COMPETITION LAW SUBMISSION

COMPETITION LAW PROJECT

NO-POACH AGREEMENTS AND THE IMPACT ON FAIR COMPETITION IN A

FREE-MARKET ECONOMY IN LIGHT OF VARIOUS ANTI-COMPETITIVE
LAWS IN INDIA

SUBMITTED BY-

Name: Gaurav Jalendra

Division: B

PRN: 16010323118

Course: BA LLB

In

September, 2017

Under the guidance of

Prof. Mr. Avinash Singh

Symbiosis Law School, Hyderabad

Symbiosis International University, Pune

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ABSTRACT

Open market economies promote free trade regulated by the market forces of demand and
supply. They provide the floor for businesses to engage in trade and earn profits based on their
skill and that which is exercised by their able competitors. In a bid to earn greater profits at a
lesser cost, or in the quickest time, some of these businesses connive to strike out competition
thereby enabling their progress on the market.

One such mechanism has become the enforcement of no-poach agreements restricting the
solicitation of employees by competitors. Although under normal situations, such non-
solicitation may be deemed legal, it takes the color of anti-competitiveness when it creates a
barrier to free trade to the detriment of the employees. This triggers various antitrust laws that
question the legality of such agreements. This research paper aims to delve deeper into how
the competition laws in India, especially the Competition Act, 2002, deals with this particular
type of anti-competitive agreement.

___________________________________________________________________________

INTRODUCTION

No-Poach Agreements are entered into between two parties who agree to not solicit the other
company’s employees, or to fix wages or other terms of employment. The potentially restrict
a company from recruiting or competing for the employees of another by offering inducements
in the form of competitive remuneration or other employment benefits. Non-competes on the
other hand, are contracts entered into by and between the employer and employee to restrain
the latter, after termination of his or her employment, from working for a competitor or starting
his own business in the same line of service. This is done to protect trade secrets from being
leaked to a competitor or used by the former employee to open his competing business.1

Supporters of non-poachers agreements, basically being employers, argue that such agreements
secure their investments made in the training of workers, as well as in expanding their customer

1
Krueger, Ashley B., Ashenfelter, Orley, 2017, ‘Theory and Evidence on Employer Collusion in the Franchise
Sector’, Princeton University Industrial Relations Sector.

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base, one that could be easily eroded by the movement of employees, who have built a good
working relationship with such customers, to competing businesses.2

On the other side of these restrictive arrangements are employees who suffer due to a weakened
bargaining power and depleted employment opportunities. This is especially true in those
industries where employees are paid minimum wage without any variations and this indicates
that there is no economic rationale behind such agreements. The lack of knowledge about such
agreements puts employees in an especially vulnerable situation where they are neither unable
to argue nor negotiate such pernicious conditions.

INDIAN LEGAL POSITION

Under Indian Law, the legality of restrictive clauses in agreements between employer and
employees, restricting the latter from pursuing a job opportunity with a competitor after
employment termination, has received widespread attention and has also become a subject
matter of litigation.

Section 27 of the Indian Contract, 1872 makes an agreement in restraint of trade void. In the
case of Embee Software Pvt. Ltd. v. Samir Kumar Shaw & Ors.3 in 2012 involving a former
employer and employee, the non-solicitation provision in an employment contract was
examined and it was held that the non-solicitation clause does not amount to restraint of trade,
business and profession, and would not be hit by Section 27 of the Contract Act as being void.
It was also held that solicitation, in case of a non-solicitation clause in a contract, would amount
to a tort and cannot be practiced by a former employee to damage the business of a former
employer.

It was held in Kosher Mfg Co. Ltd. v. Kolok Mfg. Co. Ltd.4it was held that an agreement
between two companies that one would not employ the former employees of the was void by
reason of its generality. On the contrary, in the case of Wipro Ltd. v. Beckman Coulter5 in 2006,
the Hon’ble High Court of Delhi examined the facts involving a non-solicitation clause
(involving employees of each other) in a commercial contract between the two contracting
parties. The Hon’ble High Court held that the non-solicitation clause between the two

2
https://knowledge.wharton.upenn.edu/article/how-fair-or-legal-are-non-poaching-agreements/
3
AIR 2012 Cal 141
4
1959 Ch 108 : (19858) 2 WLR 858 (CA)
5
2006 (2) CTLJ 57 (Del)

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commercial parties can be held as valid, and the respondent (Beckman Coulter) cannot offer
inducement to employees of Wipro Ltd. (petitioner) to join the respondent (Beckman Coulter).

The more serious question is whether such no-poaching or wage-fixing agreements are in
violation of the Competition Act, 2002.

