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Non-Compete Agreements in Jeopardy

Disputes over non-compete, non-solicitation, or no-poach agreements are typically civil matters, rather than criminal ones. However, recent government enforcement and cases highlight how non-compete, non-solicitation, or no-poach agreements between competitors can result in criminal charges. This article examines the potential criminal implications of non-compete, non-solicitation, and no-poach agreements and explores the reinvigorated interest in restrictive covenants by federal and state governments.  

About Non-Compete Agreements 

In the employment context, non-compete agreements are contractual agreements between employers and employees, in which employees agree not to engage in certain competitive activities or work for competitors within specified regions for specified time periods after leaving employment. On one end of the spectrum, non-compete agreements are often imposed to protect employers’ trade secrets, intellectual property, or the investment in training employees. On the other end of the spectrum, non-compete agreements may be used to disable former employees from gaining meaningful employment in an area that they built expertise in while working for their former employers. These restrictions can be used to disincentivize employees from switching jobs and commit them further to their current employees. And these restrictions can be used to help suppress wages through disincentivizing employees from seeking related employment and disincentivizing competing employers from recruiting employees.     

Violating a non-compete agreement can result in civil consequences, such as being sued by the former employer. The typical remedies sought in such cases are injunctive relief (a court order prohibiting the employee from engaging in competitive activities or misappropriating trade secrets or intellectual property) and monetary damages. Factors considered in addressing the legality and reasonableness of non-compete agreements hinge on the duration of the restrictive time period, the geography of the restriction, and the amount of trade secret and intellectual property protection at stake.   

However, when competing companies and employers agree or otherwise collude to enforce non-compete, non-solicitation, or no-poach arrangements against their employees, such collusion can restrict competition and suppress wages. This collusion can constitute antitrust violations under Section 1 of the Sherman Antitrust Act (“Sherman Act”) (15 U.S.C. § 1). 

Federal and State Governments Zero in on Non-Compete Agreements 

President Joe Biden’s Executive Order entitled “Promoting Competition in the American Economy,” issued in July 2021, called for curbing the anticompetitive use of non-compete clauses and other agreements that limit worker mobility. The order urged the U.S. Federal Trade Commission (“FTC”) to take action. In January 2023, the FTC proposed a rule to ban non-compete clauses in employment contracts. The FTC aims to crack down on non-compete agreements and promote fair competition in key industries such as labor, agriculture, and healthcare. 

Just recently, the New York Assembly and New York Senate passed a ban on non-compete agreements. If New York Governor Kathy Hochul signs the bill, then New York will join multiple other states in banning non-compete agreements.  

The VDA Case: Criminal Charges Resulting from Violating the Sherman Act 

In September 2022, VDA OC LLC (“VDA,” formerly Advantage on Call, LLC), a healthcare staffing company based in Ohio, pled guilty to criminal antitrust charges brought by the U.S. Department of Justice (“DOJ”). VDA allegedly entered into an agreement with a competitor to not hire each other’s nurses and thus suppressed their wages. The DOJ argued that such “naked no-poach agreements” are per se antitrust violations, suppressing competition and fixing wages against the Sherman Act. VDA and its manager faced fines and restitution as a result. 

Criminal Liability for Companies and Executives 

The VDA case is not an isolated example. In January 2021, the DOJ filed the first criminal antitrust case based on a no-poach agreement under the Sherman Act. In that case, a healthcare provider allegedly entered into an agreement with a competitor, resulting in charges for both the company and its chief executive officer. These cases highlight the potential for criminal liability for both companies and individual executives involved in alleged conspiracies for no-poach and non-compete agreements. 

Legitimate Business Collaboration and Non-Compete Agreements 

The concept of legitimate business collaboration plays a crucial role in analyzing the legality of non-compete agreements. In 2016, the DOJ and FTC issued joint guidance outlining the “rule of reason” test, which weighs anticompetitive effects in a relevant antitrust market against procompetitive justifications. Examples of legitimate collaborations include joint ventures, agreements related to mergers and acquisitions, and the protection of trade secrets.  

The DOJ has expanded the rule of reason in previous cases, but its current position on non-solicitation restrictive covenants is evolving. In the VDA case, the DOJ did not extend the rule of reason beyond joint ventures and mergers and acquisitions. However, in 2014, the DOJ stated that non-solicitation restrictive covenants are lawful under the following scenarios, for example: 

  • Contained within existing and future employment or severance agreements with employees; 
  • Reasonably necessary for mergers and acquisitions or joint ventures; 
  • Reasonably necessary for contracts with consultants or providers or recipients of services (e.g. subcontractors); and 
  • Reasonably necessary to settle legal disputes. 

But it is unclear whether the DOJ’s position on non-solicitation restrictive covenants remains the same at present. The DOJ and FTC’s enforcement has been evolving and becoming more aggressive. 

Key Takeaways 

Recent criminal antitrust cases and the heightened interest of federal and state governments in non-compete, non-solicitation, and no-poach agreements highlight the potential criminal consequences: 

  • Non-compete, non-solicitation, and no-poach agreements can lead to criminal charges under the Sherman Act. 
  • Companies and executives involved in anti-competitive agreements may face criminal charges. 
  • The federal government has renewed its focus on non-compete, non-solicitation, and no-poach agreements, aiming to promote fair competition and protect workers’ mobility. 

Due to government and regulatory attention and proposed rules by the FTC, businesses should carefully consider the implications of restrictive covenants, such as non-compete, non-solicitation, and no-poach agreements. Ultimately, consulting an experienced antitrust attorney is the best way to navigate the evolving legal landscape surrounding non-compete agreements. If you are facing a dispute involving a non-compete, non-solicitation, or no-poach agreement and have concerns about its enforcement or potential legal consequences, or if you are an employee or independent contractor facing the imposition of such a non-compete restriction, talk to an experienced antitrust lawyer

Justin Nematzadeh
About the Author
Justin S. Nematzadeh, Esq. is the Founder and Managing Member of Nematzadeh PLLC. From practicing at the most prestigious law firms in the world on behalf of plaintiffs and defendants, Justin possesses a wealth of experience. He has amassed a track record of results through first-chair litigation—especially in trials—on behalf of asset managers, small businesses, large corporations, entrepreneurs, government entities, public and private institutional investors, and individuals. Justin specializes in litigation concerning antitrust, business disputes, class actions, contracts, intellectual property, securities fraud, real estate, and qui tam and whistleblower matters. Acclaimed with highly coveted awards, Justin has been integrally involved in litigation that has recovered over $3.53 billion for litigants. If you have questions about this article, contact Justin today here.