Guest column: Potential antitrust implications of noncompete agreements

Popular in the labor market to protect legitimate business interests, noncompete agreements (also known as restrictive covenants) take many forms and are used by companies and employers to protect their interests and investments in employees and business relationships. Noncompete agreements generally are treated the same whether analyzed under state law or antitrust principles. However, limited instances exist in which antitrust laws may be more restrictive than state noncompete laws are. Businesses with high market shares in their geographic and product markets should take special caution to ensure their restrictive covenants do not unlawfully restrain competition.

Noncompete agreements analyzed for reasonableness

In contrast to no-poach agreements, which are “naked” agreements between competitors for the sole purpose of restricting the hiring or recruiting of one another’s employees, some traditional restrictive covenants involve an employment or similar agreement that restricts an employee from using valuable information received, or business relationships developed, over the course of their employment, in a future job with an employer’s competitor. Recognized as a restraint on trade, noncompete agreements are enforceable if the restrictions are reasonable to protect the employer’s legitimate, protectable interests (e.g., confidential information or customer or employee relationships). “Reasonableness” considers the scope of restrictions with respect to time, activity and geography under parameters established by state statute or common law principles.

In other circumstances, noncompete agreements arise when two competing entities that are part of a legitimate, pro-competitive collaboration enter into a noncompete agreement that is ancillary to their collaboration to protect each entity’s legitimate interest in its employees’ specialized training and knowledge. Much like the common-law analysis of noncompetes, an enforceable noncompete agreement ancillary to two entities’ pro-competitive collaboration is reasonable if the noncompete limitations are tailored to protect the parties’ interests.

In addition to traditional noncompete principles, antitrust analysis also considers whether the noncompete is ancillary to a legitimate, pro-competitive agreement (e.g., an employment agreement or competitor collaboration) and the relevant market impacted by the restriction.

Courts analyzing the reasonableness of noncompete agreements generally reach the same conclusion whether the analysis is conducted under noncompete or antitrust principles. See, e.g., Frackowiak v. Farmers Ins. Co., Inc., 411 F. Supp, 1309, 1318 (D. Kan. 1976) (“[A]greements not to compete, entered into in conjunction with the termination of employment or sale of a business, do not offend the federal antitrust provisions if they are reasonable in duration and geographical limitation.”); Heyde Co. Inc., v. Dove Healthcare, LLC, 654 N.W.2d 830, 834 (Wisc. 2002) (noting that an entity is not allowed to accomplish by indirect action through a no-hire agreement with a competing entity that which it cannot accomplish directly through an employer-employee noncompete).

1. Beemac Trucking

In Pittsburgh Logistics Systems Inc. v. Beemac Trucking, LLC, 249 A.3d 918 (Pa. 2021), freight broker Pittsburgh Logistics (PLS) sued Beemac Trucking, a shipping company, in an alleged breach of a nonsolicitation provision in the parties’ services agreement. The nonsolicitation provision barred Beemac, its agents and its independent contractors from hiring PLS employees for two years following the termination of the contract. Analyzing Pennsylvania noncompete laws, the Pennsylvania Supreme Court found that the parties had a legitimate basis for including a restrictive covenant as part of the services contract to prevent business partners from poaching PLS employees who, over the course of their PLS employment and training, developed specialized knowledge and expertise in the shipping and logistics industry.

However, the court ruled that the noncompete provision was too expansive to be enforceable under Pennsylvania’s noncompete laws, as the restrictions in the nonsolicitation provision were broader than needed to protect PLS’s interests. Id.at 936. The court found overbroad (i) PLS’s two-year preclusion of Beemac and any of its agents or independent contractors from hiring, soliciting or inducing any PLS employee or affiliate; and (ii) PLS’s preclusion of all PLS employees, regardless of whether the employee had worked with Beemac over the contract term.

The court also found that the anticompetitive effects of the no-solicit/no-hire covenant were harmful to the public, impairing employment opportunities and job mobility of PLS employees, who were not parties to the contract, without their knowledge or consent and without providing consideration for this impairment. Id. The court further held that the provision undermined free competition in the shipping and logistics labor market, potentially contributing to slow wage growth and rising inequality. Id.

