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Article | FINEX Observer

Managing the risk of no-poach and non-compete agreements

Financial, Executive and Professional Risks (FINEX)
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By Jully Y. Rojas | June 11, 2020

In this article, we discuss the potential exposure to employers for no-poach and non-compete agreements.

Business growth is a primary objective for most if not all companies. A common way to achieve business growth is to invest in hiring and training employees. This growth strategy might include the use of certain agreements such as no-poach and non-compete agreements, which are intended to preserve an employer’s investment of time and resources in training employees and to protect against employees who transfer those skills to a direct competitor. Despite this business intent, no-poach and non-compete agreements have come under regulatory scrutiny over the past few years. The agreements also have been a source of potential exposure for employers faced with claims over the enforceability of the agreements, thus presenting an unintended risk to businesses.

Understanding the Risks

Regulators have recently focused on “no-poach” agreements (also called “non-solicitation” agreements) based on anti-trust concerns that the agreements restrict competition in the labor market. No-poach agreements refer to agreements between companies or businesses not to compete with one another for each other’s employees.  The Department of Justice and the Federal Trade Commission have stated that certain no-poach agreements that serve no other purpose other than to limit hiring of employees between competitors are per se unlawful under anti-trust laws and could give rise to penalties.1

States have followed suit. For example, attorneys general across multiple states scrutinized a class of businesses for their use of no-poach clauses in franchise agreements in which participating companies agreed not to hire employees from each other. The states’ investigation resulted in settlements whereby some of the companies agreed not to use no-poach provisions in their franchise agreements.2

These federal and state investigations have, in turn, led to private civil litigation brought by employees alleging that no-poach provisions violate anti-trust laws. The suits have generally alleged that companies, particularly in the tech sector, agreed not to poach each other’s employees which had the effect of limiting job mobility and capping salaries.3

This is not to say that all anti-poaching agreements are unlawful. On the one hand, if a no-poach agreement serves no legitimate purpose other than to restrict competition of employees between competitors, then such “naked” agreements might raise concerns. On the other hand, regulators recognize that no-poach agreements can still allow for competition in the labor market when the agreements are tied to a separate legitimate business transaction, for example, a merger.  

Similarly, non-compete agreements are often used by companies as a way of protecting their investment in employees. No-poach agreements run between companies, whereas non-compete agreements are between an employer and an employee. The non-compete agreement usually restricts an employee from joining a competitor within a geographic area and/or within a certain time period. Again, despite the intent to protect business investment, the agreements could be seen as limiting individuals from pursuing opportunities and restricting their mobility. The constraints of non-compete agreements can thus present challenges in terms of enforceability with some jurisdictions not recognizing them as enforceable at all.4

Exposure to claims arising from No-Poach and Non-Compete Agreements

No-poach and non-compete agreements can present a risk of regulatory scrutiny and private litigation. Regulatory investigations can be expensive to defend. Likewise, companies can face exposure to lawsuits by employees alleging that agreements violate anti-trust laws. One way to manage the risk is through insurance designed to address these types of exposures. Depending on the policy wording, coverage might be afforded for claims resulting from companies’ no-poach and non-compete agreements. For example, directors & officers’ liability (D&O) insurance policies can provide coverage for regulatory investigations and anti-trust claims. Some policies may have exclusionary language applicable to anti-trust claims, but can be amended through negotiation to afford coverage at full limits or at a sub-limited amount. 

Exposure is not limited to claims challenging the validity of no-poach agreements. Consider a claim that results from an employer’s use of a non-compete agreement. An employee who signed a non-compete at the outset of their employment eventually leaves for a competitor in the same geographic area. The employee is sued for violating the non-compete agreement and in turn counterclaims against the employer alleging the agreement is unenforceable and restricts mobility. Furthermore, the new employer is sued for allegedly inducing that employee to join the new company and for tortiously interfering in an existing business relationship. Added to that are allegations that the employee departed with confidential and trade secret information to be used at the new employer. In this scenario, the former employee not only faces liability under the non-compete agreement (including provisions prohibiting misappropriation of trade secrets), but the new employer is faced with defending claims even if they were not a party to the non-compete. These claims could trigger D&O insurance, depending on the policy wording, which potentially could offset the cost to defend and settle the litigation.

Takeaways

  1. Enforceability of no-poach and non-compete agreements depends on the scope and purpose of the agreements and jurisdiction. Reviewing an agreement with outside counsel to ensure validity and enforceability is advised.
  2. D&O insurance may serve as a means of mitigating risk associated with claims against employers arising out of no-poach and non-compete agreements, including related anti-trust and business tort claims.
  3. Review your D&O policy with your insurance broker to optimize coverage for these risks and confirm that investigative and anti-trust coverage is provided.

Footnotes

1 Federal Trade Commission’s Antitrust Guidance for Human Resources Professionals on How Antitrust Law Applies to Employee Hiring and Compensation (Oct. 21, 2016) https://www.ftc.gov/news-events/press-releases/2016/10/ftc-doj-release-guidance-human-resource-professionals-how

2 https://www.atg.wa.gov/news/news-releases/ag-ferguson-s-initiative-ends-no-poach-clauses-10-more-corporate-chains-nearly

3 https://www.bizjournals.com/sanjose/news/2019/06/12/google-no-poach-clause-goog.html

4 Non-compete agreements are not enforceable in California, for example.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast, Inc. (in the United States) and Willis of Canada, Inc

Author

Claims & Legal Group, FINEX North America

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