No Cold Calling Agreements

On Sept. 24, 2010, the DOJ filed suit in the United States District Court for the District of Columbia against high-tech employers Adobe Systems, Apple, Google, Intel, Intuit, and Pixar (and in December 2010, the DOJ filed a similar suit against Lucasfilm). In its filings, the DOJ alleged that the employers had engaged in
unlawful restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. ' 1, by entering into a series of bilateral “no cold call” agreements. Specifically, the DOJ noted that each of the “defendants compete for high tech employees, and in particular specialized computer science and engineering talent,” which “[i]n recent years ' [has] been in high demand.” Complaint, ' 12. In connection with such competition for talent, the DOJ alleged that “[a]lthough Defendants employ a variety of recruiting techniques, cold calling another firm's employees is a particularly effective method of competing for computer engineers and computer scientists.” Id., ' 13. Nevertheless, the DOJ alleged, senior executives of the defendant companies negotiated and enforced a series of bilateral agreements that they would not cold call each other's employees. According to the DOJ:

Defendants' concerted behavior both reduced their ability to compete for employees and disrupted the normal price-setting mechanisms that apply in the labor setting. These cold call agreements are facially anticompetitive because they eliminate a significant form of competition to attract high tech employees, and, overall, substantially diminish competition to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.

Id., ' 14. Significantly, the DOJ noted, “[t]hese no cold call agreements were not ancillary to any legitimate collaboration between Defendants.” Id., ' 16.

Along with its complaints, the DOJ filed a “Competitive Impact Statement” with the court in each case, in which it elaborated upon the complaints' allegations. The Competitive Impact Statement observed that Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.” The DOJ noted that, in United States v. Association of Family Practice Residency Doctors, No. 96-575-CV-W-2 (W.D. Mo. May 28, 1996), it had brought a similar challenge to employment restraints contained in guidelines designed to curb competition between residency programs for senior medical students and residents of other programs. Moreover, the DOJ argued that the challenged conduct by the defendant employers at issue was analogous to conduct the DOJ had successfully challenged in prior litigation involving agreements among competitors not to solicit one another's customers (United States v. Cooperative Theaters of Ohio, Inc., 845 F.2d 1367 (6th Cir. 1988)) and to refrain from bidding against one another for leases of billboard space (United States v. Brow, 936 F.2d 1042 (9th Cir. 1991).

The DOJ's Proposed Final Judgments

Along with its complaints, the DOJ filed stipulated Final Orders in each case, reflecting its proposed resolution of the claims against the defendant employers. As of the writing of this article, the DOJ has solicited and received public comment from interested parties on the proposed Final Judgments. Subject to any revisions based on those comments, the proposed Final Judgments will be presented to the court for final approval.

The proposed Final Judgments note that they do not constitute an admission of any violation of law by any defendant, but they broadly prohibit each defendant from entering into agreements that would restrict solicitation or cold calling of a defendant's employees:

Each Defendant is enjoined from attempting to enter into, entering into, maintaining or enforcing any agreement with any other person to in any way refrain from, requesting that any person refrain from, or pressuring any person in any way to refrain from soliciting, cold calling, recruiting, or otherwise competing for employees of the other person.

Proposed Final Judgment, ' IV. Notwithstanding this broad prohibition, however, the proposed Final Judgments also identify a number of exceptions for circumstances in which the general prohibition will not “prohibit a Defendant and any other person from attempting to enter into, entering into, maintaining or enforcing a no direct solicitation provision.” Generally speaking, the exceptions permit such arrangements when they are ancillary to other agreements or transactions that serve legitimate and pro-competitive purposes.

Potential Implications for Law Firms

Similar to the competition among high-tech firms for specialized engineering and computer talent, law firms often compete for associate legal talent in defined labor markets that are similarly “characterized by expertise and specialization.” Moreover, while the DOJ's filings in these recent cases focus to some degree on specific industry traits, comments by DOJ representatives suggest that its views on the illegality of no cold call arrangements are not necessarily limited to high-tech jobs. Indeed, in documents released in connection with the stipulated Final Judgments, the DOJ indicated that its proposed settlements with the named defendant employers are only part of a larger investigation into employment practices among high-tech employers and that it “continues to investigate other similar no solicitation agreements.” Thus, it appears that the DOJ may intend to remain active in pursuing potential enforcement in this area.

