Can hiring a competitor’s employee be an antitrust problem?
A senior sales executive for your biggest competitor is looking to jump ship, and wants to join your company. Your management is thrilled. Not only will your company gain a talented salesperson with industry knowledge and contacts, but you will also be hurting your competitor at the same time. What a coup!
However, the question crosses your mind, are there any antitrust issues involved in hiring away a competitor’s employees? The answer is: there can be. And a little bit of forethought now can save your company a great deal of risk and expense down the line.
A firm that has monopoly power (or a “dangerous probability” of attaining monopoly power) can violate the Sherman Act’s prohibition against “monopolization” (or attempted monopolization) by engaging in “predatory” conduct. (For a more in-depth explanation of the antitrust laws generally, see here.) Predatory conduct generally means conduct meant to harm or disadvantage competitors “on some basis other than efficiency.” “Monopoly power” (or a dangerous probability thereof) can be inferred from having a market share as low as 30 percent in some markets.
From time to time, antitrust cases come up where a large competitor hires away a key employee, or a group of key employees, from a smaller competitor. The theory of these cases is that by hiring away a competitor’s employees, a large firm can achieve or maintain a monopoly over the relevant industry. These cases are known as “predatory hiring” claims.
Courts tend to approach predatory hiring claims with a healthy dose of skepticism. As one court has explained, “there is a high social and personal interest in maintaining a freely functioning market for talent.” Put differently, companies ought to be competing for talent, and it would turn the antitrust laws on their head to discourage firms from competing with one another for labor. As the Department of Justice and the Federal Trade Commission have put it, “competition among employers helps actual and potential employees through higher wages, better benefits, or other terms of employment.” Therefore, at least one court has stated that “the mere hiring away of employees from a rival is per se legal under the antitrust laws.”
However, under specific factual circumstances, courts occasionally do entertain claims for predatory hiring. A leading case on this issue explains that “when talent is acquired not for purposes of using that talent but for purposes of denying it to a competitor,” then the line is crossed between lawful and “predatory” hiring. For example, predatory hiring might be found where “a dominant computer software firm . . . hires away all of its rivals’ best programmers and, because it has enough of its own programmers, employs them as custodians paid the salaries of computer programmers rather than custodians.” Therefore, as another court explained, predatory hiring exists where the employee either is unused or there is a proven intent that the hiring was for the purpose of denying the employee to the competitor.
Based on this standard, courts have rejected predatory hiring claims brought against a test-preparation company that recruited a competitor’s star faculty member away to use for its own classes, or against a radio station that poached a team of its competitor’s on-air talent to use for its own programming. However, a predatory hiring claim was allowed to survive past a motion to dismiss where a plaintiff alleged that a hospital system had “raided” a rival by luring away the rival’s key physicians with above-market salaries, even though the hospital system was unable to keep the physicians busy and eventually had to let them go.
Tips for lessening exposure to predatory hiring claims
Given the risks of a predatory hiring claim, it is worth pausing before hiring away a competitor’s key employee (or a group of employees). There are seven things to keep particularly in mind.
- First and foremost, it is essential that your company has a legitimate business reason to be hiring this employee, rather than just trying to deny your competitor the benefit of the employee’s services. Therefore, make sure that your company has a plan for putting the employee to work in a meaningful capacity, commensurate with what you will be paying the individual. And then, make sure that your company’s plan for putting the employee to work is documented, in case it is ever needed to defend against a predatory hiring claim.
- Second, predatory hiring claims (and monopolization claims generally) can only be brought against companies with monopoly power or a dangerous probability of attaining monopoly power. Therefore, smaller businesses and start-up firms will face relatively little risk from poaching talent away from an entrenched incumbent firm. However, an entrenched incumbent can face much more risk from poaching talent away from small rivals or new entrants.
- Naturally, the risks are greater when hiring away a group of employees rather than an individual employee. And similarly, the risks are greater when hiring away a top executive rather than a lower-level employee.
- Next, when meeting with a prospective hire, do not try to induce the individual to violate any non-disclosure or non-compete agreements, or to be disloyal to the employee’s current employer while still remaining in its employ. For instance, one court held that a company committed an antitrust violation by getting its prospective hires to steer customers away from the company’s competitor “while [the prospective hires] were evidently still in the [competitor’s] employ.” However, the same court held that it was fair game to merely hire a competitor’s key employee away and then – after the hiring was complete – to lure away some of the competitor’s customers. And of course, such actions can lead to a host of other legal concerns in addition to anti-trust issues.
- Even if you have the purest of intentions, be mindful not to put anything in writing that could be read to suggest a predatory motivation for hiring the employee away from a rival. In one case, an executive prepared a memo that said that hiring a key employee would have the benefit of “wound[ing]” a competitor. The court ultimately held that this one document alone was not enough to make out a case for predatory hiring, but it significantly increased the time, expense, and risk of the antitrust litigation.
- In borderline cases, particular steps can be taken to lower certain risks. For instance, risks can be lessened by hiring the new employee on an “at will” basis rather than for a set period of time, or by foregoing any requirement that the new employee sign a non-compete agreement. Additionally, it can be helpful to give a new employee just a modest raise over his or her previous salary, to lessen claims that the employee was lured away with a bloated or above-market salary. Likewise, it can be helpful to show that a competitor’s employee approached your company to jump ship, rather than the other way around. Although none of these steps are by any means “necessary” for antitrust purposes, they all can reduce risks in close cases.
- Finally, it is important to keep in mind that antitrust claims do not arise in a vacuum. Therefore, a predatory hiring claim is much more likely to be brought – and to find success – when there is a larger pattern of potentially predatory activities at stake. Thus, when there are other reasons to be sensitive to antitrust concerns (such as when a competitor has already brought or threatened a lawsuit), you should be particularly sensitive to predatory hiring issues.
This article has focused on situations where one company hires an employee away from a competitor. There is a whole other body of law around situations where one employee works for two different competing companies at the same time. Those situations can raise issues of improper coordination under Section 1 of the Sherman Act and, when they involve officers or directors, issues of “interlocking” under Section 8 of the Clayton Act. These issues are more fully explored here, but they are serious considerations that should be raised with antitrust counsel before any decision is made to hire an employee who will simultaneously be working for a competitor.
The antitrust laws exist to promote competition, and these laws should not deter companies from vigorously competing with one another for valuable talent. However, the law recognizes that bona fide competition has its limits. Companies with monopoly power (or a dangerous probability of attaining monopoly power) can run into monopolization issues by poaching away talent for the sole purpose of harming their competitors. Therefore, before hiring away a competitor’s employees, take a moment to develop a plan for using the employees in a meaningful capacity commensurate with their salaries, and then put that plan into writing in case it is ever needed to defend against an antitrust case.
This article originally appeared on the Foley & Lardner website. The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.