Overview
The Department of Justice (DOJ) Antitrust Division secured another labor-side antitrust prosecution win earlier this month in United States v. Patel, a case centered on an alleged no-poach and non-solicitation agreement among Pratt & Whitney and several of its subcontractors, when Judge Victor A. Bolden of the District of Connecticut denied the defendants' joint motion to dismiss.1 But with a potentially difficult trial set to begin in late March, any celebration within DOJ's halls about the ruling is premature. As we discussed extensively in a prior client alert, the Antitrust Division has developed a track record over the years of defeating motions to dismiss labor-side Sherman Act prosecutions, only to be handed acquittals by unimpressed juries. Thus, while Patel presents the Antitrust Division with another opportunity to vindicate its strategy of availing itself of the criminal justice system to police labor markets, it could also end in an embarrassing third successive trial defeat. And for the reasons explained below, it is far from clear that Patel will be an easier case for DOJ than its predecessors. Given these high stakes, employers would be wise to continue to closely follow Patel.
The Alleged Conspiracy
As alleged, defendants Mahesh Patel, who was a manager at Raytheon subsidiary Pratt & Whitney, and Robert Harvey, Harpreet Wasan, Tom Edwards, Gary Prus and Steven Houghtaling, each of whom was an executive at one of five outsourced engineering service providers used by Pratt & Whitney, agreed "to restrict the hiring and recruiting of engineers and other skilled-labor employees" between 2011 and 2019.2The agreement, which was made orally but was reflected in a number of emails among the participants, restricted all of the defendants from hiring the contractors' employees and prohibited them from contacting, interviewing, and recruiting applicants who were employed by one of the other companies.3 Enforcement was primarily handled by Patel, who also served as an intermediary for communications among the other companies. The indictment quotes various communications between the co-conspirators, including an email from one contractor to Patel, "I am very concerned that one of the other contractors believes they can hire any of our employees . . . . Could you please stop this person from being hired by the other contractor?" as well as discussions of how the no-poach agreement would help the companies suppress wages.4 The indictment lists various devices used to conceal the misconduct: the agreement was unwritten, meetings about it were held in private, and the employees who were the subject of the agreement were provided false and misleading information about its existence.5
The Court’s Ruling
In deciding the defendants' motion to dismiss the indictment under Federal Rule of Criminal Procedure 12(b), Judge Bolden was faced with arguments that have now been made a few times in similar recent cases in other jurisdictions, and his ruling fell in line with those arguments.
As before, the principal issue for decision was whether the defendants’ alleged no-poach agreement should be analyzed under the "rule of reason" framework, which requires the court to weigh the restraint's competitive harms against its competitive benefits, or alternatively whether it amounted to a per se violation of the Sherman Act, which would dramatically lighten DOJ’s burden at trial.6
In DaVita, another recent criminal no-poach case, the court applied a three-part test:
- Did the conduct fit into a category that has previously been found to warrant per se treatment, such as price fixing, bid rigging, or horizontal market allocation?
- If not, should the court create a new category of per se unreasonableness?
- If the answer to either of the foregoing questions is "yes," was the conduct a naked restraint on trade (that is, its only purpose was to stifle competition), or was it ancillary to a procompetitive purpose?7
In Patel, the court considered precisely the same factors, and arrived at precisely the same conclusions, as the DaVita court. With respect to factor (1), it held that the alleged no-poach agreement would, if proven at trial, amount to market allocation, one of "the well-established categories that historically have required per se treatment."8 In arriving at this holding, the court considered the Second Circuit’s previous holdings that wage-fixing, another type of anticompetitive conduct affecting the labor market, could constitute price-fixing, which is another per se category.9In the court's view, therefore, it was no great stretch to conclude a no-poach or non-solicitation agreement could constitute per se illegal market allocation. Judge Bolden also cited to the ruling in DaVita itself, as well as several similar civil cases.10
With respect to factor (2), though, the Patel court held that it would be inappropriate to create a new category of per se unreasonableness for no-poach agreements. In support of this conclusion, it noted that courts regularly uphold no-poach and non-solicitation agreements under the rule of reason analysis.11 This ruling was arguably dicta insofar as Judge Bolden’s determination, under factor (1), that the no-poach agreement fell within an already established category of per se unreasonable conduct, was dispositive, but highlights that labor-related no-poach and wage fixing agreements are being treated just like other anticompetitive conduct.