Section 3 of the Act defines Anti-Competitive Agreements.

“3. (1) No enterprise or association of enterprises or person or

association of persons shall enter into any agreement in respect of
production, supply, distribution, storage, acquisition or control of
goods or provision of services, which causes or is likely to cause an
appreciable adverse effect on competition within India.

(2) Any agreement entered into in contravention of the provisions

contained in subsection (1) shall be void.”

It is clear from a bare reading of the Act that no-poach agreements are not covered explicitly
by Section 3 dealing with anti-competitive agreements, that prohibits such contracts among
enterprises engaged in identical or similar trade of goods or provision of services. In this
context, it can be said that since the enterprises competing against each other to hire or retain
employees are competitors in the employment marketplace, they may fall within the purview
of Section 3 of the Competition Act.

Section 3(1) mentions the phrase ‘appreciable adverse effect on competition’. By a collation of
the individual definitions of each word, it can be deduced that the provision means to restrict
all such practices that have a largescale noticeable and harmful impact on fair competition in a
free market economy. Although not expressly defined in the act, adverse effects on competition
have been laid out under section 19(3) of the Act to mean and include the following:

a) Creation of barriers to new entrants in the market

b) driving existing competitors out of the market;
c) foreclosure of competition by hindering entry into the market;
d) accrual of benefits to consumers;
e) improvements in production or distribution of goods or provision of services; or
f) promotion of technical, scientific and economic development by means of production
or distribution of goods or provision of services.

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Entering into no-poach or wage-fixing agreements have an impact on competition in the free
market economy as they regulate the compensation of employees and limit or control the
supply of skilled labor in the employment marketplace. By virtue of this, it can be said that
such non-solicitation agreements may trigger anti-competitive laws. No-poach or non-solicit
agreements may be legal if they are related to legitimate collaborations or business transactions
and "reasonably necessary No-poach or non-solicit agreements may be legal if they are related
to legitimate collaborations or business transactions and "reasonably necessary" for those
collaborations or transactions to move forward. Acceptable agreements may include:

1. Joint venture partners agreeing not to hire or recruit employees involved in the joint
venture; A business agreeing not to hire or recruit employees with whom the business
has come into contact while negotiating or conducting diligence for a transaction;
2. The seller of a business agreeing with the purchaser that the seller will not, for a limited
period of time, rehire or recruit key employees from the business being sold; or
3. A business agreeing not to hire or recruit employees whom a consultant has staffed on
a project for the business.

Any such agreements should also be narrowly tailored. For example, if a business agrees not
to recruit employees from a consultant, that agreement should apply only to employees who
had contact with the business during the consulting project.

Section 3(3) and 3(4) of the Act describe horizontal and vertical agreements. Raghavan
Committee Report on Competition Law observed as follows:

“4.3.1 Agreements between firms have the potential of restricting

competition. Most laws make a distinction between “horizontal” and
“vertical” agreements between firms. Horizontal agreements refer to
agreements among competitors and vertical agreements are
agreements relating to an actual or potential relationship of buying or
selling to each other. A distinction is also made between cartels – a
special type of horizontal agreements – and other horizontal
agreements and between vertical agreements between firms in a
position of dominance and other vertical agreements. Generally,
vertical agreements are treated more leniently than horizontal
agreements as, prima facie, a horizontal agreement is more likely to

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reduce competition than an agreement between firms in a buyer-seller

relationship.”

Are no-poach agreements horizontal or vertical agreements? By virtue of their meaning and
the impact they have, they can be covered under both kinds of anti-competitive agreements.
The employment market transgresses all industries and all kinds of goods and services. Skilled
employees can be required and poached from various levels of businesses or from businesses
at the same level. Hence, they are covered under both kinds of agreements. Some of these can
be per se illegal by virtue of the patent illegality and arbitrariness of the restrictive clauses.
Others can be proven to be illegal by reasonable arguments to that extent.

Competition laws in India still being nascent, it is pertinent to look at foreign jurisprudence in
this subject matter to analyze the law and logic behind no-poaching agreements and their
relation to anti-trust laws.

