DOJ Overcomes Motion to Dismiss No-Poach Antitrust Prosecution

A federal district court in Colorado last week handed the Department of Justice (DOJ) its second victory in its fight to criminally prosecute allegedly unlawful labor agreements, holding that alleged non-solicitation (or "no poach") agreements among the defendants and their competitors constituted per se violations of Section 1 of the Sherman Act. The ruling is the DOJ's second major win in this space in two months. We wrote in December about United States v. Jindal, in which the DOJ prevailed in the face of a motion to dismiss its first-ever Sherman Act wage-fixing prosecution. Now, in United States v. DaVita,¹ the DOJ has again enhanced its ability to tamp down on anticompetitive behavior in labor markets, although based on a slightly different analysis.

The Alleged Conspiracies

The DaVita indictment centers on the conduct of dialysis provider DaVita Inc. and former DaVita CEO Kent Thiry. As alleged, DaVita and Thiry carried out three conspiracies, each in violation of Section 1 of the Sherman Act. First, they conspired to "allocate senior-level employees," agreeing with competitor Surgical Care Affiliates — itself under indictment on similar charges² — that the two companies would "not solicit[] each other's senior level employees across the United States." The conspiracy centered around a meeting at which the terms of the no-poach agreement were discussed; instructions to certain executives and employees that they refrain from soliciting senior employees from co-conspirator companies; compliance monitoring, which required that senior employees notify their employer before seeking employment with a co-conspirator company; efforts to remedy violations of the no-poach agreement; and generally abiding by the no-poach agreement. The second and third conspiracies were similar, but were not limited to senior employees and involved other unnamed competitors. These conspiracies again consisted of an initial meeting, an agreement, the implementation of a compliance mechanism, and a general practice of not poaching competitors' employees in conformance with the agreement.

The Court’s Finding of an Alleged Per Se Offense

At the center of the defendants' motion to dismiss was the question of whether the parties' alleged agreement not to solicit each other's employees was a per se offense under the Sherman Act, or a violation that required a "rule of reason" analysis, which requires the court to weigh the restraint's competitive harms against its competitive benefits, examining a variety of factors including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.³ In determining whether per se treatment was appropriate, the DaVita court applied its own three-step test, drawn in part from United States v. eBay, Inc.⁴ The first step requires the court to determine whether the conduct fits into a category that has been found to warrant per se treatment, such as price fixing, bid rigging, or horizontal market allocation. If not, step two requires the court to consider whether to create a new category of per se unreasonableness. If the conduct neither fits an existing category nor warrants the creation of a new one, the rule of reason applies. But if per se treatment is appropriate under either step, the court must then consider, under the third step, whether the conduct was a naked restraint on trade (that is, its only purpose was to stifle competition) or ancillary to a procompetitive purpose.⁵ The court held that the alleged conspiracies constituted per se violations under the first step — that is, the conduct fit into an existing category of per se unreasonableness. It began its analysis by noting that horizontal market allocation agreements — agreements between competitors at the same level of the market structure to allocate a market to minimize competition — "are traditionally subject to per se treatment under Section 1 of the Sherman Act."⁶ Moreover, agreements "allocating or dividing an employment market" are horizontal market allocation agreements.⁷ Accordingly, as long as the alleged no-poach agreements were agreements allocating or dividing an employment market, they would constitute per se violations of the Sherman Act. The court did not reach step three (whether the conduct was naked or ancillary) because the defendants did not raise the issue in their motion to dismiss. The defendants resisted the court's conclusion on several grounds, which the court serially rejected. First, the defendants argued that the allegations amounted to a non-solicitation agreement, not a horizontal market allocation agreement. The court flatly rejected this argument, noting that the two were not mutually exclusive.⁸ Second, the defendants argued that the indictment lacked sufficient facts to support the allegation that they allocated the market. Citing the factual allegations summarized above, the court held that the indictment adequately pleaded an agreement to allocate the market.⁹ Third, the defendants argued that there is no precedent supporting the argument that non-solicitation agreements are subject to per se treatment. Like the court in Jindal, the DaVita court rejected this argument, stating that given the broad sweep of Section 1 of the Sherman Act, "as violators use new methods to suppress competition by allocating the market or fixing prices these new methods will have to be prosecuted for a first time."¹⁰ The DaVita court also relied heavily on an analogous but 35-year old out-of-circuit decision, United States v. Cooperative Theatres of Ohio, Inc., in which the Sixth Circuit held that horizontal allocation of the market for customers, in the form of a non-solicitation agreement among competitors, constituted a per se violation of Section 1 of the Sherman Act.¹¹ Fourth, the defendants argued that there is no precedent that would warrant a finding that non-solicitation agreements should be made into a new category subject to per se treatment. The court held that this argument was ultimately academic; the agreements at issue, as horizontal market allocation agreements, fit into an existing category of per se unreasonableness.¹² Fifth, the defendants argued that because non-solicitation agreements have not conclusively been found subject to per se treatment, per se treatment is not warranted here. In response, the court noted that while non-solicitation agreements are not inherently problematic, "agreements that nakedly allocate the market are per se unreasonable because they would almost always be an unreasonable restraint on trade."¹³ In other words, because the conduct at issue here was a horizontal market allocation agreement, it was subject to per se treatment. Finally, the court rejected the defendants' argument, also raised in Jindal, that finding a "per se rule to agreements like those alleged here for the first time would violate defendants' right to 'fair warning' under the Due Process Clause."¹⁴ In doing so, it pointed out that there was nothing novel about treating horizontal market allocation agreements as per se illegal; and "[t]he fact that defendants allegedly allocated the market in a novel way — by using a non-solicitation agreement — does not matter."¹⁵

