How analogous are labor market abuses to traditional antitrust analysis, and how comfortable will courts be applying precedents that dramatically affect the sufficiency of pleadings, parties' evidentiary burdens, affirmative defenses and jury instructions?
The judicial developments of the past year highlight this key issue that will continue to define labor market antitrust litigation this year.
Some observers of antitrust litigation in labor markets might conclude that 2022 was not a great year for prosecutors or plaintiffs, considering stinging losses in the U.S. Department of Justice's only two labor market cases to go to trial, as well as a district court defeat in a bellwether civil suit against McDonald's Corp.
Meanwhile, the government has secured its first guilty plea in a criminal prosecution for a labor market antitrust violation, and officials have pointed to judicial acknowledgment that no-poach agreements can be per se, or presumptively, anti-competitive violations of antitrust law as a significant win.
The reality is that both characterizations are somewhat overstated and obscure important nuance to these recent developments.
The government has shown no indication that its interest in labor market issues has been tempered by its losses in no-poach criminal prosecutions — quite the opposite.
In addition to several pending DOJ criminal trials involving no-poach agreements this year, the Federal Trade Commission has started 2023 by obtaining a handful of consent agreements striking noncompete agreements and has issued a notice of proposed rulemaking regarding a comprehensive ban on nearly all noncompete agreements, signaling that the antitrust agencies are broadening their scrutiny of potentially anti-competitive employment practices.[1]
Private plaintiffs are sure to follow their lead.
Why Per Se Analysis Is So Critical to Plaintiffs Challenging No-Poach Agreements
One of the most critical issues in no-poach litigation thus far has been whether or not no-poach agreements constitute per se antitrust violations, and, with the dearth of precedent, it is still a live issue.
Traditionally, per se antitrust violations describe a class of activities, like price-fixing among competitors, that courts regard as so inherently anti-competitive that they may be condemned without an in-depth analysis of the surrounding circumstances.[2] This presumption comes with significant advantages for plaintiffs and hurdles for defendants.
So far, all of the DOJ's criminal prosecutions have survived a motion to dismiss where defendants failed to persuade the courts that no-poach agreements are too novel and distinct from more conventional horizontal agreements to fix prices.[3]
As Assistant Attorney General Jonathan Kanter has emphasized, this is a significant win for the DOJ.[4] By accepting the government's argument that no-poach agreements are sufficiently similar to price-fixing agreements that have long been held to be per se violations, the courts have relieved plaintiffs of the evidentiary burdens of defining a relevant market, demonstrating that defendants have market power, and that the conduct was in fact anti-competitive. The per se classification also prevents defendants from offering pro-competitive justifications.[5]
The significance of per se treatment can further be understood by how its counterpart, the "rule of reason" treatment, would have assisted defendants. As described above, the rule of reason would require plaintiffs to identify a relevant market, show that defendants possessed market power and show that harm to competition occurred, as well as rebut any pro-competitive justifications offered by defendants.[6]
Defining a relevant market in traditional product market antitrust litigation is fact-intensive, often involving multiple experts debating multiple models and complex evidentiary considerations. Defining a relevant labor market could be even more complicated.
While product markets are often geographically well-defined, it is less clear what constitutes the geographic bounds of a labor market. If another job is located an hour away by public transportation but only 15 minutes away on a highway, should it be considered a competitor employer? What if the worker doesn't own a vehicle?
Another evidentiary difficulty will be identifying substitutes. Antitrust experts have developed many tools to identify and measure product substitutes that define the relevant market where competition occurs. However, identifying what jobs are competitive substitutes may be more difficult because of the complicated and sometimes subjective factors that determine worker mobility and job valuation, and market frictions unique to labor markets.
If grocery cashiers sometimes transition to similarly paying jobs as security guards and vice versa, should they be considered substitutes? What if a tax attorney would not and could not easily transition to working as an immigration attorney at a firm in the same office building?
While many traditional antitrust econometric tools could be modified and applied to labor markets, defendants would have many more opportunities under the rule of reason to challenge the evidence and arguments presented by labor plaintiffs.
Lastly, in the civil context, the complexity of differently situated workers revealed by a rule of reason analysis could lead to denials of class certification, as was seen in Deslandes v. McDonald's USA LLC.[7]
In Deslandes, the U.S. District Court for the Northern District of Illinois in July 2021 denied certification of a proposed class after determining that no-poach provisions in franchise agreements should be analyzed under the rule of reason.
The court held that the proposed class implicated hundreds of thousands of distinct labor markets requiring unique analysis that defied the commonality requirements of class certification.
Had the restraints been held to be per se violations, no such individualized inquiry into market attributes would have been necessary, making the proposed class more likely to be certified.
