Examining Non-Poach Agreements: Clarifying the Law and Its Impact

Defining a Non-Poach Agreement

Non-Poach Agreements are contractual agreements between two or more companies not to hire each other’s employees, regardless of whether any particular individual is specifically identified. For this reason, they are sometimes called "employee non-recruitment" or "no-poach agreements."
They are most often used in the technology industry, and several high-profile examples have involved large companies such as Adobe, Intel, Pixar, Lucasfilm and Intuit. However, non-poach agreements have also been encountered between companies in other industries, and they are not limited to agreements between direct competitors.
In this respect , a non-poach agreement may be used at any level of the employment contract. For example, employers may use non-poach agreements not only with their similarly-sized competitors, but also with larger companies, smaller companies, or even in the context of mergers and acquisitions.
As such, employers may enter into non-poach agreements with hiring companies, vendors, suppliers, subcontractors, staffing agencies, and others. Thus, employees’ ability to seek new employment opportunities with employers that are potentially outside the geographic restrictions of more traditional restrictive covenants, may be limited on an increasing basis.

The Law and Enforceability

The enforceability of non-poach agreements depends on knowing which state’s law applies and what the applicable standard is in that state. California and Massachusetts have recently seen non-poach agreements lose in court, but most states do uphold them under the right circumstances.
California has a history of ruling against non-poach agreements between large employers, at least where those agreements were directed at wage suppression. The rule in California seems to be that it is impermissible (and therefore not enforceable under Calif. Bus. & Prof. 16600) for "powerful employers" to enter into non-poach agreements that curtail competition. Non-poach agreements within the same employer though, i.e. no agreement with a competitor, aren’t covered by the statute. Paz v. California came out of the residential construction industry and involved an agreement that Puff Inc. would not solicit or hire Paz Inc.’s workers, and Paz Inc. wouldn’t solicit or hire Puff Inc.’s workers. Paz, a subcontractor for Puff, claimed this violated Labor Code Section 16600. As Paz was an individual, held to be an "employer," the Court of Appeal ruled that Section 16600 applied to him as well, he couldn’t agree not to solicit Puff’s employees, or else he would not be able to compete. Therefore Void. Paz v. California Reconveyance Co., 162 Cal. Rptr.3d 793, 798 (Cal. Ct. App. 2014).
In contrast, a recent decision illustrates that non-compete clauses are enforceable where they are not to the detriment of the general public, but instead simply facilitate competition. McKinley v. Kelly Servs., Inc.,the court says, "we will not imply a legislative intent to sanctify the employment relationship for those on the low end of the economic food chain. … Because the reason behind the policy of Sec. 16600 is to protect the public from restraints which are ‘unnecessary.’" McKinley v. Kelly Servs., Inc., No. A140440, 2014 WL 1613202, at *4 (Cal. Ct. App. Apr. 22, 2014) (quoting Advanced Bionics Corp. v. Medtronic, Inc., 29 Cal.4th 705, 719 (Cal. 2002)).
In Washington, non-poach agreements often are enforceable if they are reasonable in duration and geographic scope. So long as the agreement is not disproportionate to the restraint imposed, then such agreements are generally enforceable. E.g. Hunter Express v. Superior Court, 217 Cal.App.3d 35, 42 (Cal. Ct. App. 1989). Restraints that are less than two years in duration are almost always reasonable. While no appellate case has specifically considered a restraint of more than two years, a two year period is generally upheld and courts tend to consider that longer restraints (more than two years) are unreasonable. A duration of three years has been upheld, and some courts upheld a five year duration. Federal Express Corp. v. Int’l Bhd. of Teamsters, 678 F. Supp. 2d 1, 15 (E.D.N.Y. 2010) (collecting cases). Restricting a competitor within a one hundred mile radius of any branch of the employer is likely reasonable. Id. at 13-14. If the customer had a significant enough customer base to support it, even a 200-mile geographic scope is okay. Id. at 15. While nationwide coverage would not be enforceable, but a restriction to the Northeast may be. See Campbell v. Brown, 750 A.2d 648 (R.I. 2000). Even an agreement to not work for the competitors of a local dealership at the employer’s branch is enforceable, even though a more restrictive covenant was void. Id.
The duty of loyalty and fiduciary obligations formerly meant that even in the absence of a contractual prohibition, employees had a duty not to compete. E.g. RTI Int’l Metals Co. v. Merrill, 97 Wash. App. 433, 438 (App. Div. 1999). Washington does not require "an employment contract as a prerequisite to a finding of a breach of loyalty on the part of an employee." Id. at 438 (finding that in the absence of a contract, the employee’s failure to disclose competitors’ inquiries to his employer until four months after they were made violated his duty of loyalty). Washington recognizes that the restraint upon competition is enforceable only if the employer has a protectable business interest and the restriction is no greater than necessary to protect that interest. Arreola v. Toast, Inc., 2012 WL 5464185 (Ind.Wash. 2012).