Under factor (3), the court considered whether the alleged agreement was "ancillary to a legitimate business collaboration."12 Defendants argued that the agreement was part of Pratt & Whitney's outsourcing of engineering services to the other companies, and it was reasonable and natural for companies who were contracting with each other for engineering and other services to agree not to poach each other's employees. As the defendants put it, the no-poach agreement made it "practicable to complete the contracted-for tasks on a timely basis; supported Pratt & Whitney's ability to make commitments to future projects; allowed for the recoupment of training and recruitment costs; and mitigated the risk of 'disintermediation' between a customer and supplier (i.e., the process of 'eliminating the middleman')."13The court rejected this argument, noting that because the contractors were actually competitors, and the existence of a no-poach agreement among them was not ancillary to a legitimate business collaboration, it was an unreasonable restraint on trade.14
Like others before them, the Patel defendants unsuccessfully raised constitutional defenses. Specifically, the defendants made two arguments. First, the defendants argued that they lacked fair notice under the Due Process Clause because "Second Circuit courts before 2021 had only applied the rule of reason to no-poach, non-solicitation agreements." In response, Judge Bolden noted that the no-poach agreement was a form of market allocation, and market allocation has long been subject to per se treatment. And "the fact that Defendants allegedly allocated the market in a novel way does not create a Due Process concern."15
The defendants also raised (and lost) another constitutional defense: that the Fifth and Sixth Amendments prohibited the court from treating the alleged conduct as a per se violation because such treatment would mean the government does not need to prove that the conduct was "unreasonable," an element of the offense. Here, the court had a ready response, noting that in United States v. Koppers Co., 652 F.2d 290, 294 (2d Cir. 1981), the Second Circuit had expressly held that "since the Sherman Act does not make 'unreasonableness' part of the offense, it cannot be said that the judicially-created per se mechanism relieves the government of its duty of proving each element of a criminal offense under the Act."16
A Pyrrhic Victory for DOJ?
DOJ has said it is "pleased" with Judge Bolden’s ruling.17And for good reason — it is yet another carefully reasoned judicial opinion that seems to confirm the DOJ Antitrust Division's theory that the Sherman Act is an available tool for combating anticompetitive conduct in the labor market through criminal enforcement.
But defeating motions to dismiss does not mean winning at trial. In United States v. DaVita, the district court denied the defendants’ motion to dismiss, holding that no-poach agreements allocating or dividing an employment market constitute per se violations of the Sherman Act18— but the defendants prevailed at trial, evidently convincing the jury that the agreement at issue did not “end meaningful competition” in the labor market and undermining the credibility of the government’s witnesses by noting that many of them were parties to immunity or leniency agreements. Similarly, in United States v. Jindal, the district court held that wage-fixing agreements always amount to per se violations of the Sherman Act19— but at trial, the jury granted acquittals on both Sherman Act counts, likely because the government’s key witness had changed her testimony after entering into a leniency agreement with the government.
