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The DOJ Defeats Another Motion to Dismiss a No-Poach Criminal Indictment and Closes Out Another No-Poach and Wage-Fixing Case With a Deferred Prosecution Agreement

Two of the Department of Justice’s labor-market criminal antitrust prosecutions have seen interesting recent developments. (See our previous coverage of this prosecution trend, reported on: Feb. 9th; May 2nd; Sept. 22nd; and Nov. 29th.) In United States v. Patel, a district court denied a motion to dismiss the indictment from a group of indicted aerospace executives, who had argued that their alleged employee no-poach agreement was part of a vertical customer-supplier collaboration and thus not per se unreasonable. And, in United States v. Hee, the DOJ secured a pretrial diversion agreement with the last remaining defendant in the case, a regional manager at a healthcare staffing company, after previously obtaining a guilty plea from the company itself (resulting in the DOJ’s first labor-market antitrust conviction).

United States v. Patel: Alleged Horizontal Restraint in a Vertical Relationship Subject to Per Se Analysis

In Patel, the DOJ brought no-poach criminal charges against executives from a jet-engine manufacturer and several of its outsourced engineering providers over an alleged agreement to not solicit each other’s engineers, who worked on the jet-engine manufacturer’s projects for a nine-year period. According to the indictment, the executives agreed that the outsourced providers would not hire each other’s engineers under any circumstances and that none of their companies (including the manufacturer) would proactively contact, interview, or recruit applications employed by the other companies. The defendants would allegedly enforce this agreement by, for example, demanding that their co-conspirators rescind employment offers. This appears to be the DOJ’s first prosecution of a no-poach deal between parties with a vertical commercial relationship (i.e., the manufacturer and its outsourced providers).

The aerospace executives made five arguments in support of their motion to dismiss: (1) no-poach agreements are not per se unreasonable; (2) the alleged no-poach deal was “ancillary to a legitimate collaboration”—namely, the manufacturer outsourcing engineering services from the other companies; (3) the alleged agreement was related to a vertical commercial relationship between the manufacturer and its outsourced providers, and vertical agreements are not per se unreasonable; (4) prosecuting a no-poach deal violates the Due Process Clause’s notice provisions; and (5) prosecuting such an agreement as a per se offense would “unconstitutionally usurp the jury’s role to determine all of the facts necessary to establish each element” in violation of the Fifth and Sixth Amendments’ prohibition on presumptions.

Judge Victor A. Bolden rejected each of these arguments. First, like other courts to address the issue recently, Judge Bolden held that the alleged conspiracy is an agreement to allocate a labor market, analogous to companies allocating customer markets, and is therefore subject to per se treatment under long-standing precedent like United States v. Topco Assocs., Inc., 405 U.S. 596, 608 (1972). Second, Judge Bolden found that, “from the face of the indictment,” the alleged no-poach deal was not ancillary to a legitimate business venture because the outsourced providers do not have any joint business venture together, but rather compete with each other to work on the manufacturer’s projects. For this reason, the alleged agreement was distinct from no-poach arrangements between contractors and sub-contractors or between franchisors and franchisees. Judge Bolden noted, however, that the defendants could present evidence at trial about whether the no-poach deal was in fact an ancillary restraint—exempting it from per se treatment—and that there is a split in authority “concerning whether the ancillary restraints doctrine is a defense that negates an element of the crime or is an affirmative defense.”

Judge Bolden’s analysis of the defendants’ third argument was especially interesting. According to Judge Bolden, although the manufacturer and its outsourced providers had a vertical commercial relationship, they competed for the same employees, so the alleged no-poach deal was in fact a horizontal restraint. For “the per se rule to be inapplicable, … the restraint itself, not just the parties’ relationship, must have vertical and horizontal characteristics.” Here, the court found the restraint had only the latter; the jet-engine manufacturer was alleged to have used its vertical commercial relationship with the outsourced providers to organize and enforce what was in fact a horizontal restraint.

Furthermore, the court characterized the alleged no-poach deal as an interbrand restraint, not an intrabrand restraint, which would have received more deference under antitrust law because it can enhance interbrand competition. See Copy-Data Sys., Inc. v. Toshiba Am., Inc., 663 F.2d 405, 411 (2d Cir. 1981). Because the manufacturer did not directly hire those engineers and the engineers worked on other projects for other companies, the engineers employed by the outsourced engineering providers were not part of the jet-engine manufacturer’s “brand.”

Finally, the court rejected the aerospace executives’ constitutional arguments. The defendants had proper notice, Judge Bolden held, because “horizontal market allocation agreements have long been held per se unreasonable.” Further, the court opined that applying the per se rule in a criminal case does not usurp the jury’s role because unreasonableness is not a statutory element of a Sherman Act offense and thus need not be determined by a jury, as the Second Circuit recently held in United States v. Aiyer, 33 F.4th 97, 115 (2d Cir. 2022).

The Patel trial is scheduled to begin in late March 2023. Additionally, engineers who claim to have been affected by the alleged no-poach deal at issue in Patel have filed a putative antitrust class action against the executives’ companies, which had their motion to dismiss denied in late January. We’ll continue watching how these cases unfold.

United States v. Hee: DOJ Secures a Deferred Prosecution Agreement

In Hee, the DOJ charged a healthcare staffing company and its regional manager with conspiring with a rival staffing firm to fix the wages of nurses working in Nevada’s Clark County School District and to not hire each other’s nurses. The staffing company pleaded guilty last October to a Sherman Act Section 1 offense, making Hee the first of the DOJ’s recent wave of labor-market antitrust prosecutions to result in a conviction. In late January, the DOJ reached a deferred prosecution agreement with the regional manager, under which he will perform 180 hours of community service in exchange for the charges being dropped in six months.

The regional manager had moved to dismiss the case on the basis of alleged prosecutorial misconduct. According to the regional manager, an agent from the Federal Bureau of Investigation interviewed him and obtained his consent to copy the contents of his electronic devices without his counsel present and without disclosing that he was being criminally investigated or that three DOJ Antitrust Division attorneys were listening via livestream. The district court never ruled on this motion and it was mooted by the deferred prosecution agreement.

Assistant United States Attorney General Jonathan Kanter, the head of the DOJ Antitrust Division, highlighted Hee in recent remarks at Howard Law School. “The division’s criminal program prosecutes employers who agree to fix wages or to allocate workers by agreeing with other employers not to poach one another’s employees,” Kanter said. “Recently, we uncovered an agreement among competing employers not to raise the pay of nurses serving medically-fragile students in a school district in Las Vegas. These are nurses helping kids. Could you imagine someone more deserving of the fair wage that results from competition for their labor? As a result of our case, the company paid $72,000 in restitution to the nurses affected.”

Kanter’s remarks may signal that the DOJ plans to bring more labor-market antitrust prosecutions, even where the potential restitution to the victims is relatively low. We’ll keep monitoring this prosecution trend.