Although it may be relatively uncommon for law firms to enter into similar so-called “horizontal” agreements directly between competing firms regarding solicitation of employees as did the defendants in these cases, the DOJ's filings and statements in connection with its proposed Final Judgments make clear that the theory underlying its enforcement efforts extends as well to “vertical” agreements with third parties that may impact competition for employee services. In the context of law firms, that can potentially implicate agreements with legal recruiting and placement firms. In fact, it is not unusual among some firms who do business with legal recruiters to require commitments from those recruiters ' whether formally or informally ' that in exchange for accepting the recruiter's candidates, the recruiter will agree not to solicit the firm's associates to leave for opportunities with competitors. In this way, firms reasonably seek to avoid “churn” that could undercut their investment in recruiting new talent if the same recruiter used to place talent with the firm were allowed to take advantage of its familiarity with the firm, its practice areas, and its existing talent to recruit talent away to other clients.

As noted above, the DOJ's proposed Final Judgments list a variety of circumstances in which “no direct solicitation” agreements will be permissible. Significantly, that list permits such agreements where “reasonably necessary for contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies or providers of temporary employees or contract workers.” Proposed Final Judgment ' V.A.3. Thus, the DOJ has recognized that, at least under some circumstances, restrictions on solicitation in connection with the use of “recruiting agencies” and other service providers can be “reasonably necessary” and consistent with pro-competitive interests.

Some observers of the DOJ's proposed Final Judgments have suggested that the authorization of restrictions on solicitation in contracts with recruiting agencies and other service providers reflects a broad exception to the general opposition the DOJ has demonstrated toward such arrangements. Those observers note that the exception falls under a heading of “Conduct Not Prohibited” by the proposed Final Judgment, and combined with the absence of any specific guidance on when such agreements will be “reasonably necessary,” they suggest that no cold calling provisions ' even when relatively broadly defined ' are unlikely to pose legal concerns as long as they bear some relation to a recruiting engagement.

As other observers have noted, however, the fact that the proposed Final Judgment offers no guidance on the standard that will apply in determining whether a restriction on direct solicitation is “reasonably necessary” leaves considerable room for the DOJ to take a narrower view in future cases. Like the proposed Final Judgments, the DOJ's Competitive Impact Statements do not identify the considerations that will be relevant to determining whether a no cold calling arrangement in an agreement with a recruiting firm will be viewed as permissible under federal antitrust law. This ambiguity thus raises uncertainty for those who would rely on the exception language, including potentially law firms and legal search providers.

For example, in the context of a recruiting engagement involving a single associate position in a discrete geographic area for a law firm with multiple offices, would a no cold calling provision that precludes the placement firm from soliciting any of the client law firm's associates without limitation as to geographic scope or duration be considered “reasonably necessary”? If not, because of the breadth of the restriction in relation to the limited nature of the search, then what factors should the parties consider in narrowing the scope of the provision in order to comply with the DOJ's proposed standard? Would it be sufficient to limit the restriction to the same geographic area, or does the “reasonably necessary” standard suggest more ' perhaps requiring that the restriction be limited to the same practice area? How long in duration may such a restriction be kept in place and still meet the “reasonably necessary” threshold? And to what extent will the question of reasonable necessity be dependent upon the particular course of the dealings between the legal placement agency and law firm? Will the lawfulness of a restriction on solicitation turn upon the nature and degree of information about the law firm, its practices, and its business plans provided to the recruiter in connection with the search? These and many other questions are left unanswered by the DOJ's proposed “reasonably necessary” standard.

