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Non-Solicitation In The Context Of Competition And Labour Laws     

BloombergQuintOpinion

Can an enterprise agree with its competitors not to hire each other’s employees without violating antitrust laws? Like any other practice of an enterprise, hiring practices may also violate antitrust laws. From an antitrust perspective, enterprises competing against each other to hire or retain employees are competitors in the employment marketplace irrespective of whether they sell the same product or provide the same services. Therefore, any agreement between employers, expressly or implicitly, agreeing not to hire each other’s employees, even if done to reduce costs, may violate antitrust laws.

With increasing protectionist barriers around the globe, companies are rushing to find new opportunities to expand and grow. As a result, competition among companies is unavoidable. This competition is not limited to goods or services offered by these companies and may extend to the hiring of employees, especially in industries where skilled talent is required. Companies have a collective interest to eliminate this competition by forming a no-poaching agreement amongst themselves, which restricts hiring each other’s employees.

However, no-poaching agreements may be in violation of antitrust laws as they impose restrictions on employees to pursue other jobs, as well as limiting their remuneration.

The Hong Kong Competition Commission has highlighted this issue by publishing an Advisory Bulletin: ‘Competition concerns regarding certain practices in employment marketplace in relating to hiring and terms and conditions of employment’. Before reporting some of the key findings and recommendations of the HKCC, we map the competition law developments in this area from around the globe.*

The enforcement actions by the United States Department of Justice clearly establish that no-poaching agreements are in violation of antitrust laws. Since 2010, when action was taken by the DoJ against Google, Apple, Adobe, Intel, Pixar and Intuit for entering into an agreement not to solicit/hire each other’s employees, DoJ has amplified its scrutiny into no-poaching and wage-fixing agreements. DoJ brought forth several successful cases recognising agreements fixing wages or preventing poaching as anti-competitive.

In one of the cases, DoJ opined:“these agreements eliminated a significant form of competition to attract skilled employees and overall diminished competition to the detriment of affected employees who were likely deprived of competitively important information and access to better job opportunities.”

With the increase in the number of enforcement actions with respect to no-poaching and wage-fixing agreements, in October 2016, the DoJ issued guidelines encapsulating general principles for human resources professionals and companies to avoid running afoul of antitrust laws as they relate to the agreements and communications among them. The guidance, which was jointly issued by the DoJ and the Federal Trade Commission, intended to send a strong message to the errant companies as the guidelines provide that going forward naked wage-fixing or no-poaching agreements will be viewed as per se illegal and authorities will proceed criminally against such agreements.

Despite issuance of guidelines and high-profile cases, human resource professionals and companies do not often realise that their discussions with competitors regarding employment conditions, benefits and wages may be in violation of antitrust laws.

Many simply believe that their formal or informal discussions with competitors are perfectly lawful.

Earlier this year, an official of the Antitrust Division of DoJ stated that investigations regarding a number of no-poaching agreements are underway and they were ‘shocked’ by the number of cases they have come across. However, they noted that this increase in numbers may be simply because of the lack of awareness or understanding as in most cases such agreements are not top of the mind of human resource professionals or companies. They may, however, get uncovered during the course of some other investigation by the authorities.

As we approach the stage of rapid globalisation, regulators across geographies are trying to exhibit renewed commitment to enforce antitrust laws against companies entering into no-poaching and wage-fixing agreements. The legality of no-poaching and wage-fixing agreements has also received considerable attention in Europe. In 2010, the competition authority of Spain, the National Commission for Markets and Competition, levied a fine of €14 million on eight freight forwarding agent companies for setting up a cartel to coordinate their pricing strategies. Apart from coordinating their prices, the authority also found the companies coordinating their strategies on various other issues including conditions for hiring of workers.

Hong Kong Competition Commission And Employment Practices

The recent advisory bulletin published by HKCC, clarifying that wage-fixing and no-poaching agreements raise potential competition concerns, is a significant development. In addition to the agreements amongst competitors, the advisory bulletin also covers agreements that may be entered into between companies not competing in the provisions of the same goods and services – i.e. downstream market. The advisory bulletin further clarifies that the authority may choose to prioritise the matter if undertakings are also competitors or potential competitors in the downstream market.

As per the advisory bulletin, sharing of competitively sensitive information, whether reciprocal or unilateral, directly between competitors or through a third party, was held to be a concerted practice. With the issuance of the advisory bulletin, HKCC has advised undertakings to independently determine the policies that they intend to adopt regarding employment terms and conditions including compensation of employees and the manner in which such undertakings solicit and recruit/ hire employees. Undertakings were also advised to avoid communicating such policies to other employers.