In fact, DOJ has yet to secure a labor-side Sherman Act conviction at trial; the only convictions DOJ has won in labor-side Sherman Act cases were a conviction on an obstruction of justice charge (with the Sherman Act charges resulting in acquittals)20and a pre-trial guilty plea to a Sherman Act charge.21
DOJ should not expect an easy trial win in Patel either. Even in rejecting the defendants' argument that their conduct was, as a matter of law, ancillary to a procompetitive purpose, the court conceded that the defendants could "contest DOJ’s allegations to the contrary with facts not included in the Indictment . . . at a later stage of the proceedings."22 For instance, the defendants may be able to show that the Pratt & Whitney contractors cooperate, rather than compete, to work on the outsource agreements; or that, as the defendants argued in their dismissal briefing, "the alleged no-poach agreement could have procompetitive effects such as ‘promoting consistent staffing, avoiding disruptions, and incentivizing outsource firms to invest in recruitment and training of outsource engineers by preventing free riding.'"23 The defendants could also employ some of the same tactics used by the defendants in Jindal and DaVita, such as undermining the credibility of the government’s witnesses and introducing doubt as to the alleged co-conspirators’ intentions in discussing the topic of hiring each other’s employees.
The third time may not be the charm for the government. And if Patel does end in another round of acquittals, the Biden Administration may have no choice but to pursue additional methods of fighting anticompetitive conduct in the labor markets, such as existing civil enforcement tools or others that would require new legislation.
Endnotes
1United States v. Patel, 3:21-cr-00220 (D. Conn.).
2 Indictment ¶¶ 10-16, 19, United States v. Patel, 3:21-cr-00220 (D. Conn. Dec. 15, 2021), ECF No. 20.
3Id. ¶¶ 20-21.
4 Id. ¶ 22.
5 Id. ¶ 29.
6See Ruling and Order on Motions, United States v. Patel, 3:21-cr-00220, 2022 WL 17404509, *5-6. (D. Conn. Dec. 2, 2022), ECF No. 257.
7 See United States v. DaVita, 1:21-cr-00229, 2022 WL 266759, at *4 (D. Colo. Jan. 28, 2022). In a guidance document published in 2016, DOJ and the FTC similarly defined a “naked” (as opposed to ancillary) no-poach agreement as one that is “is separate from or not reasonably necessary to a larger legitimate collaboration between the employers. . . . Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.” Department of Justice Antitrust Division, Federal Trade Commission, Antitrust Guide for Human Resource Professionals 3 (Oct. 2016), https://www.justice.gov/atr/file/903511/download.
8 Patel, 2022 WL 17404509, at *7.
9 See, e.g., Todd v. Exxon Corp., 275 F.3d 191, 201 (2d Cir. 2001) (Sotomayor, J., concurring) (“If the plaintiff in this case could allege that defendants actually formed an agreement to fix . . . salaries, the per se rule would likely apply.”); Nat’l Basketball Ass’n v. Williams, 45 F.3d 684, 690 (2d Cir. 1995) (“Employers who were horizontal competitors for labor are prohibited from agreeing upon terms and conditions of employment.”) (citing Anderson, 272 US 359).
10 Patel, 2022 WL 17404509, at *9.
11Id. at *8.
12 Id. at *11.
13Id.
14 Id. at *14. Separately, the court also noted that the conspiracy was not merely a “vertical” one among Pratt & Whitney and each of its contractors (which would mean it was subject to the rule of reason) but rather a “horizontal” agreement among all of the contractors as well as Pratt & Whitney.
15 Id. at *18-19.
16Id. at *19-20.
17Bryan Koenig, Raytheon Manager, Staffing Execs Can’t Slip No-Poach Counts, Law360 (Dec. 2, 2022), https://www.law360.com/articles/1554639.
18 See DaVita, 2022 WL 266759, at *5-7.
19 United States v. Jindal, No. 4:20-CR-358, 2021 WL 5578687, at *5-7 (E.D. Tex. Nov. 29, 2021)).
20 See our earlier client alert here.
21 Matthew Perlman, DOJ Gets 1st ‘No Poach’ Guilty Plea With School Nurse Case, Law360 (Oct. 27, 2022), https://www.law360.com/articles/1544215 (“A health care staffing company pled guilty in Nevada federal court Thursday to charges over an alleged scheme to suppress the wages of nurses working in Las Vegas schools, marking the first successful prosecution of criminal charges in a labor-side antitrust case.”).
22Id. at *14.
23 Patel, 2022 WL 17404509, at *12.
