Canadian COMPETITION LAW

December 28, 2010

The Department of Justice has announced that it has reached a settlement with Lucasfilm Ltd. to prevent it from entering into agreements restraining employee recruitment.  The announcement by the DoJ follows its investigation of the employment practices of high tech companies, including Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp. and Pixar.

In making its announcement, the DoJ said:

“Today’s complaint arose out of a larger investigation by the Antitrust Division into employment practices by high tech companies. In September 2010, the Antitrust Division reached a settlement with Adobe Systems Inc., Apple Inc., Google Inc., Intel Corp., Intuit Inc. and Pixar that prevented the companies from entering into no solicitation agreements for employees.

According to today’s complaint, Lucasfilm and Pixar agreed not to cold call each other’s employees; agreed to notify each other when making an offer to an employee of the other company; and agreed, when offering a position to the other company’s employee, not to counteroffer with compensation above the initial offer.

…

The digital animation sector faces strong demand for employees with advanced or specialized skills.  A principal means by which digital animation companies recruit these employees is their direct solicitation, referred to as “cold calling.” Savvy employees can use these companies’ tactics to extract multiple rounds of bidding, thus increasing their eventual salaries. These forms of competition, when unrestrained, result in better career opportunities, the department said.

The complaint alleges that the companies’ actions reduced their ability to compete for digital animation workers and interfered with the proper functioning of the price-setting mechanism that otherwise would have prevailed in competition for employees. None of the agreements was limited by geography, job function, product group or time period.

The proposed settlement, which if accepted by the court will be in effect for five years, prohibits the companies from engaging in anti-competitive agreements relating to employee hiring and retention. Although the complaint alleges only that the companies agreed to certain practices, the proposed settlement more broadly prohibits the companies from entering, maintaining or enforcing any agreement that in any way prevents any person from soliciting, cold calling, recruiting or otherwise competing for employees. The companies will also implement compliance measures tailored to these practices.”

This case is interesting in that it coincides with the introduction of new cartel rules in Canada, including new conspiracy offences that prohibit agreements between competitors (or potential competitors) to divide markets or restrict output.  At the same time, a second civil track has been introduced under which the Competition Bureau can challenge competitor agreements that prevent or lessen competition substantially (or are likely to do so).

Among the issues that will remain to be determined under the new rules that are relevant to the recent Lucasfilm settlement are whether buyer cartels (i.e., agreements between competing buyers of products or services) will be caught (or rather should be reviewed under the new civil agreements provision), whether many types of common commercial restraints can be challenged under the new criminal rules (including restrictive covenants in employment and sale of business agreements) and perhaps most interestingly, the scope of a newly introduced “ancillary restraints defence” (under which agreements that are ancillary, directly related to and reasonably necessary for a larger pro-competitive agreement can escape the new criminal prohibitions).

In this regard, the U.S. DoJ appears to have adopted an analytical approach commonly taken by U.S. courts in considering whether a restraint is “bare” and at root anti-competitive or, alternatively, ancillary and related to some larger, pro-competitive agreement, concluding that the non-solicitation agreement was a naked restraint, without pro-competitive justification.  Also generally consistent with factors articulated by U.S. courts, as well as those set out by the Competition Bureau in its recently issued Competitor Collaboration Guidelines, the DoJ also noted that the challenged restraint in this case was not limited by, among other things, geography or time period.

The line, however, between “naked” or “bare” restraints (potentially subject to per se condemnation under section 1 of the Sherman Act) and secondary or “ancillary” restraints (entitled to a more detailed “rule of reason” review) has been something of a battleground in the U.S.  As such, given that contested conspiracy cases have historically been far less common in Canada, it will likely take some years before Canadian courts add shape to Canada’s new U.S. style conspiracy regime.

For a copy of the Department of Justice’s News Release see: Justice Department Requires Lucasfilm to Stop Entering into Anticompetitive Employee Solicitation Agreements.

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