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It’s a cold, cold world: tech companies agree to halt “no cold-call” agreements that Justice Department charges are illegal per se
September 29, 2010
Employment Law Alert
Author(s): Gordon L. Lang, Jeffrey M. Tanenbaum

The Justice Department filed suit on September 24 against six high tech companies charging that  their alleged bilateral agreements to refrain from “cold calling”—that is, soliciting—each other’s employees for employment are automatically illegal under federal antitrust law. The government filed its proposed settlement agreement with the companies the same day, along with its views on when non-solicitation agreements are, and are not, unlawful.

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The Justice Department announced on September 24 that it had filed suit against six high tech companies charging that their alleged bilateral agreements to refrain from “cold calling”—that is, soliciting—each other’s employees for employment violate the law. United States v. Adobe Systems, et al., (D.D.C.)  DOJ charges that the “no cold-call” agreements restrained competition for employees and likely deprived employees of competitively important information and access to better job opportunities. The government also filed its proposed settlement with the tech companies. The settlement is subject to court approval. Under the settlement, the defendants would not admit any wrongdoing, but would agree, among other things, to abandon the no cold-call agreements and not enter into new ones. The defendants would also have to implement compliance procedures. 

Perhaps the most notable part of the case is the government’s charge that the non-solicitation agreements are “illegal per se”—that is, automatically illegal. And although the complaint notes that “[h]igh tech labor is characterized by expertise and specialization,” the government’s comments suggest that its views on per se illegality are not necessarily limited to high tech. DOJ notes in its competitive impact statement that it charged in 1996 (during the Clinton administration) that an agreement among family practice directors to not solicit residents from each other was illegal per se, and it analogized the no-solicitation of employees restraint to agreements to not cold call another’s suppliers or customers. 

Importantly, the government did recognize that non-solicitation agreements may be entirely appropriate in certain circumstances. Thus the settlement would not prohibit, among other things:

  • a defendant’s non-solicitation agreement with its own employees;
  • no direct solicitation provisions that are reasonably necessary for mergers or acquisitions (whether or not consummated), including in related due diligence;
  • reasonably necessary no direct solicitation provisions for contracts with consultants or recruiting agencies and the like; and
  • non-solicitation agreements that are reasonably necessary for the function of a legitimate collaboration agreement, such as joint development, technology integration, joint ventures, and teaming agreements.

A. Employers beware

A number of employers have noted that they don’t believe “no cold-call” agreements violate the law or do any harm to the companies involved or their employees. They add that employee movement is commonplace. Nevertheless, the Justice Department has set forth its position. Indeed, the Department reports that it “continues to investigate other similar no solicitation agreements.” 

The settlement itself does not include fines, but employees may bring their own lawsuits seeking treble damages—perhaps purportedly as class actions—asserting that they have been unable to obtain “better” jobs as a result of “no cold-call” agreements. And, employers in states such as California, which have their own set of strict laws governing alleged anti-competitive activity, may be particularly at risk.

B. Next steps for employers

The recently announced settlement serves as a good reminder for employers to review their hiring practices to make sure they are both effective and legally compliant. This should include, but not be limited to, a review of any policies that might be viewed by DOJ or other enforcement officials as anti-competitive, as well as a review  of policies and procedures designed to comply with the Foreign Corrupt Practices Act (“FCPA”), the Fair Credit Reporting Act (“FCRA”), Title VII, the ADA, the Genetic Information Nondiscrimination Act (“GINA”), other EEO related requirements, immigration law, and privacy law. 

And companies that may be inclined to have what may be described as traditional non-solicitation agreements—for example, in connection with merger talks or in joint activities—may want to assure that those non-solicitation agreements are not overly broad and can be defended as reasonably necessary.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.