DOJ Enters Into Settlement Ending No-Poach Agreements In The Rail Equipment Supplier Industry
On April 3, 2018, the U.S. Department of Justice (“DOJ”) filed a simultaneous Complaint and Stipulation in its investigation into no-poach agreements—defined as agreements between competitors not to compete for employees—between Knorr-Bremse AG (“Knorr”) and Westinghouse Air Brake Technologies Corporation (“Wabtec”) in the rail equipment supplier industry. DOJ took a broad view of the scope of such agreements to include both the solicitation and hiring of employees, and to include both the hiring of employees located domestically and those located internationally and hired to work in the United States. Prior enforcement actions of no-poach cases had brought only civil charges; however, DOJ has recently announced its intent to seek criminal charges in policy guidance published in October 2016. In this action, DOJ exercised its prosecutorial discretion in deciding not to bring criminal charges. Nevertheless, this appears to be the first step in DOJ’s efforts to step-up enforcement consistent with the recent public statements of Makan Delrahim, Assistant Attorney General for the Antitrust Division.
The defendants are the two largest competitors in the rail equipment supplier industry, competing in the market for the “manufacture, and sale of equipment used in freight and passenger rail applications.” DOJ’s Complaint alleged that the two defendants, as well as competitor Faiveley Transport S.A. (“Faiveley”), which was acquired by Wabtec in November 2016, entered into a series of unlawful “promises and commitments not to solicit, recruit, hire without prior approval, or otherwise compete for employees,” in violation of Sherman Act Section 1. In the proposed Final Judgment, DOJ broadly defined “No-Poach Agreement” and “No-Poach Provision” to mean any agreement “that restrains any person from cold calling, soliciting, recruiting, hiring, or otherwise competing” for employees. DOJ’s definition included in its scope both employees located in the United States hired to work domestically or internationally, and employees located internationally and hired to work in the United States, thus extending the reach to international hiring. In its Complaint, DOJ characterized no-poach agreements as unnecessary to any legitimate business transaction or collaboration. Consistent with prior enforcement actions, DOJ argued that no-poach agreements are per se unlawful restraints of trade that are merely market allocation agreements not ancillary to any legitimate business transaction or collaboration. DOJ’s Complaint alleged that the agreements harmed the market for American rail industry workers by reducing access to higher-paying jobs, restricting wages, and decreasing the ability of workers to negotiate for better terms of employment.
DOJ alleged that historically the defendants compete in a highly competitive labor market to attract a limited supply of skilled employees by offering attractive salaries, benefits, training, and other favorable employment terms. In order to cut down on the employees’ leverage in the labor market, the defendants entered into “pervasive” no-poach agreements between senior company executives, which eliminated competition between them in the hiring of employees in various jobs in the industry, including project management, engineering, sales, and corporate officer roles.
The Complaint further alleged that the agreements were negotiated through constant communication between the defendants, including the use of letters, emails, and direct communications at trade meetings, and were well known to both senior executives at the parent companies, as well as by lower- and mid-level employees at their American subsidiaries. One such letter, sent by a Knorr director to a senior executive at Wabtec, stated that “you and I both agreed that our practice of not targeting each other's personnel is a prudent cause for both companies.” Another internal Knorr email stated that communications with competitors “resulted in an agreement between us that we do not poach each other’s employees.” The defendants agreed in the settlement with DOJ that they would refrain from “attempting to enter into, entering into, maintaining, or enforcing any No-Poach Agreement or No-Poach Provision.”
The clear guidance from this action is that antitrust compliance needs to extend beyond a firm’s price-setting mechanisms and should also closely examine human resource divisions and hiring practices. Firms should be aware that that no-poach agreements are a serious priority for the DOJ going forward and criminal charges, including corporate and individual fines including possible jail time, may be brought if warranted by the circumstances.