INTERNATIONAL JURISPRUDENCE AND LAWS

The Hong Kong Competition Commission (HKCC) has highlighted this issue by publishing
an Advisory Bulletin: ‘Competition concerns regarding certain practices in employment
marketplace in relating to hiring and terms and conditions of employment’. Before reporting
some of the key findings and recommendations of the HKCC, we map the competition law
developments in this area from around the globe.6 The Ordinance mandates that undertakings
should independently adopt policies regarding employment terms, compensations in particular,
and also ensure that such policies or the terms therein are not communicated by any direct or
indirect, formal or informal means of communication to other employers. The Commission
considers that agreements and concerted practices in relation to compensation or solicitation or
hiring of employees or certain classes of employees may contravene the First Conduct Rule
(FCR) Guideline. Undertakings that reach an agreement in relation to any aspect or element of
compensation or exchange information about their intentions in this respect are, effectively,
fixing the price of labor. Compensation in this context is not limited to salaries and wages but
can include benefits and allowances such as insurance benefits, housing allowances, relocation

6
Competition Commission Advisory Bulletion, 2018,
https://www.compcomm.hk/en/media/press/files/20180409_Competition_Commission_Advisory_Bulletin_Eng.
pdf

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support, severance payments or long service payments. Undertakings that reach an agreement
in relation to solicitation, recruitment or hiring of each other’s employees or classes of
employees (non-poaching or other arrangements) or exchange information about their
intentions in this respect are, effectively, engaging in market sharing by allocating sources of
supply. In light of the FCR Guidelines, the Competition Commission of Hong Long views price
fixing and market sharing agreements as created having the object of harming competition7.

In the United States of America, the agreement between competitors to fix prices or eliminate
credit conditions and further determine the price based on that amounts to a conspiracy and is
illegal per se. An agreement setting a minimum price and a maximum price, is illegal under the
law in America.8 Around the fall of 2016, the United States Department of Justice’s Antitrust
Division announced that from that point forward, it “intended to proceed criminally against
naked no-poach and wage-fixing agreements.” According to the Antitrust Division, “[n]o-
poach agreements are naked if they are not reasonably necessary to any separate, legitimate
business collaboration between the employers . . . [and] are per se unlawful because they
eliminate competition in the same irredeemable way as agreements to fix product prices or
allocate customers.”9 On 20th October, 2016, the Federal Trade Commission and the
Department of Justice of the Antitrust Division in USA issued guidance for Companies and
Human Resource Professionals, relating primarily to wage-fixing and anti-poaching
agreements, to enable them to follow practices conducive for the free and fair functioning of
the market. The guidelines also express the intention of proceeding with criminal investigations
on allegations of agreements between employers to not solicit or hire each other’s employees.
Prior to this guidance, the DOJ has brought forth several successful cases, primarily against hi-
tech companies, recognizing agreements preventing ‘cold calling’ as prima facie illegal which
cannot seek the justification of resultant procompetitive circumstances. In the case of U.S v.
eBay Inc. 10the judgement prohibited companies 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 in any way refrain from, or pressuring any person in any way to

7
Competition Commission, FCR Guideline, para. 6.10 and 6.18.
8
Naghdi, Ashkan and Gharibeh, Ali, ‘An Overview of Anti-Competitive Conditions in America’, Journal of
Politics and Law, Vol. 9, No. 2, 2016.
9
https://www.justice.gov/atr/division-operations/division-update-spring-2018/antitrust-division-continues-
investigate-and-prosecute-no-poach-and-wage-fixing-agreements
10
U.S. v. eBay Inc., No. CV12-58690-PSG (N.D. Cal. Sept. 2, 2014).

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refrain from hiring, soliciting, cold calling, recruiting, or otherwise competing for employees
of the other person.”

On April 3, 2018, the Antitrust Division filed a civil antitrust lawsuit against Knorr-Bremse
AG and Westinghouse Air Brake Technologies Corp. (“Wabtec”), and with it simultaneously
filed a civil settlement. The complaint alleges that these companies and a third company,
Faiveley, reached naked no-poach agreements beginning as early as 2009 and continuing until
at least 2015, in violation of Section 1 of the Sherman Act. The competitive impact statement,
filed simultaneously with the complaint in the United States District Court for the District of
Columbia, explains that these no-poach agreements are properly considered per se unlawful
market allocation agreements under Section 1 of the Sherman Act. In the relevant labor
markets, the agreements eliminated competition in the same irredeemable way as agreements
to fix product prices or allocate customers, and they were not reasonably necessary for any
collaboration between the firms. These no-poach agreements distorted competition to the
detriment of employees by depriving them of the chance to bargain for better job opportunities
and terms of employment.11 Market participants were put on notice that the judiciary and
administration intends to zealously enforce the antitrust laws in labor markets and aggressively
pursue information on additional violations to identify and end anticompetitive no-poach
agreements that harm employees and the economy.