Finally, it should be noted that the DOJ's focus on the no cold calling agreements at issue in its current enforcement efforts likely arose, at least in part, from the fact that the job market for highly skilled digital animators is a fairly concentrated one, in which restrictive agreements among a relatively few employers could arguably impact competition and prices for talent. In contrast, there may be both more legal employers and more legal recruiters active in most large legal markets. In such circumstances, it may be more difficult to demonstrate that vertical no poaching arrangements between firms and recruiters impact the overall competitive market for legal talent. Such a showing may be more plausibly advanced, however, in smaller and mid-sized legal markets, particularly those dominated by a relatively few major firms.

Conclusion

While law firms may not typically enter into the sort of formal restrictions on solicitation of each other's attorneys like those at the root of the DOJ's recent enforcement efforts, the rationale behind those enforcement efforts ' that agreements precluding cold calls tend to restrict competition for talent within a defined labor market and thus affect the prices paid for such talent ' is hardly unique to the high-tech sector. And while the DOJ has suggested limits on this theory of antitrust violation where the no cold calling agreement is ancillary and reasonably necessary to the engagement of a talent recruiter, it has so far left unanswered many questions regarding the circumstances in which such an agreement will be viewed as “reasonably necessary.” Accordingly, law firms inclined to seek such restrictions on cold calling from the recruiters with which they work would be prudent to use restraint and limit the scope of such agreements to terms they feel confident can be justified based on the particular facts of the recruiting engagement.

Karl G. Nelson, a member of this newsletter's Board of Editors, is a partner in Gibson Dunn & Crutcher LLP, where he practices in the areas of labor and employment and class action litigation, and serves as the Co-Partner In Charge of the firm's Dallas office. The author acknowledges the helpful assistance of Scott Mellon, an associate in the Dallas office, in preparing this article.

In recent months, the Antitrust Division of the U.S. Department of Justice (DOJ) has demonstrated what many view as a newly aggressive approach toward challenging agreements between businesses not to poach each other's employees. In particular, the DOJ has brought legal challenges targeting a number of significant employers in the high-tech sector for their agreements not to cold call each other's talent.

Not unlike the businesses targeted by the DOJ, law firms compete with one another in an increasingly fluid market for scarce associate legal talent. And it's not uncommon for firms to seek to prevent legal recruiters who place lawyers with them from simultaneously recruiting away the firm's lawyers for placement with competitors. Accordingly, while the recent enforcement efforts might be distinguished in some ways from the typical legal industry setting, law firms and their leaders would be well advised to keep in mind the DOJ's stance as reflected in its recent suits, the potential impact it may have on no poaching arrangements in the legal industry, and the questions that remain unanswered by the DOJ's recently proposed settlements.

Challenges to 'No Cold Call' Arrangements

On Sept. 24, 2010, the DOJ filed suit in the United States District Court for the District of Columbia against high-tech employers Adobe Systems, Apple, Google, Intel, Intuit, and Pixar (and in December 2010, the DOJ filed a similar suit against Lucasfilm). In its filings, the DOJ alleged that the employers had engaged in
unlawful restraint of trade in violation of Section 1 of the Sherman Act, 15 U.S.C. ' 1, by entering into a series of bilateral “no cold call” agreements. Specifically, the DOJ noted that each of the “defendants compete for high tech employees, and in particular specialized computer science and engineering talent,” which “[i]n recent years ' [has] been in high demand.” Complaint, ' 12. In connection with such competition for talent, the DOJ alleged that “[a]lthough Defendants employ a variety of recruiting techniques, cold calling another firm's employees is a particularly effective method of competing for computer engineers and computer scientists.” Id., ' 13. Nevertheless, the DOJ alleged, senior executives of the defendant companies negotiated and enforced a series of bilateral agreements that they would not cold call each other's employees. According to the DOJ:

Defendants' concerted behavior both reduced their ability to compete for employees and disrupted the normal price-setting mechanisms that apply in the labor setting. These cold call agreements are facially anticompetitive because they eliminate a significant form of competition to attract high tech employees, and, overall, substantially diminish competition to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.

Id., ' 14. Significantly, the DOJ noted, “[t]hese no cold call agreements were not ancillary to any legitimate collaboration between Defendants.” Id., ' 16.