Employers and Employees – Pros and Cons

For employers, the advantage of using non-poach agreements is found at the intersection of upward mobility and employee retention. When leveraged properly, such agreements can help put an entire workforce on a similar career trajectory that maximizes company growth and opportunities to meet the individuals’ goals. A perennial source of management training is to help existing employees prepare for promotion and new responsibilities. Filling new responsibilities is a matter of constant concern for human resources departments across the country. Non-poach agreements can help ensure that when a qualified employee moves up, the employer has a qualified replacement prepared to step up as well.
Think of non-poach agreements as a way to build a manpower infrastructure. Non-poach agreements can help facilitate mobility up within the organization for all employees, which in turn helps ensure a continuous and constant supply of applicants from within the business. Employees looking to move up will have incentive to stay with their current employer until those opportunities arrive. From the employer’s perspective, non-poach agreements purchases a degree of stability in the workforce.
From the employee’s perspective, the benefits of non-poach agreements might include: job security, upward mobility, exposure to new technologies and the opportunity to move to new locations. Non-poach agreements provide willing employees the benefit of having their professional skills updated from time to time with new opportunities. Non-poach agreements are not an iron cage. Employees can choose to work for different companies (if their skills are always in demand, there is almost certainly a company or more willing to hire them), or they can choose to participate in an opportunity for advancement at another company in the network of employers.
Non-poach agreements can also have a broad impact on hiring practices. According to a study cited by Business To Community, 51% of all businesses that participated in a survey did not take into account team unity when it came to hiring. Just over a third (34.8%) consulted external resources such as managers and consultants for the same sort of assistance. Non-poach agreements can change the incentives for candidates in assessing job offers, which business decisions they want to take into account and which ones to ignore.
Employers that do not use non-poach agreements may be exposing themselves to dangerous competition and businesses that do use non-poach agreements may be limiting their potential recruitment pool. This will be discussed further in the next section.

Non Poach Agreements in Employment Agreements

Non-poach provisions usually find their way into an employment agreement, as a separate section or as part of the restrictions on post-termination activities, such as a non-solicitation provision. The rationale for this is that the employee has agreed to a host of restrictions on their ability to poach clients, prospective clients, and employees, in exchange for a job, which is consideration that will support the restrictions. Many employers choose not to have the employee enter into a stand-alone document as it means that the employer will have to pay for the employee’s legal advice on the covenant, although some employers do not have a problem with this.
A non-poach provision should contain the same basic elements as both a non-solicitation covenant and other restrictive covenants. The territory in which the provision applies should cover the employer’s clients, and prospective clients, in the territory where the employee worked . The length of the prohibition should not be longer than the length of the restriction in the employment agreement, such as the non-solicitation provision. The issue of whether the prohibition is reasonable, in terms of duration, is determined not only by the length of the agreement but also the implications of allowing the activity at issue to occur. If providing employees to clients is a material part of the employer’s business, the restriction may be reasonable, notwithstanding the length of the covenant. For example, if the employee worked for a national employer, while in the Atlantic Region, then a restriction for one year within the Region, and an additional 6 months on a national basis, may well be reasonable. There is very limited jurisprudence in the Atlantic Region dealing with non-poach provisions.