But…A Warning to the Government

Although the motion was decided in the government’s favor, the court went out of its way to address DOJ's "apparent assertion" that non-solicitation agreements are always horizontal market allocation agreements and, therefore, per se unreasonable.[16] As the court noted, there are precedents involving no-hire agreements that were not subjected to per se treatment because they did not allocate the market,[17] and the same reasoning could apply to non-solicitation agreements. As a result, it will not suffice for the government to allege merely that a defendant entered into a non-solicitation or no-hire agreement; any such agreement must be market-allocating to qualify as a per se violation. By contrast, in Jindal, the court held that "fixing the price of labor, or wage fixing, is a form of price fixing and thus illegal per se,"¹⁸ leaving little or no room for defendants facing wage-fixing charges to argue that certain wage-fixing agreements should not be subjected to per se treatment.

DOJ Is Likely to Continue Using Antitrust Prosecutions to Police Labor Markets

As we noted in December, the DOJ is aggressively pursuing wage-fixing and no-poach prosecutions. Beyond the rulings in Jindal and DaVita, motions to dismiss making similar arguments are pending in United States v. Surgical Care Affiliates, LLC and SCAI Holdings, LLC and United States v. Hee (a wage-fixing and no-poach case). Moreover, two new indictments — one against executives and managers of Pratt & Whitney and various suppliers alleging a no-poach conspiracy in United States v. Patel,¹⁹ and the other against four managers of home health care agencies alleging a wage-fixing and no-poach conspiracy in United States v. Manahe²⁰ — are beginning to make their way toward trial. We should expect to see similar motions filed in those cases, given that these issues remain ones of first impression in those courts. Although the motions in those cases are likely to yield similar outcomes, as the DaVita decision’s warning to DOJ on proof of market allocation makes clear, the analytical paths these courts take toward their rulings may differ, and could offer nuanced differences that help guide the defendants' trial defenses. Finally, the slowly forming consensus among courts that no-poach and wage-fixing agreements are per se offenses subject to criminal prosecution further underscores the importance of companies having effective compliance that involves legal, human resources, and executives at the highest level, promptly and thoroughly investigating allegations of no-poach/wage-fixing agreements when they arise, and considering availment of the Antitrust Division's Leniency Program, where appropriate. We will continue to monitor developments in these cases and in no-poach/wage-fixing enforcement efforts more broadly.   Endnotes ¹ 1:21-cr-00229, 2022 WL 266759 (D. Colo. Jan. 28, 2022). ² Indictment, United States v. Surgical Care Affiliates, LLC and SCAI Holdings, LLC, No. 3:21-cr-00011 (N.D. Tex. Jan. 5, 2021). ³ DaVita, 2022 WL 266759, at *2. ⁴ 968 F. Supp. 2d 1030 (N.D. Cal. 2013). ⁵ DaVita, 2022 WL 266759, at *4. ⁶ Id. at *3. ⁷ Id. ⁸ Id. at *4. ⁹ Id. at *5. ¹⁰ Id. ¹¹ 845 F.2d 1367 (6th Cir. 1988). ¹² DaVita, 2022 WL 266759, at *7. ¹³ Id. at *15. ¹⁴ Id. at *8. ¹⁵ Id. at *9. ¹⁶ Id. at *8. ¹⁷ See, e.g., Bogan v. Hodgkins, 166 F.3d 509, 515 (2d. Cir. 1999) (holding that a no-hire agreement, as alleged, was not a per se violation because there was no geographic or market allocation). ¹⁸ Jindal, 2021 WL 5578687, at *5 (cleaned up). ¹⁹ 3:21-mj-01189 (D. Conn., filed Dec. 7, 2021). ²⁰ 2:22-cr-00013 (D. Me., filed Jan. 27, 2022).