In a landmark case of first impression, the US Department of Justice’s (DOJ) Antitrust Division (Division) indicted and brought to trial a federal criminal prosecution alleging agreements between DaVita, Inc., its former CEO Kent Thiry and other companies not to solicit each other’s employees. The case was the first criminal trial of its kind in the Division’s recent efforts to expand Sherman Act liability under Section 1 to include so-called no-poach and non-solicit agreements. Following an eight-day jury trial and two days of deliberation, a Denver jury acquitted Thiry and DaVita on all counts of the unprecedented “no-poach” conspiracy. As the district judge himself succinctly put it to the jury: this case was “a unique case in the field of antitrust law.”

This criminal prosecution in the labor markets reflects a novel and aggressive stance on expanding Sherman Act criminal liability. In pursuit of this policy shift, the Division is trying to jam a square peg into a round hole by characterizing non-solicit and no-poach agreements as per se market allocation agreements. The per se rule creates a judicial shortcut of sorts that makes it easier for the government to prosecute classic cartel conduct such as price-fixing and bid rigging. This case, and related cases, are the first time the per se shortcut has been used in a so-called labor market allocation case. This unprecedented litigation created a watershed moment for the Division’s views that non-solicit and no-poach agreements are per se illegal. The complete acquittal of both defendants and the rulings of the district judge before trial cast doubt on whether the per se standard is appropriate for “no-poach” agreements and whether such agreements should be prosecuted criminally at all.

WHERE DID THIS COME FROM?

Historically, the Division pursued enforcement of alleged anticompetitive labor market practices in the civil context, meaning fines for companies and individuals. In fact, that was the approach the Division took with no-poach and no cold call agreements entered into by major technology and railway companies. The Division engaged in a volte-face and declared it would criminally prosecute such labor market agreements for the first time in October 2016. Without an intervening act of Congress, executive order or ruling by any court, the Division warned that going forward it intended to proceed criminally against “naked wage-fixing or no-poach agreements” between horizontal competitors in the labor market. The Division declared that investigating alleged “naked wage-fixing or no-poach agreements” was a top priority. Ignoring concerns related to the separation of powers, the Division unilaterally cited its discretion and put the full weight of the government into labor market no-poach agreements. That momentum accelerated in December 2020 and continued throughout 2021, with the Division bringing 12 criminal cases against nine individuals and three companies. In short, aggressive and expansive antitrust enforcement from the DOJ is now the new normal.

DOJ SEEKS TO CREATE A NEW CATEGORY OF PER SE LIABILITY AND USES DAVITA AND THIRY AS A TEST CASE

The Division returned a superseding indictment against DaVita, Inc. and Kent Thiry on November 4, 2021. The three-count indictment alleged that the defendants entered into non-solicitation agreements with three separate companies to suppress competition for senior executives (Count I) and all employees (Counts II and III). The defendants moved to dismiss the indictment, arguing that there was no precedent supporting this case of first impression as a per se violation and that a court should not find—for the first time—that employee non-solicit agreements are so pernicious that they should be categorically prohibited as per se illegal. Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886-97 (2007). The defendants also argued that such a rule could not be announced for the first time in a criminal case, particularly where the Division had not shown that such agreements “would always or almost always tend to restrict competition and decrease output,” “have manifestly anticompetitive effects” and “lack any redeeming virtue.” Leegin at 886. Finally, the defendants argued the following: that the alleged non-solicitation agreements have significant plausible procompetitive benefits, that there is no body of cases finding such agreements manifestly anticompetitive or unlawful even under the rule of reason standard, and that declaring the alleged agreements per se illegal would violate the Due Process Clause by depriving defendants of fair warning of the offense with which they have been charged.

A core tenet of the defendants’ argument on the motion to dismiss is that labor is different. It is different because courts allow restrictions on labor in individual employment contracts with non-solicitation clauses and because certain employees have access to highly confidential information that creates a competitive advantage when those employees leave the company. Labor market restrictions are permissible because there are procompetitive reasons to restrict labor. The fact that labor is different is an independent reason that labor market agreements do not fit a predetermined category of per se unlawfulness such as price-fixing, bid rigging or market allocation.

In denying the defendants’ motion to dismiss, the court acknowledged that “[t]here are no cases finding that non-solicitation agreements are so pernicious, in and of themselves, that they should be classified as per se unreasonable.” The court also held that only those “naked” no-hire and non-solicitation agreements that “allocate the market” are per se unreasonable. (“What I conclude is that if naked non-solicitation agreements or no-hire agreements allocate the market, they are per se unreasonable.”). In contrast, “[w]here they have been found not to allocate the market…courts have not found no-hire [and non-solicitation] agreements to be inherently anticompetitive.” “It does not follow that every non-solicitation agreement or even every no-hire agreement would allocate the market and be subject to per se treatment.” Accordingly, the court denied the defendants’ motion to dismiss only because it determined that “the government has sufficiently alleged,” on the face of the indictment, “that defendants allocated the market with their non-solicitation agreement.”

The court itself acknowledged the significance of imposing the per se standard during the oral argument on the motion to dismiss when it commented, “So if I decide that it’s a per se violation, in effect, I’m deciding that these people are guilty,” and explained to the Division lawyers that “[w]ell, your prosecutorial discretion is if I have an easy win by having the judge call it per se we go home and celebrate, and if we have to do the hard work of proving unreasonable restraint of trade, we’re not going to do it. We’ll let someone else worry about it.” Recognizing the draconian nature of the per se standard in a case of first impression, the court ruled that the Division would “not merely need to show that the defendants entered the non-solicitation agreement and what the terms of the agreement were. It will have to prove beyond a reasonable doubt that the defendants entered into an agreement with the purpose of allocating the market” and that the defendants “intended to allocate the market as charged in the indictment.” Lawyers defending future labor market allocation cases should cite and rely on this language that charging a mere non-solicitation agreement, absent more, is insufficient to state a per se offense. Moreover, the court’s key holding that the government must prove that the purpose of the non-solicitation agreement was to allocate the market for employees is a key defense strategy that should be argued in future cases.

