The U.S. Department of Justice’s (“DOJ’s”) ongoing efforts against no-poach agreements suffered their latest setback on April 28, 2023, following the Connecticut federal court’s ruling in U.S.A. v. Mahesh Patel, acquitting all six defendants of criminal liability for allegedly entering into a horizontal no-hire agreement. Though it is tied to the particular facts of the case, the ruling is yet another sign that the DOJ continues to face an uphill battle to impose criminal liability on what typically has been a civil issue.

Overview of DOJ No-Poach Enforcement

The DOJ has the power to enforce restraints of trade that violate the Sherman Act. Criminal liability under the Sherman Act can be considerable—companies face criminal fines of $100 million or more, and executives face up to 10 years in prison.

Criminally, the DOJ typically has gone after only per se restraints of trade. The per se rule historically has been applied to restraints such as price-fixing, bid-rigging, and market allocations “that would always or almost always tend to restrict competition and decrease output.”¹ These restraints are considered per se unreasonable and therefore “do not require elaborate inquiry as to the precise harm they have caused or the business excuse for their use.”² No-poach agreements, however, had not traditionally been a DOJ target for criminal enforcement.³

That began to change around 2010, when the DOJ started filing multiple civil enforcement actions against Silicon Valley tech companies, arguing no-poach agreements between them were per se unlawful (the “High Tech cases”). After a couple of years, the parties settled and entered stipulated final judgments that prohibited agreements to refrain from soliciting, recruiting, or otherwise competing for employees. But these judgments did not prohibit an agreement with a “no direct solicitation provision” if it was not a “naked” agreement, i.e., if the agreement was ancillary to a specific legitimate transaction such as existing or future employment or severance agreements, M&A deals, contracts with consultants, settlement agreements, and contracts with resellers.⁴

The DOJ brought its first criminal actions against no-poach agreements in 2021. Other than one plea deal and one case that remains pending, defendants have obtained acquittals against the DOJ in each case to date. Patel was the latest.

U.S.A. v. Mahesh Patel

Background. Patel was one of the DOJ’s higher-profile cases. In December 2021, the DOJ indicted six executives and managers from Raytheon and other aerospace firms, charging them with a conspiracy in which they agreed not to poach competitors’ workers for more than a decade. The court denied defendants’ motion to dismiss, and the case went to trial. Once the government rested its case-in-chief, defendants moved for a judgment of acquittal, arguing that the government’s evidence “does not permit a reasonable juror to find that Defendants entered into the charged market allocation agreement.” The court agreed.

Holding. “[N]ot all no poach agreements are market allocations subject to per se treatment,” the court held, “and therefore, determining whether a no poach agreement is a market allocation is highly fact specific.” Based on the facts in Patel, the court found that, as a matter of law, the agreement at issue did not involve a market allocation under the per se rule because the “alleged agreement itself had so many exceptions that it could not be said to meaningfully allocate the labor market of engineers” between the firms.⁵

The alleged agreement allowed, for instance, hiring between two of the defendants on a case-by-case basis with the other side’s consent. The restrictions on hiring also apparently shifted “throughout the course of the conspiracy.” Evidence showed that, at some point, certain restrictions were for just three to six months, whereas at other times defendants were told they could hire other defendants’ employees “when [it] really needed them.”

While the court acknowledged that there were emails “suggesting a blanket agreement not to hire,” that apparently was not borne out in practice. “Hiring among the relevant companies was commonplace,” the court found, “throughout the alleged agreement.” The court identified only one purported year-long hiring freeze. And even then, there were still some limited exceptions. The court therefore held that, while the agreement may have constrained mobility to some degree, it did not “allocate the market” “to any meaningful extent.” In reaching this holding, the court denied it was imposing any new requirements for per se liability and suggested that, if anyone may be trying to make new law, it was the government:

If anything, the government has tried to expand the common and accepted definition of market allocation in a way not clearly used before.⁶

Practical Takeaways

Despite defendants’ clear victory, the court’s ruling does not mean that naked no-poach agreements are now exempt from criminal liability or the per se rule. The per se analysis is highly fact-specific, as was the court’s ruling. While it imposed some restraints on employee mobility, the agreement in Patel did not result in a blanket hiring freeze. The court instead found that hiring among the companies was “commonplace.”

Even after Patel, this continues to be a largely unsettled area of the law. The ruling may make it harder for the DOJ to prevail in criminal prosecutions against no-poach agreements. But regardless, employers should continue to keep in mind that, even if criminal liability or prosecution is avoided, there can still be a risk of civil liability depending on the nature of the agreement. See, e.g., High-Tech cases. Courts and juries may be less reluctant, for instance, to find companies civilly as opposed to criminally liable. As the Patel court noted, courts “are obligated to construe criminal statutes narrowly so that Congress will not unintentionally turn ordinary citizens into criminals.”

While Patel is yet another blow to the DOJ’s efforts, it is not clear whether the DOJ will continue to bring criminal cases against no-poach agreements or back off in light of its latest defeat.

Whatever happens, employers should continue to consult with counsel before entering into agreements with restrictive covenants such as no-hires.

Footnotes

1. United States of America v. Mahesh Patel, et al., No. 3:21-CR-220 (VAB), 2023 WL 3143911, at *3 (D. Conn. Apr. 28, 2023).

2. Id.

3. A MoForward Warning Comes True: No Poach Enforcement Hits the Defense Industry.

4. U.S. v. Adobe Systems, Inc., et al.

5. United States of America v. Mahes Patel, et al., No. 3:21-CR-220 (VAB), 2023 WL 3143911, at *9 (D. Conn. Apr. 28, 2023).

6. Id. at n.7.