Ancillary Restraint Doctrine as Affirmative Defense
The courts in the DOJ's first two criminal no-poach prosecutions agreed that allegations of no-poach agreements within criminal indictments will be considered as sufficiently alleged per se violations of the Sherman Act.[8]
However, courts have had more difficulty determining the significance of the "ancillary restraint" doctrine, where an anti-competitive horizontal restraint is excused by virtue of its relationship to a pro-competitive business arrangement like a joint venture, the sale of a business or an athletic league.
This defense, and how widely or narrowly courts define it, is critical to litigation, even at the pleadings stage.
Courts in criminal proceedings thus far have determined that the ancillary restraint doctrine is an affirmative defense to be litigated at trial, and does not defeat an indictment that properly alleges a per se violation at the pleadings stage.[9]
This is significant because the government criminally charges only per se violations as a matter of prosecutorial policy; thus, indictments do not typically allege alternative theories of harm requiring rule of reason analysis as a backstop.
In the civil context however, the district court in Deslandes did find in June 2022 that a nopoach agreement was ancillary to a franchise arrangement at the motion to dismiss stage, thus dismissing the plaintiff's per se cause of action.[10]
The plaintiff's complaint argued in the alternative that, if the court deemed them to be ancillary and thus not treatable as per se violations, the agreements should still be analyzed using a rule of reason analysis.
Ultimately, however, the district court's finding of an ancillary restraint to a pro-competitive franchise arrangement at the pleadings stage was sufficient to grant the defendant's motion for a judgment on the pleadings.
The Deslandes decision is currently being appealed, with both the FTC and DOJ having weighed in as friends of the court contesting whether the defendants adequately demonstrated the restraints were ancillary, and particularly pushing back on the district court's determination of an ancillary restraint defense requiring rule of reason analysis at the pleadings stage.[11]
Poor Test Cases and Bad Facts for Prosecutors and Plaintiffs
While the government was able to score procedural victories in its first no-poach prosecutions by surviving motions to dismiss in both U.S. v. Jindal and U.S. v. DaVita Inc., the courts' holdings that no-poach agreements among horizontal competitors are per se
antitrust violations was not without important caveats.
In Davita, the U.S. District Court for the District of Colorado instructed the jury that to convict, they would have to find "beyond a reasonable doubt that defendants entered into an agreement with the purpose of allocating the market," essentially adding an intent requirement to a per se cause of action, when other, more traditional product market per se violations have required no such showing.[12]
The judge in Davita thus broke from a line of cases following the U.S. Court of Appeals for the Third Circuit's 1979 decision in U.S. v. Gillen that reasoned that per se violations require no finding of criminal intent because the conduct at issue is "unquestionably anticompetitive."[13]
The defendants successfully argued that the purpose of the agreements was actually to identify which workers were dissatisfied in order to compete to keep them.
Like in Davita, the U.S. District Court for the Eastern District of Texas in Jindal instructed the jury that evidence of lack of intent was a relevant factor in assessing guilt, despite initially recognizing that horizontal agreements among competitors to fix wages are a per se violation of antitrust laws.[14]
Juror remarks following the Jindal trial suggest that the prosecution's evidence was spotty, inconsistent and not strong enough to establish the existence of an agreement beyond a reasonable doubt, which is the standard of proof necessary in a criminal trial.
If the prosecution in either case had presented stronger evidence — for example, communications explicitly showing agreement and identifying intent to suppress wages or allocate workers — it might not have provoked jury instructions on the issue of purpose that
raised the evidentiary burden to convict.
The full consequences of the Davita and Jindal courts' position on criminal intent for per se anti-competitive agreements in labor markets remains to be seen.
The DOJ appears to be pursuing other cases with stronger evidence of explicit agreement with intent to fix wages or allocate workers that will provide courts additional opportunities to abandon or double down on the focus on purpose and intent in per se violations.
One such case, U.S. v. Hee, netted the DOJ its first guilty plea in October 2022, where the government alleged that a pact was made for the express purpose of not raising wages.
On the civil side of 2022 labor market antitrust litigation, the plaintiffs bar struggled to convince courts that no-poach agreements in the franchise context should be considered to be per se antitrust harms, despite the government even weighing in on the plaintiff's side as a friend of the court.
In Deslandes, former employees of McDonald's fast food franchises challenged no-poach provisions within franchise agreements that restricted franchisees from soliciting or hiring one another's employees.[16]
Unfortunately for the plaintiffs, no-poach agreements in the franchise context may be easier to justify as ancillary to the franchise agreement itself, especially when, as in Deslandes, the agreement is a provision of the franchise agreement itself.
After the court declined to employ per se treatment, defendants ultimately prevailed on a motion for judgment on the pleadings.
