Thursday, 4 August 2011

Monsters Inc - No Headhunting Allowed


Introduction
Recently, the US Department of Justice settled two antitrust investigations into illegal anticompetitive agreements amongst seven high profile technology companies.[1] Given the identities of the companies involved and the serious illegality involved, it is highly surprising that the settlement went through without a great deal of publicity. Indeed, it is probably even more surprising that the DOJ decided to commence civil litigation in the first place, rather than criminal prosecutions, given the conduct involved six separate naked restraints in breach of section 1 of the Sherman Act by such corporate giants as Google, Apple, Intel, Adobe and Lucasfilm.

Unfortunately, it appears that the DOJ has failed in its mandate by not pursuing the companies involved in these illegal agreements more vigorously. The conduct merited more serious sanctions than simply a promise not to engage in such conduct again in the future. The DOJ should have taken criminal prosecutions against the companies involved given the seriousness of the conduct. Ultimately, it may have been a case of the DOJ being simply too fearful of commencing criminal proceedings against these corporate behemoths because of their combined legal and financial firepower.

Background
In September 2010, the DOJ commenced legal action against Google, Apple, Adobe, Intel, Pixar and Intuit for alleged contraventions of section 1 of the Sherman Act.[2] On December 2010, the DOJ instituted separate legal proceedings against Lucasfilm for similar conduct.[3]

Google, Apple, Adobe, Intel, Pixar and Intuit case (Google case)
The DOJ alleged in its case that Google, Apple, Adobe, Intel, Pixar and Intuit had contravened section 1 of the Sherman Act by entering into a number of agreements preventing them from cold calling employees of the other companies with employment offers.

Section 1 of the Sherman Act prohibits:
Every contract, combination in the form or a trust or otherwise, in restraint of trade or commerce among the several states.
The DOJ found that the companies had entered into five separate agreements as follows: 
  • Apple – Google 
  • Apple – Adobe 
  • Apple – Pixar 
  • Google – Intel 
  • Google – Intuit. 
These agreements had a number of common characteristics.

First, each of the agreements instructed all employees not to actively solicit staff from the other party to the agreement.

Second, all of the agreements had been in existence for a number of years. The Apple – Adobe agreement commenced in 2005 while the Apple – Google agreement commenced in 2006. All of the remaining agreements (ie Apple – Pixar, Google – Intel and Google – Intuit) commenced in 2007.

Third, the agreements were designed and entered into by senior executives of each of the companies.

Fourth, these senior executives actively managed and enforced the agreements through direct communications with the other companies.

Fifth, the agreements covered all employees of the firms. The agreements were not limited by geography, job function, product group or time period.

Finally, each company maintained a written “Do Not Call List” which each of the companies displayed prominently in their premises. These lists included the names of the company or companies which the employees were not permitted to cold call pursuant to the agreements.

The DOJ found in relation to the Apple – Google agreement, there had been a number of instances of Apple complaining to Google about alleged breaches of the agreement. As a result of receiving these complaints, Google conducted a number of internal investigations to determine whether there had in fact been a breach of the agreement. Once these internal investigations were completed, Google reported its findings back to Apple.

Similarly, there was evidence that Intuit had complained to Google about breaches of their agreement. Google responded by conducting an internal investigations into these complaints to determine whether there had been a breach of the agreement.

The DOJ also found that Adobe had only agreed to enter into the agreement with Apple because if feared that if it refused, Apple would retaliate by headhunting a large number of its employees.

Competitive Impact Statement[4]
The DOJ discussed the likely competitive impact of the illegal conduct in its Competitive Impact Statement (CIS) which was filed in support of the final settlement.

In the CIS, the DOJ stated that:
The effect of these agreements was to reduce Defendant’s competition for highly skilled technical employees (high tech employees), diminish potential employment opportunities for those same employees and interfere with the proper functioning of the price-setting mechanism that would otherwise have prevailed.
The DOJ concluded that the agreements were naked restraints of trade in violation of Section 1 of the Sherman Act.

Antitrust laws in the United States draw a distinction between naked restraints and ancillary restraints.

If a restraint is broader than is reasonably necessary to achieve efficiencies from a business collaboration, they are defined as a naked restraint which is per se unlawful. Naked restraints are prohibited on a per se basis because of their pernicious effect on competition and their lack of any redeeming virtues.

On the other hand, ancillary restraints are not per se illegal. In order to be characterised as an ancillary restraint, an agreement must be ancillary to a legitimate pro-competitive venture and reasonably necessary to achieve that pro-competitive benefit. If a restraint is determined to be an ancillary restraint it will be then be evaluated under the rule of reason test. This test balances the pro-competitive benefits of the restraint against its anticompetitive effects.

The DOJ noted in the CIS that whilst the various defendants had been engaged in a number or legitimate collaborative projects, the employment agreements were not ancillary to those projects. Indeed the illegal agreements did not specifically refer to any collaborative projects at all – rather the agreements applied to all company employees and were not limited by geography, job function, product group or time period.