‘No-poaching’ clauses are in sharp focus as the Donald Trump administration and Democratic
States threaten action against companies for these. The U.S. economy is growing but the wages
are not, and this has been an underlying reason for the political turmoil. Labor distress has
contributed in good measure to the rise of the ‘Trump movement’.12 Peter Cappelli,
management professor at Wharton School, observes that “informal, unwritten no-poaching
agreements have been common among Silicon Valley technology companies”.13 In one widely
reported case, Apple, Google, Intel and Adobe agreed to pay $415 million to settle a ‘no-
poaching’ lawsuit three years ago with affected employees.14

In Europe, several national competition authorities (including in Spain, the Netherlands and
Croatia) have investigated no poach deals, including those made in the freight forwarding,

11
United States of America v. Knorr-Bremse AG and Westinghouse Airbrake Technologies Corporation
12
https://www.thehindu.com/news/international/no-poaching-pacts-under-scrutiny/article24781021.ece
13
Ibid.
14
https://www.freepressjournal.in/business/federal-judge-approves-415-mln-dollar-settlement-by-apple-
google

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hospitals and IT employment sectors. While the European Commission hasn’t previously
looked at no poach agreements, there is clearly potential for them to fall foul of EU antitrust
laws in the same way as other agreements that may be found to restrict competition. 15

ANALYSIS

An individual is free to contract and to abstain from contracting and to exercise every
reasonable right thereto, except only as he is restricted from voluntarily and unreasonably or
for wrongful purposes restraining the right to carry on trade.16 No-poach and wage fixing
agreements as detailed above have an extended economic impact on the employment
marketplace. Despite business arguments that such agreements cut costs for the companies,
from the perspective of the employees, this makes wages and compensation rates static. It kills
the prospect of better alternative opportunities. On the legal front, such agreements have been
deemed and declared illegal by various foreign countries, including but not limited to USA, the
European Union, United Kingdom, Hong Kong, etc. The USA in particular carries civil
penalties with damages running into millions along with possible jail time. Indian laws, on the
other hand, do not have any laws laid down in this matter. The judiciary has already declared
that through judgements that such non-solicitation agreements are not in contravention to the
Indian Contract Act, 1872. In contention to this is the argument that such leeway given to
businesses paves the way for ‘economic terrorism’ under the garb of such restraints. Employees
should have the right and freedom to change employment and seek an improvement in service
conditions.17 The right to trade has also been granted in the Constitution of India, under Article
19. The agreements entered into by companies to protect themselves from competition are in
conflict with the rights of employees to seek employment of their choice and as it affects
livelihood, it must prevail over such restrictive agreements.18

With respect to the Competition Laws, the Competition Commission of India has so far only
treated such poaching as ‘employment issues’. In the year 2015, IndiGo had been accused of
poaching over 60 pilots from Air India and Jet Airways and the Competition Commission of

15
https://www.linklaters.com/en/insights/publications/2018/september/no-poach-agreements-whats-the-
big-deal
16
Mogul Steamship Co. v. McGregor, 1892 AC 25.
17
Pepsi Foods Ltd. & Others v. Bharat Coca-Cola Holdings Pvt. Ltd. & Others, 81 (1999) DLT 122.
18
Desiccant Rotors International Pvt Ltd v Bappaditya Sarkar & Anr., Delhi HC, CS (OS) No. 337/2008 (decided
on July 14, 2009).

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India had been approached by Air India to prevent this ‘predatory recruitment’ of trained pilots.
The CCI had rejected the complaint summarily by terming it as an ‘employment issue’ and had
gone on to state that there was no restriction on an airline company to hire pilots who worked
for other airlines. In this context, the Ministry of Civil Aviation has been contemplating since
then to develop a framework for anti-poaching whereby airlines give informal commitment in
furtherance of the agreement to not poach staff and pilots of other airlines.19

So far, the CCI has not taken a serious step towards correcting the situation and issuing
guidelines for the same, primarily because not many cases in this respect have actually come
up for consideration before the authority.

CONCLUSION

The trend of antitrust agencies looking at no poach and wage fixing agreements is gaining
momentum around the globe and this is expected to continue – particularly given the purported
prevalence of such arrangements as a matter of standard HR practice within a number of
industries. Nor are potential violations limited only to agreements with respect to wages –
agreements among companies on any benefits, terms or conditions of employment could be
subject to an enforcement action. In view of the serious nature of violation of rights and the
economic discrimination against and disadvantage posed to the employees, strict action is
necessary in times of the ever-expanding global market. By necessary implication, the legal
infirmities from which the Indian system suffers needs to be resolved to ensure a free and fair
competitive open-market economy.

19
https://thelawblog.in/2017/01/03/poach-me-not-the-position-of-antitrust-law-in-india-and-usa-on-
poaching-agreements-between-companies-for-employees/#_ftn3

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