Trends and Published Cases

In recent years, non-poach agreements have been a focal point of various regulatory initiatives and class action lawsuits. As the FTC and state AGs ramped up their enforcement actions against what it views to be unlawful conduct between competitors to allocate employees, the use of these types of "gentlemen’s agreements" among companies came under increased scrutiny.
In the employment context, there has been a significant uptick in involvement by various state attorneys general (AGs), particularly those from California, New York and Texas in targeting non-poach agreements that they believe violate state and federal antitrust laws. These efforts were among the stated motivations behind the June 2018 announcement by the DOJ’s Antitrust Division to update its policy and guidance regarding the use of no-poach agreements. Additionally, in January 2020, California’s AG issued a warning to fast food chains in California, warning that new legislation targeting no-poach agreements was on its way. And, as detailed further below, the Washington AG obtained a stipulated judgment and permanent injunction against C-Tech.
Outside of the state AGs, both Google and Express Scripts have faced class action lawsuits and investigations related to their multi-company no-poach agreements. In early 2019, Google entered into a settlement with the plaintiff class in Steele v. Google, Inc., which had alleged that Google brokers "no-poach" agreements with other technology companies. Similarly, Express Scripts recently agreed to pay $290 million to settle a class action brought on behalf of a similarly situated group of pharmacists and pharmacy benefit managers alleging that the pharmacy benefits manager and major insurers in their networks conspired to suppress pharmacists’ wages by entering into multi-company "do not compete" agreements.
In Sheldon v. Illinois State University, the plaintiff class of graduate students argued that the no-poach clause in its collective bargaining agreement with Illinois State University violated the Sherman Act because it restricted "the ability of parties in competing labor markets to reach agreements about the hiring or recruiting of workers." No. 14-CV-4265, 2019 WL 7371929, at *1 (C.D. Ill. Dec. 31, 2019). Judge Michael Mihm of the United States District Court for the Central District of Illinois dismissed plaintiffs’ third amended complaint, explaining that the no-poach clause is not a per se violation of the Sherman Act, and that the plaintiffs did not allege any facts to satisfy the inapplicability of the rule of reason. Id. at *1. In so ruling, the court expressly noted that this decision is in line with the Fifth Circuit’s ruling a decade earlier in Fisher v. City of Berkeley, 475 F.3d 1021 (5th Cir. 2007), in which the court explained that the defendants could not have created anticompetitive effects "by agreeing not to recruit each other’s workers if neither defendant had any available workers to recruit." The court also distinguished this case from United States v. Ryan, 247 F.3d 396, 403 (5th Cir. 2001) in which the Fifth Circuit upheld a verdict against employees who agreed to cap salaries because the agreement to limit wages "was in essence an agreement to reduce price."
As the American Bar Association has previously observed, non-compete and no-poach agreements are evolving and will continue to evolve. What was once an area of relative uncertainty is quickly becoming a high-stakes area of litigation that all employers must proactively address.

Best Practices for Creating Non-Poach Agreements

As with any contractual relationship, crafting a non-poach agreement demands carefully drawn provisions and precise terms. Even more critical is compliance with relevant law, which can be jurisdiction dependent. Moving too far afield from what is acceptable in a given state can mean the demise of an otherwise rightfully drawn non-poach would-be asset. Beyond compliance, there is also the challenge of crafting an agreement that carefully balances company interests against worker rights. A close examination of what is included — and omitted — from the agreement is critical to protecting the company from unwanted risk. This particularly is the case with respect to staff members who are not bound by contracts of employment with the company or any of its affiliates. From a compliance perspective , here are some best practices to consider when drafting non-poach agreements: The following are some best practices for these types of agreements to consider including: Employers that are considering engaging in non-poaching agreements should obtain a review of their particular transaction by a legal professional to ensure they understand how their agreement may operate under applicable state laws.