Agreed Settlement[5]
The agreed settlement had four main elements:
  • Prohibited conduct. 
  • Conduct not prohibited. 
  • Required Conduct. 
  • Compliance. 
Prohibited conduct
Under the final judgment, the defendants were prohibited from agreeing, or attempting to agree, with another person to refrain from cold calling, soliciting, recruiting or otherwise competing for the employees of another person.

The defendants were also prohibited from requesting or pressuring another person to refrain from such competitive conduct.

The orders went beyond the conduct which formed the basis of the initial complaint. While the agreements had only related to cold calling employees from the other company, the orders prohibit restrictions on cold calling as well as restrictions on all forms of solicitation and recruitment.

Conduct Not Prohibited
This section outlines the conduct which is not prohibited by the final judgment. The prohibition will not apply to “no direct” solicitation provisions which are:
  • contained in existing and future employment or severance agreements; 
  • reasonably necessary for mergers or acquisitions (consummated or unconsummated), investments or divestitures, including due diligence; 
  • reasonably necessary for contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies or providers of temporary employees or contract worked; 
  • reasonably necessary for the settlement or compromise of legal disputes; and 
  • reasonably necessary for contracts with resellers or OEM’s, providers or recipients of services, and the function of legitimate collaborative agreements. 
The effect of this section of the final judgement is to carve out a quite large area of business activity where the companies will still be permitted to impose restrictions on the free movement of employees. However, this section does not allow the companies to enter into collective agreements to prevent competition amongst them for employees.

Required Conduct
The final judgement establishes mandatory procedures for ensuring the defendant’s compliance with the final judgment.

The defendant’s main obligation is to ensure that each relevant officer of the company is made aware of the details of the final judgment. The defendants are to do this by providing staff with a copy of the final judgement and annual briefings to explain the meaning and requirements of the final judgment.

The defendants must provide the DOJ with certification that they have complied with their obligations to educate their employees about the final judgment. The defendants must also maintain a written record of any violations of the terms of the final judgment.

Compliance
The final judgment confers a number of rights on the DOJ so that it can effectively monitor the defendant’s compliance with the final judgment. For example, the DOJ is permitted access to all of the defendant’s records. It also has access to the defendant’s employees for the purposes of conducting interviews and taking depositions.

Lucasfilm - Pixar agreement
The Lucasfilm and Pixar agreement and settlement is quite similar to the Google matter described above. However there was one significant difference between the agreements – ie the Lucasfilm – Pixar agreement appears to have constituted an even more serious contravention of section 1 of the Sherman Act than the Google case agreements.

Lucasfilm and Pixar entered into a three-part agreement with the following restrictions:
  • not to cold call the other company’s digital animators to offer them employment, 
  • not to make counteroffers under certain circumstances to the other company’s digital animators; and 
  • to provide notification to the other company when they made an employment offer to a digital animator employed by the other company. As is apparent, this agreement was more specific than the Google case agreements and also contained more extensive restrictions.
This agreement was entered into by the companies in January 2005 and was actively policed by senior executives of each firm.

A number of complaints were made under the agreement that the other party was not honouring the terms of the agreement. These complaints were subsequently investigated and the parties then implemented steps to ensure future conformity with the agreement.

The DOJ concluded that the Lucasfilm - Pixar agreement had:
  • reduced the ability of the parties to compete for employees; 
  • disrupted the normal price setting mechanisms that apply in labour markets; 
  • eliminated significant forms of competition for digital animators; and  
  • substantially diminished competition to the detriment of the affected employees. As a result, digital animators were likely to have been deprived of competitively important information about job opportunities as well as being denied access to better job prospects.
Competitive Impact Statement[6]
The CIS in relation to this settlement is quite similar to the CIS in the Google case.

The main difference is that this CIS seeks to distinguish the case from the Google case in terms of its more serious effect on competition:
The restraint challenged here is broader than the no cold call restraints challenged in United States v Adobe Systems Inc. The prohibition on counteroffers by non-employing firms renders the Lucasfilm-Pixar agreement, taken as a whole, more pernicious than an agreement to refrain from cold calling and is per se illegal.
Settlement
The settlement in relation to the Lucasfilm – Pixar agreement is in all practical respects identical to the settlement in the Google case.

Commentary
In deciding what enforcement response to take in relation to anticompetitive conduct, an antitrust regulator will place considerable weight on the seriousness of the conduct. In particular, an antitrust regulator will seriously consider taking criminal proceedings (where such proceedings are available) in relation to per se offences (ie naked restraints). This likelihood is enhanced when the antitrust regulator believes that the agreements have had a significantly adverse effect on competition in a market. Despite making this clear finding in relation to both the Google case agreements and the Lucasfilm – Pixar agreement of significant adverse effects on competition, the DOJ decided to pursue a civil action.

Furthermore, by deciding to pursue a civil proceeding in these cases, the DOJ precluded itself from being able to seek a fine in relation to the agreements. In the US fines are only available in relation to criminal prosecutions and not civil proceedings.

