-poach agreement is reasonable in light of the circumstances. No-poach agreements lasting for multiple years may draw more scrutiny, particularly if they are drafted to cover a broad range of individuals.
  • No-hire agreements should be carefully targeted. Parties should pay close attention to the scope of a no-hire provision (as separate from a non-solicitation provision) that will apply after closing. The legitimately pro-competitive case for a no-hire provision is often limited to employees in key roles specific to the acquired business.
  • Identity of the seller/buyer. A founder or other small business refraining from poaching employees whom the owner or management personally knows well may be more reasonable than a large, public company agreeing not to hire under any circumstances any employee in a large subsidiary or division that it sells. Similarly, private equity no-poach agreements across multiple portfolio companies may receive more scrutiny than would an agreement restricting the activities of an individual portfolio company or management team.
  • Exceptions to the no-poach. No-poach agreements often will contain exceptions for solicitations not specifically directed at covered persons (e.g., a general advertisement in trade journals) and may allow for hiring individuals who are not solicited in violation of a no-poach agreement. In many cases, the no-poach restriction will expressly cease to apply if an individual is no longer employed by a party. Parties should consider, in the context of their industry, their businesses and the proposed transaction, whether to include these exceptions, which, in addition to giving some comfort to one party, will also support an argument that the no-poach agreement passes muster under a rule of reason analysis.
  • Be wary when using forms. Although many no-poach provisions are heavily negotiated, occasionally a party will not feel strongly and may decide to accept the other party's initial proposal. More aggressive bidders may initially include in an acquisition agreement a questionable no-poach provision expecting it to be watered down in negotiations. Even if the other party would accept the proposed language without change, both parties should still work to ensure the final no-poach provision is within the DOJ/FTC guidance.

These provisions can come under DOJ or FTC scrutiny in a variety of ways, including as part of a merger review, ancillary to a broader investigation of these types of agreements involving a company or an industry generally or because of specific complaints to regulators lodged by employees or competitors. The stakes can be substantial. While no-poach agreements in the context of an M&A transaction are likely to be analyzed under the rule of reason and not considered per se illegal, a carefully tailored no-poach provision will help protect against DOJ or FTC scrutiny and inquiry. In contrast, an overly broad no-poach provision may invite an expensive and time-consuming DOJ or FTC investigation that could even delay closing of a transaction. Given these risks, it is important that parties undertake a facts and circumstances analysis early in the deal process and be wary of off-the-shelf provisions unless they are appropriately scoped to the deal at hand.

1 Nylen, Leah. Number of no-poach agreements uncovered by DOJ 'shocking,' official says, MLEX, May 17, 2018.
2 For example, see remarks by Principal Deputy Assistant Attorney General Andrew Finch in a January 2018 speech that "the Division expects to pursue criminal charges" for agreements that began after October 2016, as well as for agreements that began before but continued after that date. Available at https://www.justice.gov/opa/speech/principal-deputy-assistant-attorney-general-andrew-c-finch-delivers-remarks-heritage.
3 The DOJ/FTC guidance is available at https://www.justice.gov/atr/file/903511/download.
4 More recently, the DOJ's Antitrust Division published in its Division Update Spring 2018, No More No-Poach: The Antitrust Division Continues to Investigate and Prosecute "No-Poach" and Wage-Fixing Agreements, reminding companies that "Market participants are on notice: the Division intends to zealously enforce the antitrust laws in labor markets and aggressively pursue information on additional violations to identify and end anticompetitive no-poach agreements that harm employees and the economy." Available at https://www.justice.gov/atr/division-operations/division-update-spring-2018/antitrust-division-continues-investigate-and-prosecute-no-poach-and-wage-fixing-agreements.

 

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