It is said that employees are an employer’s most valuable asset. Unlike most assets, however, employees can pick up and leave when “opportunity knocks.” Employee turnover not only causes higher payroll and recruiting costs, but also risk disclosure of trade secrets and other confidential, intellectual property. One solution? Employers have entered into “no-switching” agreements, under which they agree not to recruit each other’s employees. In re: High-Tech Employee Antitrust Litigation illustrates why these agreements are a bad idea. Employers seeking to avoid a talent drain and significant financial liability must look elsewhere for an effective solution.

The case: In re: High-Tech Employee Antitrust Litigation

In early 2005, the tech industry was booming. The Internet’s rapid expansion caused high demand for highly skilled tech engineers. Short supply of these workers resulted in a competitive job market among high-tech employers. Workers increasingly changed employers for greener pastures, offered by recruiters loaded with promises of signing bonuses and stock options. To address this issue, a group of Silicon Valley giants, including Google, Inc., Apple Inc., Adobe Systems Inc., Lucasfilm Ltd. and others entered into no-switching agreements.

Each of these companies agreed not to actively recruit employees from “Do Not Cold Call” lists of employers. These agreements allegedly: (1) prohibited employers from recruiting employees by “cold calling” them; (2) required the potential employer to notify the current employer when making an offer to an employee; and (3) prohibited the current employer from making a counter-offer above the first offer.

This solution proved effective at reducing turnover. Valued employees remained with their employers, and the parties to the agreement avoided costly bidding wars with each other. By engaging in these tactics, however, these companies may have violated anti-trust laws. In June 2011, following a Department of Justice investigation, 64,000 “technical employees” of these companies filed a class action lawsuit alleging that the companies had violated anti-trust laws.

The plaintiff-employees survived a challenge to class certification, a motion to dismiss, and a motion for summary judgment. Then the employers began to settle claims. On August 8, 2014, the federal district court hearing the case refused to approve a $324.5 million settlement agreement reached by the class with some of the companies. The court noted that there was ample evidence that the companies had engaged in an over-arching conspiracy. And, considering the potential exposure, the proposed settlement amount indeed was low. Plaintiffs’ expert opined that the total damages in the case exceeded $3 billion dollars. After trebling damages pursuant to the Sherman Act, these Companies could be liable for $9 billion. Thus, unless the remaining defendants satisfy the district court’s concerns, this case is headed to trial.

Anti-Trust Laws and Recruiting

To state a claim for an anti-trust violation under the Sherman Act, a plaintiff must allege that: (1) there was an agreement, conspiracy, or combination between two or more entities; (2) the agreement was an unreasonable restraint of trade; and (3) the restraint affected interstate commerce. The employees in the High-Tech litigation argued the employers conspired to refrain from recruiting each other’s employees. By doing so, plaintiffs argued, the employers artificially lowered the employees’ wages when the competition for these tech engineers was at its fiercest.

The no-switching agreements in In re: High-Tech Employee Antitrust Litigation were bilateral, that is, between pairs of employers, such as Pixar and Lucasfilm. Every agreement applied to all employees of a given pair of employers, and was not limited by geography, job function, product group, or time period. The agreement also was not related to any specific collaboration between the employers. The employers argued the plaintiffs failed to present sufficient evidence that they were engaged in a conspiracy to suppress wages. The court denied the employers’ motion and held that there was evidence that high-level executives were personally involved in the no-switching agreements. Importantly, there was also evidence that these companies shared confidential compensation information with each other, even though they considered the others competitors for talent.

Tips for Employers

Employers understandably wish to protect their investments in their employees, ensure continuity, and prevent disclosure of intellectual properties. There are legal alternatives to no-switching agreements. For example, an employer having difficulty recruiting talent may improve recruiting methods, such as by using an effective headhunter, attending job fairs, and being active in the community. Creating ties to universities, such as via paid internships, may help recruit talented individuals early in their career and create goodwill among job seekers.

Employers may wish to conduct salary and benefits surveys, or otherwise ensure wages and working conditions are competitive. They may offer inducements to remain employed such as deferred compensation, retention bonuses, a sabbatical after a specified term of employment, and stock options.

Employers also may create financial disincentives to discourage workers from leaving. These methods could include requiring an employee to reimburse signing bonuses or relocation expenses if the employee resigns or is fired within a certain time period following the employee’s start date.

Finally, employers should ensure that they are protected from theft of trade secrets and from unfair competition by former employees. Employers can generally restrict employees from working for a competitor during employment, particularly to protect intellectual property. Employers should have clear policies regarding confidentiality of competitive business information and should contain restrictions on the use, copying, and disclosure of the employer’s electronic information. Written agreements protecting confidential information are important as well.