In determining that the provision failed to satisfy the reasonableness standard under Pennsylvania’s noncompete laws, the court considered several principles relevant to antitrust analysis. Doing so suggests that the court would have ruled similarly had it considered the noncompete provision under antitrust laws — finding a legitimate noncompete agreement ancillary to a pro-competitive collaboration, but unreasonable in that it was not tailored to protect the interests of the entities without causing unnecessary anticompetitive effects.

2. Aya Healthcare Services

By comparison, in Aya Healthcare Services, Inc. v. AMN Healthcare, Inc., 9 F.4th 1102 (9th Cir. 2021), the 9th Circuit Court of Appeals considered the antitrust implications of a noncompete provision and found that the provision was legitimate, reasonable and ancillary to a pro-competitive collaboration. The 9th Circuit affirmed summary judgment in favor of defendant AMN Healthcare in a case involving the validity of a nonsolicitation provision in an agreement with competitor Aya Healthcare to provide travel nursing services. AMN, a temporary health care staffing agency, contracted with Aya, a competing temporary health care staffing agency, for Aya to provide staffing services as a subcontractor. The contract included a provision prohibiting Aya from soliciting AMN’s employees, which Aya claimed violated the antitrust laws.

The 9th Circuit disagreed, finding that, although the agreement was a horizontal restraint between two rival employers, the nonsolicitation provision was ancillary to the parties’ pro-competitive agreement to supply travel nurses for hospitals. Much like Beemac’s analysis under state noncompete law, the 9th Circuit considered whether there was a legitimate basis for the restraint, finding that the nonsolicitation provision promoted enterprise and productivity within the context of the broader collaboration. Id. at 1111. The Aya court found that the nonsolicitation provision between AMN and Aya was a pro-competitive restraint under the antitrust laws to ensure that AMN could guard its investments and not lose its personnel during the collaboration. Id. at 1110.

The Aya court also considered the restraint’s potential anticompetitive effect in the relevant market. The Aya court considered evidence of AMN’s 30% market share as compared to Aya’s 15% market share, finding there was no direct proof that increased prices for travel nurses in the market was due to the nonsolicitation agreement. The Aya court further rejected that AMN’s market share in the relevant markets suggested AMN wielded extraordinary control over available workflow and assignments to demonstrate harm to competition. Id. at 1113. The 9th Circuit ruled that Aya failed to show significant barriers to entry or expansion in the relevant markets to support a finding that the nonsolicitation provision was part of a predatory scheme that violated the antitrust laws.

Beemac and Aya demonstrate the overlap between state noncompete and antitrust laws when assessing whether a restraint between competitors or potential competitors is reasonable and procompetitive. And, the Aya court’s analysis further illustrates the important, and sometimes diverging, analysis of market share in construing a restrictive covenant under the antitrust laws.

When antitrust and noncompete laws diverge

Narrow circumstances may exist in which a noncompete agreement that is reasonable under state noncompete principles would not be considered reasonable under antitrust principles. These circumstances include otherwise legitimate noncompete agreements ancillary to a pro-competitive collaboration when one entity holds a large market share. Under such circumstances, the noncompete may be reasonable under state noncompete principles, but the antitrust analysis of the entity’s market share would find the agreement anticompetitive. In other words, the entity with a larger market share entering a noncompete agreement ancillary to a pro-competitive collaboration could be required to use narrower noncompete terms to satisfy antitrust laws than what would be permissible under the state noncompete laws.

Consider a business fixed to a particular geography with a large market share in the goods or services it provides. If this business had a legitimate pro-competitive collaboration with a smaller competitor that included a restriction barring the smaller competitor from hiring the larger business’s skilled labor for a reasonable period of time within the competitors’ fixed geography, a traditional noncompete analysis likely would find that the restriction was reasonably necessary to preserve the larger business’s protectable interest in its skilled employees. However, an antitrust analysis might find that the agreement — which may foreclose the smaller competitor’s ability to hire available laborers and compete against the larger competitor outside of the collaboration — unlawfully restricts competition.

Businesses with significant market shares in their respective geographic and product markets should be especially cautious that their restrictive covenants do not cause anticompetitive effects and therefore separately violate state and federal antitrust laws. In addition to engaging counsel with expertise in noncompete law, businesses with large market shares also should consider involving antitrust counsel to be sure that they are appropriately balancing additional competition risks that may exist.•

Kathy L. Osborn and David A. Given are partners and Anna M. Behrmann and Susanne A. Johnson are associates at Faegre Drinker Biddle & Reath LLP. Opinions expressed are those of the authors.