THE TRIAL

Although the court found that DOJ had pled a per se case, the defendants argued—and the jury ultimately agreed—that is night and day from actually proving that non-solicitation agreements are per se illegal. Leading up to trial, the court itself questioned whether the per se standard would ultimately be appropriate:

“…it is still at least our view that the question of whether this ultimately goes to the jury as a per se case depends on the evidence they present, and that the court should, in order for the trial to be fair, allow all of the evidence about the relationships between these alleged co-conspirators that could explain exactly the question Your Honor has teed up, which is what they were trying to accomplish. THE COURT: Okay. I hear you. I might be inclined to agree with you, actually.”

At trial, the government called two of the three counterparty CEOs, three COOs and one head of Human Resources. In each instance, the witnesses had received a form of the non-prosecution agreement. Importantly, the witness and document evidence adduced at trial demonstrated the following:

• The charged non-solicitation agreements did not constitute market allocation agreements;

• The charged agreements did not “end meaningful competition” for the employees that were allegedly subject to them;

• The employees subject to the alleged non-solicitation agreements had hundreds—if not thousands—of other competitors in the market vying for their services;

• The charged agreements permitted transfers between the alleged co-conspirator companies and employees did move between the companies during the charged conspiracy periods;

• The charged agreements did not suppress employees’ wages in any meaningful way;

• Employee turnover was not suppressed;

• The alleged conspirators lacked the ability through agreements between them meaningfully to affect competition or competitive outcomes for those employees; and

• The evidence showed procompetitive purposes and effects of the charged agreements, among others.

Although the court denied the defendants’ motions for a judgment of acquittal and allowed the case to go to the jury on a “per se” standard, ultimately the court—through its jury instructions—did not agree with the Division that a typical per se approach was appropriate. By way of example, evidence and economic expert testimony about strategic business reasons for alleged non-solicitation agreements, the existence of employee movement, the lack of effect and the lack of harm could be considered. The court allowed the jury to consider that “evidence of lack of harm or procompetitive benefits might be relevant to determining whether defendants entered into an agreement with the purpose of allocating the market.” The court also instructed that to find defendants guilty beyond a reasonable doubt, the jury must find that the defendants sought to “end meaningful competition” through the non-solicit agreements. At the end of two days of deliberations, the jury—not the government—had the last word, and justice was done.

TAKEAWAYS

There are several important takeaways for counsel from this case of first impression. First, there were significant legal victories beyond the jury’s verdict, and these may be a useful precedent for other matters. As described above, the court required the Division to prove more than the mere existence of an agreement and the defendants’ participation in a conspiracy. Importantly, the court required the Division to prove intent—that “defendants entered into an agreement with the purpose of allocating the market.”

In addition, there were two important jury instructions that may assist other defendants in pending matters. In one, the court instructed that the jury “may not find that a conspiracy to allocate the market for the employees existed unless you find that the alleged agreements and understandings sought to end meaningful competition for the services of the affected employees.” The jury asked about this definition, inquiring about what “meaningful competition” means. The court instructed in its response that ‘meaningful competition’ essentially is another way of saying ‘significant competition’ or ‘competition of consequence.’ In another key jury instruction, the court instructed the jury that “evidence of lack of harm or procompetitive benefits might be relevant to determining whether defendants entered into an agreement with the purpose of allocating the market.” This instruction is a critical instruction to seek in similar cases.

Second, despite the Division’s insistence—bolstered to a minimal degree by their surviving two motions to dismiss in a criminal matter—that certain alleged “no-poach” agreements should be considered only under the per se standard, once the factual record is developed, counsel should continue to press against the imposition and advocate that the appropriate standard is the rule of reason because of the core tenet that labor is fundamentally different from markets for customers/goods/services. Because agreements to allocate the market, as charged in this case, for labor can and do have inherent procompetitive benefits to both employers and employees, traditional market allocation cases are not sufficiently analogous to condemn labor market allocation agreements as per se illegal. Where Congress has not spoken and where there is no considerable experience with the type of restraint to predict with confidence that the offense would be invalidated in all or almost all instances, the factual record can demonstrate that the evidence is not so thoroughly pernicious to merit per se treatment.

Finally, while the full acquittal represents a setback for the Division’s aggressive stance on criminalizing certain labor market practices, this result is unlikely to deter the DOJ’s misguided pursuit of these matters. The Division’s novel and aggressive stance on expanding Sherman Act criminal violations to how companies engage with their workers have thus far passed muster at the motion to dismiss stage but has flunked with juries. See generally, US v. DaVita, Inc. and Kent Thiry, 21-cr-00229; US v. Jindal, 20-cr-00358. However, the Division is steadfastly determined to investigate and prosecute alleged “wage-fixing and no-poach” issues. With the Division’s resolute approach to changing the landscape of antitrust labor market cases, companies would be prudent to ensure their compliance programs are updated to include specific and appropriate guidance on these issues.

When clients consider typical antitrust cartel investigations, the focus has traditionally been on alleged conspiracies relating to pricing, sales and/or bidding of certain products or in certain geographic areas. The Division is shifting the landscape and its criminal focus towards labor market antitrust issues. To address the Division’s assertive approach, executives involved in hiring and compensation-related decisions would be well-served to receive antitrust training addressing issues relating to these issues.