Another important factor for an antitrust regulator to weigh up in deciding whether to commence criminal proceedings is whether the conduct has been occurring for a long period of time. An antitrust regulator may conclude that criminal proceedings are not appropriate where a cartel has only been in existence for only a short period, for example less than 12 months. However, in the present cases, all of the agreements had been in place for between four and six years, which is a significant period for companies to be engaged in an illegal cartel.

It should also have been highly relevant to the DOJ’s decision-making process that all of the agreements were designed, negotiated and implemented by senior executives of each of the companies. Furthermore, the agreements were all actively managed and enforced by these senior executives throughout the life of the agreements.

These agreements were not the handiwork of junior employees acting on a frolic of their own. Rather these agreements were properly seen as company policies to lessen competition devised at the most senior levels of each of the companies. The fact that senior executives were the authors of the agreements would generally be considered a significant aggravating factor by an antitrust regulator when determining the appropriate enforcement response. Indeed, it is usually the case that involvement by senior executives in a long running and detrimental cartel would result in the antitrust regulator deciding to commence criminal proceedings against both the company and senior executives involved in the conduct.

Finally, there would be no validity in a claim by the companies that there did not know that the conduct was illegal. The fact that employers are not permitted to enter into restrictive agreements preventing competition for employees is well established and well understood law in the US. It is well know that such agreements will constitute a contravention of section 1 of the Sherman Act.

As observed by the DOJ in both of the CIS's filed in these matters, similar types of restraints by employers in relation to employees have been challenged by the DOJ in the past.

In both of the CIS's the DOJ made reference to the case of United States v Ass’n of Family Practice Residency Doctors No. 96-575-CV-W-2, Complaint at 6 (W.D.Mo. May 28, 1996) which involved similar employment restraints as those the subject of the Google case.[7] In this case, the Association issued guidelines to its members which were designed to restrict competition for senior medical students between residency programs. In particular, the guidelines included a restraint preventing family practice residency program directors from directly soliciting family practice residents from other residencies.

The DOJ commenced civil legal proceedings against the Association for this conduct, alleging per se violations of Section 1 of the Sherman Act.

Accordingly, there can be no doubt that each of the companies must have been aware, based on the Family Practice Residency Doctors case and other relevant DOJ cases, that agreements between competitors not to compete for employees were illegal per se under section 1 of the Sherman Act.

In the context of the various factors discussed above, it is very surprising that the DOJ decided to take such a light-handed enforcement approach to these agreements. There is simply no credible reason, based on generally accepted antitrust enforcement criteria, for these agreements to be settled on a civil basis rather than the DOJ deciding to commence criminal prosecutions and seek significant fines.

Conclusion
The decision by the DOJ to settle these employment restriction cases on a civil basis is very puzzling.

One explanation for the DOJ’s approach may be that the agency has become quite lenient in its approach to the enforcement of section 1 of the Sherman Act where the conduct relates to restrictions on employees rather than restrictions on the supply of goods and services. If this were indeed the explanation for the DOJ’s approach in these cases, it would be a very unfortunate development. This is because such employer agreements will invariably cause the individual employees effected by such agreements considerable financial detriment in terms of lost income and lost opportunities.

Another possible explanation for the DOJ’s light-handed response to these agreements, may due to the agency being simply too fearful of the prospect of commencing criminal proceedings against such large companies because of their legal and financial firepower. There is no doubt that had the DOJ commenced criminal proceedings against Google, Apple, Intel, Adobe, Intuit, Lucasfilm and Pixar, the litigation would have been enormously expensive for the DOJ. However, antitrust regulators must not make "bad" enforcement decisions because they are concerned about the cost implications of taking large cases. If antitrust regulators are too risk adverse to take on such large cases, who will be left to pursue such cases?

Whatever the reason for the DOJ’s questionable approach to punishing these companies for their illegal agreements, it is clear the DOJ has lost the opportunity to pursue a landmark case which would have done a great deal to clarify the application of antitrust law to employment markets. Unfortunately, it is unlikely that the DOJ will get a another chance to run such an important case in this particular area in the future.


[1] The proposed settlement in the United States v Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corporation, Intuit Inc., and Pixar was filed on 24 September 2010. Final Judgment was entered on 17 March 2011. The proposed settlement in United States v Lucasfilm was filed on 21 December 2010 and Final Judgment entered on 3 June 2011.
[2] Complaint - http://www.justice.gov/atr/cases/f262600/262654.htm
[3] Complaint - http://www.justice.gov/atr/cases/f265300/265395.htm
[4] CIS - http://www.justice.gov/atr/cases/f262600/262650.htm
[5] Final Judgment - http://www.justice.gov/atr/cases/f272300/272393.htm
[6] CIS - http://www.justice.gov/atr/cases/f265300/265397.htm
[7] CIS - http://www.justice.gov/atr/cases/f262600/262650.htm

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