There are ongoing arguments about whether or not the ancillary restraint defense requires defendants to show that the agreement was reasonably necessary for the operation of the franchise in order to trigger rule of reason analysis, with a pending appeal against McDonald's where the DOJ and FTC have submitted an amicus brief arguing they do.
Deslandes should also not be read as a general indication of the difficulties worker plaintiffs will face in challenging no-poach agreements. In fact, the court in the civil case against Davita, following the DOJ's unsuccessful criminal prosecution for the same conduct, rejected rule of reason treatment.
In In re: Outpatient Medical Center Employee Antitrust Litigation, the defendants filed a notice of supplemental authority in support of a motion to dismiss citing the Deslandes court's rejection of per se analysis of nonsolicitation agreements.[17]
The Northern District of Illinois was unpersuaded, and distinguished the no-poach agreements at issue is Deslandes as ancillary to a larger franchise agreement, thus triggering rule of reason analysis, and held that where a horizontal agreement among competitors was a naked restraint, per se analysis remained appropriate.
Conclusion
Prosecutors and litigants had varying degrees of success arguing that traditional antitrust doctrine and legal precedent should or should not apply to agreements restricting employment in 2022.
As with most antitrust matters, the factual circumstances surrounding a particular employment restraint can be outcome-determinative and matter a great deal even at the earliest stages of litigation.
The more the facts of a case suggest an explicit agreement to set wage levels or apportion workers, the more comfortable courts appear to be in strictly applying precedential antitrust rules governing burdens of proof, sufficiency of pleadings and affirmative defenses.
In contrast, courts have been less comfortable extending antitrust precedent to circumstances where an analogy to naked agreements to fix prices or allocate markets is more tenuous. They have responded by reincorporating criminal intent requirements and carefully protecting the ancillary restraint defense in per se cases.
Whether or not all horizontal agreements on employment restrictions should be treated as per se violations remains a live issue, with business groups and human resources associations arguing that forms of employment coordination with pro-competitive benefits, never before condemned, should not be criminally prosecuted under a standard so prejudicial to defendants.[20]
The continued viability of the ancillary restraint doctrine as an affirmative defense is also likely to receive continued scrutiny as both parties realize how powerful it can be, even at the pleadings stage, though it hasn't yet been enough to dismiss a criminal indictment.
J. Manly Parks is a partner and Randy J. Kim is an associate at Duane Morris LLP.
Notes
[1] Press Release, Federal Trade Commission, FTC Proposes Rule to Ban Noncompete Clauses, Which Hurt Workers and Harm Competition (Jan. 5, 2023) https://www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-ruleban-noncompete-clauses-which-hurt-workers-harm-competition.
[2] Continental T. V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49-50 (U.S.Cal., 1977).
[3] See United States v. Jindal, No. 4:20-CR-00358, 2022 WL 997174 (E.D. Tex. Apr. 1, 2022), United States v. DaVita Inc., No. 1:21-CR-00229-RBJ, 2022 WL 266759 (D. Colo. Jan. 28, 2022).
[4] Despite Defense Verdicts in Healthcare Wage-Fixing Suits, Feds Remain Resolute, The National Law Review (May 3, 2022) https://www.natlawreview.com/article/despite-defenseverdicts-healthcare-wage-fixing-suits-feds-remain-resolute.
[5] Antitrust Per Se Standard, Practical Law Practice Note w-024-5969.
[6] Id.
[7] Deslandes v. McDonald's USA LLC, No. 17 C 4857, 2022 U.S. Dist. LEXIS 113524 (N.D. Ill. June 28, 2022).
[8] See supra n.2
[9] See, e.g., United States v. DaVita Inc., No. 1:21-CR-00229-RBJ, 2022 WL 266759, at *4 (D. Colo. Jan. 28, 2022).
[10] Deslandes at *34.
[11] Brief for the United States of America and the Federal Trade Commission as Amici Curiae in Support of Neither Party, Leinani Deslandes v. McDonald's USA LLC et al., case number 22-2333.
[12] United States v. DaVita Inc., No. 1:21-CR-00229-RBJ, 2022 WL 266759, at *9 (D. Colo. Jan. 28, 2022).
[13] United States v. Gillen, 599 F.2d 541 (3d Cir. 1979).
[14] United States v. Jindal, No. CV 4:20-CR-00358, 2021 WL 5578687, at *8 (E.D. Tex. Nov. 29, 2021), reconsideration denied sub nom. United States v. Rodgers, No. CV 4:20-CR-00358, 2022 WL 889942 (E.D. Tex. Mar. 25, 2022).
[16] No. 17 C 4857, 2022 U.S. Dist. LEXIS 113524 (N.D. Ill. June 28, 2022).
[17] In re: Outpatient Medical Center Employee Antitrust Litigation, 2022 U.S. Dist. LEXIS 173925 (N.D. Ill. Sep. 26, 2022).
