Last Friday Judge Lucy H. Koh issued an unusual ruling in a somewhat unusual case. The ruling was unusual in that the court rejected a proposed settlement in the hi-tech wage collusion class action case. Judge Koh denied a request to preliminarily approve a $324.5 million deal to end the antitrust class action against Google Inc., Apple Inc., Intel Corp. and Adobe Systems Inc. The suit alleged the companies agreed to not compete for each others’ high-tech employees such as software engineers and computer scientists. The court found the proposed settlement too low and indicated it should be at least $55 million more. The civil case followed a similar suit by the Antitrust Division charging a per se violation for agreeing not to compete, but the Division’s case was brought as a civil action.
Judge Koh was troubled by the fact that the settlement called for disproportionately less from the defendants than settlements reached earlier with Intuit Inc., Lucasfilm Ltd. and Pixar Animation Studios Inc. This didn’t seem right to the court because the $324.5 agreement was reached after the court had granted class certification, which should have upped the ante for the hold out defendants. The court explained: “Counsel’s sole explanation for this reduced figure is that there are weaknesses in plaintiffs’ case such that the class faces a substantial risk of non-recovery. However, that risk existed and was even greater when plaintiffs settled with the settled defendants a year ago, when class certification had been denied.” More details about the case and settlement rejection can be found here: (NY Times); here (WSJ); and here (Reuters).
The Class Action Followed USDOJ Antitrust Division’s Earlier Civil Suits
The plaintiffs’ case followed a civil lawsuit filed by the Antitrust Division in 2011 that was settled by consent decree The defendants were perhaps fortunate that the Division chose to proceed civilly for collusion that in other contexts might have resulted in criminal prosecutions. The complaint charged a per se violation of the Sherman Act stating: “These no cold call agreements are facially anticompetitive because they eliminated a significant form of competition to attract high-tech employees, and, overall, substantially diminished competition to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.” One example from the complaint of the agreements reached is the Apple-Google agreement:
17. Beginning no later than 2006, Apple and Google agreed not to cold call each other’s employees. Senior executives at Apple and Google reached an express no cold call agreement through direct and explicit communications. The executives actively managed and enforced the agreement through direct communications.
18. The Apple-Google agreement covered all Google and all Apple employees and was not limited by geography, job function, product group, or time period. Moreover, employees were not informed of and did not agree to this restriction.
The Division filed a similar case against eBay and Intuit. In comments announcing the settlement, the Division stated:
This is one further step towards closing an unfortunate chapter for Silicon Valley and other companies who unlawfully agreed to deny their employees the opportunity to receive competing job offers. These so-called “do not poach” or anti-solicitation agreements are per se unlawful, and the Antitrust Division takes them very seriously. As a result of investigations into recruiting-related antitrust misconduct, a number of companies – Adobe, Apple, Google, Pixar, Intuit and Lucasfilm are under a court-ordered injunction to stop these illegal practices. As a result of our action today, eBay also will be under a court-ordered injunction–after the closing of the public comment period and entry of the final judgment by the court.
The behavior was blatant and egregious. And the agreements were fully documented in company electronic communications.
The documents in the case certainly seemed “hot” and show some pretty egregious behavior by high-level executives. In one example of a “hot “ document Mr. Jobs wrote Eric E. Schmidt, the chief executive of Google at the time, “I would be extremely pleased if Google would stop doing this,” referring to its efforts to recruit an Apple engineer. Mr. Schmidt forwarded the email within Google and added his own comment: “I believe we have a policy of no recruiting from Apple and this is a direct inbound request. Can you get this stopped and let me know why this is happening? I will need to send a response back to Apple quickly so please let me know as soon as you can.” When Mr. Jobs learned that the Google recruiter who contacted the Apple employee would be “fired within the hour,” he responded with a smiley face. (here)
Another “hot” document cited by Judge Koh: When Steve Jobs objected to Google pursuing certain employees the Google executive responded deferentially to Mr. Jobs: “Steve, Based on your strong preference that we not hire the ex-Apple engineers, Jean-Marie and I decided not to open a Google Paris engineering center.” The email to Jobs was forwarded within Google to senior executives.
The Antitrust Division complaint alleged: “the agreement served no purpose but to limit competition. These no cold call agreements were not ancillary to any legitimate collaboration between Defendants. None of the agreements was limited by geography, job function, product group, or time period.” An agreement among road contractors not to solicit business from competitors’ existing customers, or any agreement where competitors agree not to solicit each others’ source of supply for an input might (would) be brought criminally. Professor Herbert Hovenkamp commented that both the e-book and anti-poaching cases “look suspiciously like a lot of other cases that resulted in criminal charges. But there’s always the factor of prosecutorial discretion.”
The Antitrust Division Manual does have a section on “Standards for Determining Whether to Proceed by Civil or Criminal Investigation.”
Many investigations conducted by the Division are clearly civil investigations (e.g., merger investigations). Nevertheless, there are some situations where the decision to proceed by criminal or civil investigation requires considerable deliberation. In general, current Division policy is to proceed by criminal investigation and prosecution in cases involving horizontal, per se unlawful agreements such as price-fixing, bid rigging, and customer and territorial allocations. Civil process and, if necessary, civil prosecution is used with respect to other suspected antitrust violations, including those that require analysis under the rule of reason as well as some offenses that historically have been labeled “per se” by the courts. There are a number of situations where, although the conduct may appear to be a per se violation of law, criminal investigation or prosecution may not be appropriate. These situations may include cases in which (1) the case law is unsettled or uncertain; (2) there are truly novel issues of law or fact presented; (3) confusion reasonably may have been caused by past prosecutorial decisions; or (4) there is clear evidence that the subjects of the investigation were not aware of, or did not appreciate, the consequences of their action. (at p. III-12).
There are differences in the high-tech industry that may account for the Division proceeding civilly. Perhaps “no poach” agreements were considered novel. And, in other contexts, an employee “no poach” agreement might be ancillary to a legitimate form of joint venture. Also, the agreement (as alleged) did not eliminate all competition; it related only to not competing through “cold-calls.” But it is not known why this case was brought civilly. The Division does not comment on charging decisions and did not explain why the high-tech wage cases were brought as civil actions.
The Defendants Should and Will up the Ante
This case is not going to trial. The plaintiffs estimated damages at $3 billion, so exposure trebled would be $9 billion. Of course, the case won’t settle for anything near $3 billion, but the defendants should and will up the settlement offer. There are several factors at play. For one, Judge Koh stated that should happen. There is strong evidence in the case. The documents are “hot” and embarrassing to the defendants. Other “hot” documents may well be under seal and the defendants’ may wish to keep it that way. In many antitrust damage class actions the harm is dispersed through many layers of distribution and affect perhaps millions of consumers in a comparatively negligible way. Here, the “victims” were very targeted and their livelihood affected. The agreements allegedly depressed the workers’ pay by 10 to 15 percent. Finally, an agreement not to compete for employees can be even more effective than an actual agreement on wages. Episodes of cheating quickly become obvious. It is easier to monitor and enforce, as this agreement sometimes was. Lastly the defendants seem have the resources to up the ante with a more generous settlement proposal and put this unfortunate lapse in judgment and ethics in the trash bin and hit delete permanently.
Thanks for reading.