India And Non-Solicitation Of Employees

In India, Section 27 of the (Indian) Contract Act, 1872 makes a restrictive provision void, such as ‘non-compete’ in an employment contract, between an employer and its employee, after the termination of an employment contract / employee engagement. Similarly, non-solicitation, being a restrictive covenant, has also received attention over time and been a subject matter of litigation involving an employer and employee as well as two entities involved in a commercial arrangement.

In the case of Embee Software Pvt. Ltd. v. Samir Kumar Shaw & Others, in 2012 involving a former employer and employee, the non-solicitation provision in an employment contract was examined and it was held that the non-solicitation clause does not amount to restraint of trade, business and profession, and would not be hit by Section 27 of the Contract Act as being void. It was also held that solicitation, in case of a non-solicitation clause in a contract, would amount to a tort and cannot be practiced by a former employee to damage the business of a former employer.

In the case of Wipro Ltd. v. Beckman Coulter, in 2006, the Hon’ble High Court of Delhi examined the facts involving a non-solicitation clause (involving employees of each other) in a commercial contract between the two contracting parties. The Hon’ble High Court held that the non-solicitation clause between the two commercial parties can be held as valid, and the respondent (Beckman Coulter) cannot offer inducement to employees of Wipro Ltd. (petitioner) to join the respondent (Beckman Coulter).

Despite non-solicitation being subjected to judicial scrutiny, the Competition Commission of India has come across only a few cases concerning hiring practices that involved allegations such as predatory hiring, non-compete clauses. However, the CCI has not evinced much interest in these cases and closed them by terming them as employment issues.

But the serious question that arises is whether no-poaching and wage-fixing agreements are in violation of the Competition Act, 2002.

No-poaching or wage-fixing agreements are made between employers – i.e. at the same level of value chain. Under the purview of the Competition Act, Section 3 deals with anti-competitive agreements prohibited among enterprises engaged in identical or similar trade of goods or provision of services. In this context, it can be said that since the enterprises competing against each other to hire or retain employees are competitors in the employment marketplace, they may fall within the purview of Section 3 of the Competition Act.

Additionally, the Competition Act does not expressly cover no-poaching or wage-fixing agreements. However, the same may fall within the purview of Section 3(3) of the Competition Act as these agreements determine the compensation of employees and limit or control the supply of skilled labour in the employment marketplace. Therefore, it will be interesting to observe the CCI’s interpretation with respect to such agreements. Considering that Indian competition law is still developing, foreign competition law jurisprudence is also likely to play an important role.

Another aspect that may be of interest to the CCI is the consideration of the type of competitors with which no-poaching or wage-fixing agreements may be avoided to ensure that there is no liability under the antitrust laws. Whereas companies traditionally looked to other companies that sell the same products or compete for the same customers, this concept has expanded even to include a company’s customers, clients, suppliers or any other company that might compete to hire the other company’s employee.

Conclusion

Given that Indian competition legislation is relatively new and has not come across any case concerning no-poaching or wage-fixing agreements amongst competing enterprises in the employment marketplace, the CCI may take its cue from trends in sectors that require skilled employees to observe if the effect of such agreements are felt in India and conduct a sector inquiry.

Accordingly, as done in the pharmaceutical sector, the CCI may consider conducting a sector inquiry in sectors where such agreements are in place. One such sector is IT, which has been mushrooming in India and where news reports suggest salaries have remained more or less static (at the fresher levels) for several years. The CCI may also consider coming out with guidelines or an advocacy booklet laying down hiring practices that may lead to competition law violation. It would be interesting to see whether the CCI provides antithetical views on the subject or tries to reconcile its position with that adopted by the High Court of Delhi where it was held that a non-solicitation clause between the two commercial entities is valid.

In the present environment, with increasing employee turnover and difficulty in retaining talent, companies must carefully navigate both retaining talent and the laws that protect those employees in the employment market.

It is important to recognise that for several years there was virtually no guidance addressing this issue. Therefore, in the context of recent developments, it is important for companies to be cautious and mitigate risks involved. Companies should avoid sharing or discussing sensitive employment information with competitors and ensure that all senior executives and human resource professionals receive antitrust compliance training.

This note was authored by Rahul Goel - Partner in the Competition Practice, Manishi Pathak - Partner in the Employment Team, and Anu Monga - Director in the Competition Practice, at the Delhi Office of Cyril Amarchand Mangaldas.

* The views and opinions expressed in this blog piece are those of the authors alone and do not necessarily reflect the official position of Cyril Amarchand Mangaldas. As such, this blog piece does not constitute specific legal advice. Additionally, the authors are not qualified to opine on foreign law and their regulations or foreign law judgments. International law developments and judgments in this piece are discussed purely from a comparative perspective.

The views expressed here are those of the author’s and do not necessarily represent the views of Bloomberg Quint or its editorial team.