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February 16, 2022

DOJ Survives Challenges to Labor Market Prosecutions

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Key Takeaways

  • This ruling comes on the heels of a November 2021 decision in which another federal court denied a motion to dismiss a criminal wage-fixing indictment against former employees of physical therapy staffing companies. The DOJ, as a matter of policy, only brings criminal charges in cases where the conduct is a per se violation of the antitrust laws, rather than conduct governed by the more lenient “rule of reason” standard. Therefore, these court decisions are significant victories for the DOJ in its recent push to bring criminal charges in labor market collusion cases.
  • The DaVita court is the first to rule on a defense argument that criminal prosecutions of no-poach agreements should be dismissed because, prior to 2021, the DOJ had charged such cases civilly under the rule of reason framework. Not surprisingly, the DOJ has begun filing notices highlighting the DaVita decision in other no-poach cases where defendants have made the same argument.

A little over a year after bringing its first "no-poach" prosecution, the U.S. Department of Justice's Antitrust Division (DOJ) defeated a motion to dismiss an indictment in a closely watched decision that may make it more difficult for defendants to challenge such indictments in the future. On January 28, 2022, in United States v. DaVita Inc., Judge R. Brooke Jackson of the U.S. District Court for the District of Colorado ruled that naked horizontal nonsolicitation agreements that allocate the market―i.e., those that are not ancillary to a legitimate procompetitive business purpose―are per se violations of the Sherman Act. Restraints on soliciting or hiring employees that are subordinate, collateral and necessary to a legitimate transaction, such as a collaboration agreement, that may enable companies to offer goods or services that are cheaper, more valuable to consumers or brought to market faster than would be possible absent the restraint do not necessarily violate federal antitrust law.

This ruling comes on the heels of a November 2021 decision in which another federal court denied a motion to dismiss a criminal wage-fixing indictment against former employees of physical therapy staffing companies. The DOJ, as a matter of policy, only brings criminal charges in cases where the conduct is a per se violation of the antitrust laws, rather than conduct governed by the more lenient "rule of reason" standard. Therefore, these court decisions are significant victories for the DOJ in its recent push to bring criminal charges in labor market collusion cases.

The DaVita court is the first to rule on a defense argument that criminal prosecutions of no-poach agreements should be dismissed because, prior to 2021, the DOJ had charged such cases civilly under the rule of reason framework. Not surprisingly, the DOJ has begun filing notices highlighting the DaVita decision in other no-poach cases where defendants have made the same argument.

The DaVita Indictment and Motion to Dismiss

In its first no-poach prosecution, in January 2021, the DOJ indicted UnitedHealth Group unit Surgical Care Affiliates LLC (SCA), an outpatient medical facility, in the U.S. District Court for the Northern District of Texas, for allegedly agreeing with unnamed competitors not to "poach" or hire each other's employees. The SCA indictment came several years after DOJ announced that it would begin criminally prosecuting companies and individuals for such conduct, and after Doha Mekki―who at the time was counsel to then-Assistant Attorney General Makan Delrahim and is now the principal deputy assistant attorney general of the Antitrust Division―told the House Judiciary Committee that "a number of active criminal investigations into naked no-poach and wage-fixing agreements" were ongoing. In its July 2021 indictment of dialysis company DaVita and its CEO, Kent Thiry, the DOJ revealed that DaVita was one of the other companies unnamed in the SCA indictment.

DaVita and Thiry moved to dismiss the indictment based on several grounds. The court recognized, as a fundamental matter, that certain classes of restraint are so "manifestly anticompetitive" that they are considered per se violations of the Sherman Act and that a detailed analysis of the market and the restraint under a rule of reason analysis is not required in those instances. The court quickly disposed of defendants' arguments that the indictment was deficient because it simply alleged a nonsolicitation agreement rather than a horizontal (i.e., among participants at the same level) market allocation agreement, and that it did not contain sufficient factual allegations.

Ruling: Horizontal Nonsolicitation Agreements That Allocate the Market Are Per Se Illegal

Before turning to defendants' legal arguments, the court set forth a three-part test to determine whether per se treatment for charged conduct is appropriate:

  1. Whether the conduct falls into a category that has been found to be subject to per se treatment;
  2. If the answer to number 1 is no, whether the creation of a new category of per se unreasonableness covering the conduct is appropriate, and
  3. If the answer to questions 1 or 2 is yes, whether the practice is "naked" (i.e., has no purpose except stifling competition) or ancillary to a legitimate procompetitive business purpose.

The first of defendants' legal arguments was that there is no established precedent holding nonsolicitation agreements as per se violations. The court disagreed, stating that although there are no perfectly analogous cases:

[T]hat is the nature of Section 1 of the Sherman Act: as violators use new methods to suppress competition by allocating the market or fixing prices these new methods will have to be prosecuted for the first time.