Along with its complaints, the DOJ filed a “Competitive Impact Statement” with the court in each case, in which it elaborated upon the complaints' allegations. The Competitive Impact Statement observed that Section 1 of the Sherman Act prohibits “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.” The DOJ noted that, in United States v. Association of Family Practice Residency Doctors, No. 96-575-CV-W-2 (W.D. Mo. May 28, 1996), it had brought a similar challenge to employment restraints contained in guidelines designed to curb competition between residency programs for senior medical students and residents of other programs. Moreover, the DOJ argued that the challenged conduct by the defendant employers at issue was analogous to conduct the DOJ had successfully challenged in prior litigation involving agreements among competitors not to solicit one another's customers ( United States v. Cooperative Theaters of Ohio, Inc. , 845 F.2d 1367 (6th Cir. 1988)) and to refrain from bidding against one another for leases of billboard space ( United States v. Brow , 936 F.2d 1042 (9th Cir. 1991).

The DOJ's Proposed Final Judgments

Along with its complaints, the DOJ filed stipulated Final Orders in each case, reflecting its proposed resolution of the claims against the defendant employers. As of the writing of this article, the DOJ has solicited and received public comment from interested parties on the proposed Final Judgments. Subject to any revisions based on those comments, the proposed Final Judgments will be presented to the court for final approval.

The proposed Final Judgments note that they do not constitute an admission of any violation of law by any defendant, but they broadly prohibit each defendant from entering into agreements that would restrict solicitation or cold calling of a defendant's employees:

Each Defendant is enjoined from attempting to enter into, entering into, maintaining or enforcing any agreement with any other person to in any way refrain from, requesting that any person refrain from, or pressuring any person in any way to refrain from soliciting, cold calling, recruiting, or otherwise competing for employees of the other person.

Proposed Final Judgment, ' IV. Notwithstanding this broad prohibition, however, the proposed Final Judgments also identify a number of exceptions for circumstances in which the general prohibition will not “prohibit a Defendant and any other person from attempting to enter into, entering into, maintaining or enforcing a no direct solicitation provision.” Generally speaking, the exceptions permit such arrangements when they are ancillary to other agreements or transactions that serve legitimate and pro-competitive purposes.

Potential Implications for Law Firms

Similar to the competition among high-tech firms for specialized engineering and computer talent, law firms often compete for associate legal talent in defined labor markets that are similarly “characterized by expertise and specialization.” Moreover, while the DOJ's filings in these recent cases focus to some degree on specific industry traits, comments by DOJ representatives suggest that its views on the illegality of no cold call arrangements are not necessarily limited to high-tech jobs. Indeed, in documents released in connection with the stipulated Final Judgments, the DOJ indicated that its proposed settlements with the named defendant employers are only part of a larger investigation into employment practices among high-tech employers and that it “continues to investigate other similar no solicitation agreements.” Thus, it appears that the DOJ may intend to remain active in pursuing potential enforcement in this area.

Although it may be relatively uncommon for law firms to enter into similar so-called “horizontal” agreements directly between competing firms regarding solicitation of employees as did the defendants in these cases, the DOJ's filings and statements in connection with its proposed Final Judgments make clear that the theory underlying its enforcement efforts extends as well to “vertical” agreements with third parties that may impact competition for employee services. In the context of law firms, that can potentially implicate agreements with legal recruiting and placement firms. In fact, it is not unusual among some firms who do business with legal recruiters to require commitments from those recruiters ' whether formally or informally ' that in exchange for accepting the recruiter's candidates, the recruiter will agree not to solicit the firm's associates to leave for opportunities with competitors. In this way, firms reasonably seek to avoid “churn” that could undercut their investment in recruiting new talent if the same recruiter used to place talent with the firm were allowed to take advantage of its familiarity with the firm, its practice areas, and its existing talent to recruit talent away to other clients.

As noted above, the DOJ's proposed Final Judgments list a variety of circumstances in which “no direct solicitation” agreements will be permissible. Significantly, that list permits such agreements where “reasonably necessary for contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies or providers of temporary employees or contract workers.” Proposed Final Judgment ' V.A.3. Thus, the DOJ has recognized that, at least under some circumstances, restrictions on solicitation in connection with the use of “recruiting agencies” and other service providers can be “reasonably necessary” and consistent with pro-competitive interests.

