Californian corporations face class actions for allegedly trying to prevent staff from joining rivals
Adobe Systems, Apple, Google and Intel are all facing large fines in the US after being accused of operating an "overarching conspiracy" to prevent their staff - engineers and technical employees - from moving between them. The corporations have allegedly been striking a series of ‘non-poaching’ deals, principally through the use of non-solicitation agreements, which has led to a class action by 64,000 employees who are claiming that they have been denied the chance to move jobs.
The Northern District court for the state of California has recently rejected a $324m (£193m) settlement in the latest development of this long-running lawsuit. Some companies - Pixar, Lucasfilm and Intuit - have already reached settlement agreements with their employees.
Enforcement
The non-solicitation agreements are alleged to violate the US antitrust laws, which prohibit unreasonable restraints of trade. The Federal Trade Commission enforces the antitrust rules and most enforcement actions are civil in nature, although both individuals and businesses can also face criminal prosecution. Criminal penalties can be severe, with fines up to $100 million for a corporation, and $1 million for an individual and up to 10 years imprisonment. If actions are taken under federal law, the maximum fine may be increased to twice the amount gained from the illegal acts, or twice the money lost by the victims of the crime, if either of those exceeds $100 million. Companies are, among other things, banned from using ‘unfair methods of competition’ and ‘unfair or deceptive acts or practices’.
Restrictive covenants
In the UK, employees are generally free to leave employers and set up in competition. However, low level restraint on trade is permissible, and enforceable, if it is reasonable and goes no further than is necessary to protect the legitimate interests of the company. This is mainly achieved though restrictive covenants, which are clauses found in an employee’s contract of employment or service agreement. These can legally restrain the employee from going to work for a competitor, or trying to entice colleagues to follow, for a period of time (usually six to 12 months) or within a specified geographical location. They can encompass both a time period and geographical location. Typically, restrictive covenants are reserved for highly skilled or senior employees.
Investigations
Happily for employers, there are no criminal law sanctions in the UK if the rules are breached, although anyone found to be involved in cartel activity may be fined or sent to prison for up to five years. Nevertheless, the Competition & Markets Authority (CMA) is able to investigate business practices and any agreement found to infringe the anti-competitive provisions would be void. During investigations, the CMA can require companies to comply with temporary directions, if it considers it necessary to act urgently either to prevent significant damage to a person or category of persons, or to protect the public interest.
Deterrents
However, the main deterrent, and one that is particularly pertinent to large global companies, is that businesses may be fined up to 10 per cent of their worldwide turnover for entering into an anti-competitive agreement or abusing a dominant market position (not to mention the prospect of being sued for damages by those affected). What’s more, company directors may be disqualified from acting as a director for up to 15 years.
Had the Adobe, Apple, Google and Intel case occurred in the UK, it would certainly appear that a blanket agreement to prevent the free movement of skilled employees between competitors could have the effect of preventing, restricting or distorting competition, and possibly constituting an abuse of a dominant market position. The rationale would be that such blanket agreements would be particularly problematic in the IT and technology industries, where the anti-poaching of employees could severely limit (or, at least, control) technical developments by preventing the transfer of knowledge and skill.
The use of restrictive covenants is increasing, particularly after the economic downturn, but it seems unlikely (although by no means impossible) that we will see any significant number of blanket non-poaching agreements here in the UK. However, while the legislation is in place to deter blanket non-poaching agreements, the US case illustrates that this may not necessarily put companies off using them.
Chris Cook is a partner and head of employment and Chris Wilks, a partner and head of corporate & commercial at SA Law
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