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  • Shivansh Shukla

Handshakes on Headhunting? The Legality of No-Poach Agreements

[Shivansh is a student at NALSAR University of Law.]


A no-poach agreement is one wherein two or more employers enter into an accord to fix wages, terms of employment and not to solicit, cold call, hire or pursue each other’s employees. These agreements are often informal understandings between employers to avoid contacting one another’s employees or to refrain from matching offers made by competitors. Recently, there have been reports stating that Reliance Industries and Adani group have engaged in a similar gentleman's agreement, wherein they have mutually decided not to recruit each other's employees. Such agreements between rival companies have apparently been in existence for some time. The aforementioned understanding between Reliance and the Adani group is claimed to be lawful, as neither party holds a dominant position in the relevant sectors, and the agreement does not impede individuals from seeking employment. One can argue that by focusing on the express provisions of Indian law, the agreement between Reliance Industries and Adani group is indeed permissible. However, the fact that two powerful entities in the Indian market, led by the country's wealthiest individuals, have entered into an agreement to refrain from competing is bound to raise concerns within the realm of competition law.


Competition Law Concerns in No-Poach Agreements


Antitrust authorities and scholars frown upon such agreements because of their potential to restrict competition in the employment market. It saves the employers the trouble of offering more competitive remuneration or employment terms in the employment market. It also imposes restriction on mobility of employees and results in denial of benefits of a competitive employment market. Their impact thus causes permanent and irrevocable damage to the negotiating position of the employees by tipping the balance in favour of the employers who have been set free from the competitive pressures in the market. This invariably leads to unjust accrual of benefits to the employer at the expense of puncturing of the career goals and interests of the employees.


Moreover, such an agreement also accompanies or helps in, other concerted actions such as cartelization or exchange of information since it facilitates employers coming together to jointly negotiate their future business strategy with respect to employment market, paving the way for a similar partnership in the consumer market.


International Approaches Towards No-Poach Agreements


The US court in United States v. eBay categorically held that there exists no reason to believe that the competition law operates only in consumer markets. It shall be a wrong reading of the law to suggest that the competition law will not operate in employment markets the way it does in the consumer market. Further, a no-poach agreement has the same anti-competitive impact as price fixing agreements by enabling the employers to avoid competing with one another and replace the risks of competition with the fruits of co-operation. Therefore, competition authorities view no-poach agreement in the same vein as other allocation agreements such as price fixing agreements. In Danielle Seaman v. Duke University (Danielle Seaman), the court thus held that no-poach agreements in the employment market between competing employers are considered per se unlawful under Section 1 of the Sherman Act in a manner akin to other allocation agreements that exist in the consumer market.


Interestingly, the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued an antitrust guidance stating that firms that compete to hire employees shall be considered to be competitors in the employment market irrespective of whether they compete in the same consumer market or not. In similar vein, the Competition Bureau Canada (CBC) released Enforcement Guidance on Wage-fixing and No Poaching Agreements that uses the term ‘unaffiliated’ employers. Hence, it shall be anti-competitive even for a bakery owner to enter into such an agreement with a motel owner.


The French Competition Authority has also held undertakings that would consult one another on receiving application from the employees of other parties of the no-poach agreement. Similarly, the Spanish Competition Authority likened no-poach agreements to price fixing agreements and opined that in addition to obvious kind of horizontal agreements in consumer market, the competition law also applies to less subtle agreements that operate in the employment market. Along with the apprehensions regarding interests of employees and competition in the employment markets, the European Union Competition Commissioner has also placed emphasis on the fact that no-poach agreements restrict talent from moving where it serves the economy best. Additionally, an agreement to not hire certain people has also been construed as an agreement to not innovate or enter a new market.


Permissible Defences


Courts have drawn certain exemptions to no-poach agreements and some considerations shall be made in the decision making process. Primarily, an agreement that is ancillary to a separate, legitimate business transaction or collaboration among the employers can be allowed, subject to a rule of reason analysis. Danielle Seaman held that an agreement shall be considered to be ancillary when it is subordinate and collateral to a separate, legitimate transaction, and reasonably necessary to make the main transaction more effective in accomplishing its purpose. An ancillary agreement shall not be considered per se illegal and shall be analyzed under the rule of reason approach.


To take a few illustrations, in Eichorn v. AT&T Corporation, a ‘no-hire agreement’ between the buyer and the seller of a company for a period of 8 months was permitted since it was ancillary to the sale of the corporation in question. Similarly, Deslandes v. McDonald’s USA, LLC, allowed hiring restrictions between franchises of the same brand since they were ancillary to the franchise agreements.


Potential Indian Approach to No-Poach Agreements  


The Competition Commission of India (CCI) is yet to deal with a case on no-poach agreements. However, the Competition Act 2002 (Act) does not differentiate between employment and consumer market. A no-poach agreement intends to control the supply of labour in the employment market and shall be covered under Section 3(3)(b) of the Act. Additionally, Section 3(3)(c) of the Act prohibits allocation and sharing of market between two enterprises and does not provide an exhaustive list of actions, allowing the CCI to extend the section to future situations that were not anticipated during the drafting of the Act. An agreement to not compete in the employment market is essentially an allocation agreement. The sole distinction lies in the fact that instead of agreeing to refrain from poaching customers, the employers have committed to abstain from recruiting each other's employees. The effects of such an agreement on the market and the interests of employees are completely analogous to those of a conventional allocation agreement concerning customers. In both instances, the agreements allow an employer to circumvent competition on the market over business costs and gaining a freeway with regards to wages and terms of employment.


It is noteworthy that Section 3 of the Act follows the structure of Section 1 of the Sherman Act. Regardless, the emerging competition jurisprudence in India has heavily relied upon precedents established by both the European Union and the US legal systems in the past. Curiously, the manner in which Indian courts handle such agreements under Section 27 of the Indian Contract Act 1872 bears resemblance to their treatment under Section 1 of the Sherman Act. The Delhi High Court has held that contract entered into by companies to shield themselves from competition are in conflict with the rights of the employees to seek employment of their choice and as the latter affects livelihood, it must prevail. The preamble of the Act also shares the same objective and considerations, aiming to “ensure freedom of trade carried on by other participants in markets.”


It is thus a reasonable assertion that the approach of CCI with regards to no-poach and wage fixing agreements shall prefer a wide reading of the law that is in sync with the approach taken by the foreign competition authorities, primarily the DOJ and the FTC. Consequently, the aforementioned arguments made in defence of the agreement entered into between Reliance Industries and Adani Group are doomed to be rejected. The guidance released by DOJ, FTC, and CBC makes it clear that two groups need not necessarily compete in the consumer markets they shall nonetheless be competitors in the employment market. It is considered unlawful to enter into an agreement even with the intention to reduce costs and an employer is barred to convey its business policies to other companies. The argument that the two groups are not dominant shall offer little respite since a per se approach precludes discussion on actual impact of the agreement on the market. Thus, CCI is likely to act against such agreements if an information is to be filed.


Conclusion


It is asserted that a no-poach agreement should not be assessed as per the black letter of the statute but rather should be evaluated from the standpoint of the overarching objectives and principles of the competition law. Adopting a substantive approach would lead to a more extensive application of competition law in the realm of employment, thereby facilitating the fulfilment of its objectives within the market.

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