Some observers of the DOJ's proposed Final Judgments have suggested that the authorization of restrictions on solicitation in contracts with recruiting agencies and other service providers reflects a broad exception to the general opposition the DOJ has demonstrated toward such arrangements. Those observers note that the exception falls under a heading of “Conduct Not Prohibited” by the proposed Final Judgment, and combined with the absence of any specific guidance on when such agreements will be “reasonably necessary,” they suggest that no cold calling provisions ' even when relatively broadly defined ' are unlikely to pose legal concerns as long as they bear some relation to a recruiting engagement.

As other observers have noted, however, the fact that the proposed Final Judgment offers no guidance on the standard that will apply in determining whether a restriction on direct solicitation is “reasonably necessary” leaves considerable room for the DOJ to take a narrower view in future cases. Like the proposed Final Judgments, the DOJ's Competitive Impact Statements do not identify the considerations that will be relevant to determining whether a no cold calling arrangement in an agreement with a recruiting firm will be viewed as permissible under federal antitrust law. This ambiguity thus raises uncertainty for those who would rely on the exception language, including potentially law firms and legal search providers.

For example, in the context of a recruiting engagement involving a single associate position in a discrete geographic area for a law firm with multiple offices, would a no cold calling provision that precludes the placement firm from soliciting any of the client law firm's associates without limitation as to geographic scope or duration be considered “reasonably necessary”? If not, because of the breadth of the restriction in relation to the limited nature of the search, then what factors should the parties consider in narrowing the scope of the provision in order to comply with the DOJ's proposed standard? Would it be sufficient to limit the restriction to the same geographic area, or does the “reasonably necessary” standard suggest more ' perhaps requiring that the restriction be limited to the same practice area? How long in duration may such a restriction be kept in place and still meet the “reasonably necessary” threshold? And to what extent will the question of reasonable necessity be dependent upon the particular course of the dealings between the legal placement agency and law firm? Will the lawfulness of a restriction on solicitation turn upon the nature and degree of information about the law firm, its practices, and its business plans provided to the recruiter in connection with the search? These and many other questions are left unanswered by the DOJ's proposed “reasonably necessary” standard.

Finally, it should be noted that the DOJ's focus on the no cold calling agreements at issue in its current enforcement efforts likely arose, at least in part, from the fact that the job market for highly skilled digital animators is a fairly concentrated one, in which restrictive agreements among a relatively few employers could arguably impact competition and prices for talent. In contrast, there may be both more legal employers and more legal recruiters active in most large legal markets. In such circumstances, it may be more difficult to demonstrate that vertical no poaching arrangements between firms and recruiters impact the overall competitive market for legal talent. Such a showing may be more plausibly advanced, however, in smaller and mid-sized legal markets, particularly those dominated by a relatively few major firms.

Conclusion

While law firms may not typically enter into the sort of formal restrictions on solicitation of each other's attorneys like those at the root of the DOJ's recent enforcement efforts, the rationale behind those enforcement efforts ' that agreements precluding cold calls tend to restrict competition for talent within a defined labor market and thus affect the prices paid for such talent ' is hardly unique to the high-tech sector. And while the DOJ has suggested limits on this theory of antitrust violation where the no cold calling agreement is ancillary and reasonably necessary to the engagement of a talent recruiter, it has so far left unanswered many questions regarding the circumstances in which such an agreement will be viewed as “reasonably necessary.” Accordingly, law firms inclined to seek such restrictions on cold calling from the recruiters with which they work would be prudent to use restraint and limit the scope of such agreements to terms they feel confident can be justified based on the particular facts of the recruiting engagement.

Karl G. Nelson, a member of this newsletter's Board of Editors, is a partner in Gibson Dunn & Crutcher LLP, where he practices in the areas of labor and employment and class action litigation, and serves as the Co-Partner In Charge of the firm's Dallas office. The author acknowledges the helpful assistance of Scott Mellon, an associate in the Dallas office, in preparing this article.