The court also relied on United States v. Cooperative Theatres of Ohio, Inc., a 1988 case in which the Sixth Circuit Court of Appeals held illegal an agreement among theater booking agents not to solicit customers (movie theaters) already served by the other companies, finding customers and employees sufficiently analogous.

The court agreed with defendants' next argument, that there is no precedent affording per se treatment to all nonsolicitation agreements, but nonetheless concluded that the restraints in this case fell into an existing category of per se unreasonableness, i.e., a horizontal market allocation agreement. The court further concluded that "no-hire" agreements that are nothing more than naked agreements to allocate the market are also considered per se violations. Because the court considered the agreements at issue to be market allocation agreements, it rejected the defendants' argument that per se treatment of these agreements would violate their right to fair warning under the Due Process Clause.

Notably, however, the court specifically disagreed with DOJ's argument that all nonsolicitation and no-hire agreements are horizontal market allocation agreements and per se violations of the Sherman Act, concluding "that if naked non-solicitation agreements or no-hire agreements allocate the market, they are per se unreasonable." The court thus left open the possibility that not all such agreements will carry criminal liability.

Effect of DaVita Decision on Other Labor Market Cases

On February 3, just days after the DaVita decision, the DOJ filed a notice in a Nevada case in which healthcare staffing company VDA OC LLC and its former regional manager, Ryan Hee, were charged with fixing wages for Las Vegas school nurses. The DOJ pointed out that the defendants in that case, like the DaVita defendants, had cited the fact that no federal court had ever held employee nonsolicitation agreements to be per se illegal under the Sherman Act. The DOJ argued that "DaVita shows why those arguments are misguided," and that "with the issuance of this [DaVita] order, the argument that no federal court has held a no-poach agreement to be a per se criminal violation under the Sherman Act is foreclosed."

The DOJ also cited the DaVita decision in an amicus brief it filed in a proposed class action against SCA, United Surgical Partners International Inc. and DaVita in the Northern District of Illinois. There, the DOJ argued that Judge Jackson's ruling bolsters the DOJ's contention that the class plaintiffs, whose complaint contains allegations similar to those in the DaVita indictment, also alleged a market-allocation scheme that qualifies for per se treatment. The defendants in the civil case responded on February 7, stating that the class complaint, which is subject to different pleading standards than the DaVita indictment, does not adequately allege an employee allocation agreement. Thus, the defendants argued, the DaVita court's statement that no-hire agreements without naked market allocation are "not themselves so pernicious that they would almost always be unreasonable restraints on trade" actually supports their claim that the complaint should be dismissed.

The DaVita decision has been cited by both sides in the SCA prosecution in the Northern District of Texas. On February 1, the DOJ filed a notice in the case citing the DaVita decision and making the same argument as it did in the VDA case. SCA responded on February 10, arguing that DaVita requires the government to prove that the challenged agreement "is in fact an agreement ‘to allocate the market,' with the ‘main purpose' of ‘stifling competition.'" SCA further argued that according to DaVita, the government needs to allege a relevant labor market, as well as intent to allocate and actual allocation of that market.

Conclusion

While motions to dismiss indictments are rarely granted, the DaVita decision is nonetheless a significant victory for the DOJ. An adverse decision could have imperiled other similar prosecutions and jeopardized the success of the DOJ's program aimed at criminally prosecuting labor market collusion. Still, we should expect other defendants charged in no-poach or wage-fixing indictments to continue to argue that the conduct should not be subject to per se treatment for the same reasons that the DaVita defendants advanced. It remains to be seen whether other courts will follow Judge Jackson's lead and uphold such indictments. But one thing is clear: So far, the DOJ's labor market prosecutions are holding up and will continue to pose a risk for companies engaged in labor market collusion.

We can expect to see more indictments of employers for wage-fixing or no-poach agreements in the coming months and more civil suits being filed. The consequences for a company or individual facing an indictment or civil complaint are severe. Criminal violations of the Sherman Act are punishable by up to $100 million in fines for companies and $1 million in fines for individuals, or twice the gross gain or loss from the offense, whichever is greater. Individuals can be sentenced to up to 10 years of imprisonment. In addition, private plaintiffs are entitled to three times the amount the plaintiff actually suffered from the violation, plus attorney fees. So companies should tread carefully when considering entering into agreements that could be found to violate antitrust laws and seek experienced antitrust counsel before doing so.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

ALM expressly disclaims any express or implied warranty regarding the OnPractice Content, including any implied warranty that the OnPractice Content is accurate, has been corrected or is otherwise free from errors.

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