California Continues To Go After Non-Competes

We’ve written at length about the rapidly-changing landscape regarding covenants not to compete, including the first-in-the-nation law in California that essentially prohibits all such agreements, and we’ve kept you abreast of how various states have responded to the California statute, including New York and Massachusetts.  (“The State-by-State Smackdown”)

Now, covenants not to compete typically arise in the context of an employment agreement, with the employee agreeing that if she leaves the company (or is fired), she will not flee to the company’s closest competitors.  Typically, the question as to whether such agreements are enforceable turns on how narrowly-tailored the covenant is to serve its purpose, which means the determination is generally made on a case-by-case basis.  This reflects a balancing of two goals:  ensuring free and fair competition in the marketplace, and also protecting a company against rivals seeking to “poach” its employees and potentially steal secrets, practices, and other confidential information.  It’s a tough balance to strike, and the parties typically only figure out exactly where the line should be drawn once one party sues the other.

So what if two California companies decided to “cut out the middleman” – in this case, their employees – and simply agree with each other that neither company would poach the other’s workers?  According to two federal lawsuits filed by the U.S. Department of Justice and the California Attorney General, that’s exactly what online retailer eBay and software giant Intuit – which, among other things, manufactures software programs including Quicken, QuickBooks, and TurboTax – allegedly agreed to do back in 2006.  According to the DOJ and the California AG complaints, eBay and Intuit entered into a “handshake” agreement not to solicit or hire each other’s employees.

Although the two companies service different markets, the complaints allege that eBay and Intuit compete for the same pool of specialized computer engineers and scientists.  Moreover, the gravamen of both complaints is that the alleged “handshake” agreement violated federal and state antitrust laws by reducing competition and thus artificially depressing the salaries, benefits, and employment opportunities the employees might have received absent the agreement.

Ultimately, the question is likely to come down to which rule the United States District Court for the Northern Division of California chooses to apply.  eBay has argued that the governments must show a specific injury “of the type the antitrust laws were designed to prevent,” i.e., that a prospective employee suffered decreased wages, benefits or employment opportunities as a result of the alleged “handshake” deal.  Specifically, eBay has moved to dismiss both the DOJ and the California AG’s complaints on 12(b)(6) grounds, arguing, inter alia, that neither the DOJ or California have articulated any actual injury arising from the alleged handshake agreement.

Both the DOJ and the California AG have responded that the Court should instead evaluate the agreement as “per se” illegal even if they cannot identify particular employees who have been harmed, because the agreement allocates a particular market (for workers in the technology sector) among two companies (eBay and Intuit).  (The DOJ’s response memorandum is here, and the California AG’s response is here. eBay also filed reply briefs in both cases:  DOJ and the California AG actions.)

As far as we can tell, this is a question of first impression.  If the Court adopts the “per se” analysis urged by the DOJ and the California AG, it will essentially prevent companies from doing an “end run” around the California statute prohibiting covenants not to compete by simply agreeing amongst themselves not to poach each other’s employees.

Briefing in the two cases just concluded, so the ball is literally in court.  We’ll be watching….

• Breach of Contract
• Civil Litigation