The Regulatory Blind Spot for No-Poach Agreement in Nepal

Over the last two decades, competition law has undergone a significant transformation. Traditionally, competition law focused almost exclusively on product and service markets, targeting cartels, price-fixing, bid-rigging and market allocation among sellers. However, following the Silicon Valley no-poach conspiracy, a landmark case that exposed anticompetitive practices in the labour market by high-tech companies, the applicability of competition law in the labour market emerged as a nascent concept. Several jurisdictions like the USA, Japan, Hong Kong and Portugal have released public documents condemning no-poach agreements, but its legality remains a question mark in other jurisdictions. 

A no-poach agreement broadly refers to an arrangement between two or more employers under which they agree not to solicit, recruit, hire or employ each other’s employees. These agreements can take various forms, ranging from reciprocal arrangements to restrictions imposed by one employer on hiring a counterparty’s employees, restrictions on mere solicitation to outright prohibition on employing counterparty’s employees.

At the core, these deals limit worker mobility, downsize labour market competition, and sometimes extend beyond mere non-solicitation to outright bans on employment. While the proponents might argue these provisions protect investments in training or trade secrets, several jurisdictions view them as tools to stifle competition in labour inputs.

Are no-poach agreements anticompetitive practice? 

A competitive labour market is generally characterised by multiple employers competing to hire workers, a large pool of workers with comparable skills, competitive wage-taking behaviour, and free mobility of labour. In such a setting, employees are paid market-equilibrium wages and can move to better-paying firms if wages are suppressed. No-poach agreements undermine these conditions by restricting employers from hiring or soliciting each other’s employees. By eliminating competition for talent, these arrangements suppress wages, restrict labour mobility and distort competition in the labour input market.

From an economic perspective, no-poach agreements operate as monopsony power in the labour market, where there is a single buyer in the market, restricting competition. While monopsony was traditionally associated with a single dominant employer, modern economic analysis recognises that coordinated conduct among multiple employers can produce similar effects. By agreeing not to hire or solicit each other’s employees, employers effectively behave as a single buyer of labour. For affected workers, the practical choice of alternative employers disappears, even though multiple firms formally exist. This loss of competition weakens workers’ ability to negotiate higher wages, better benefits or improved working conditions. Existing labour market frictions such as high switching costs, limited information, search difficulties and regulatory barriers already restrict worker mobility. No-poach agreements exacerbate these conditions by contractually limiting employment opportunities, further entrenching employer power and suppressing labour market competition.

Recognising these harms, several jurisdictions have treated no-poach agreements as a form of anti-competitive conduct. In the United States, the Department of Justice considers naked no-poach agreements to be per se violations of competition law, while ancillary restraints are assessed under the rule of reason. Naked no-poach agreements are stand-alone arrangements between competing employers whose sole purpose is to restrict the hiring or solicitation of each other’s employees, without being connected to any legitimate business collaboration. In contrast, ancillary no-poach restraints arise within the context of a broader, lawful commercial relationship, such as a joint venture or franchise arrangement, where the hiring restriction is intended to support a legitimate business objective. Such restraints are assessed under the rule of reason, meaning their legality depends on whether they are reasonably necessary and whether their pro-competitive justifications outweigh their anticompetitive effects.

The European Union applies an ‘object or effect’ (similar to that of the US) under Article 101 of the Treaty on the Functioning of the European Union (TFEU), and India evaluates such agreements based on their appreciable adverse effect on competition, balanced against any pro-competitive justifications. These approaches reflect a growing consensus that labour markets should be protected from cartel-like restrictions in the same manner as product and service markets.

Can Nepal’s competition law catch no-poach sneaks?

Section 3 of the Competition Promotion and Market Protection Act, 2063 prohibits agreements entered into with the object of restricting or limiting competition in relation to goods and services. Section 3(3) further provides that any agreement made in violation of this provision is automatically void. If said to fall under section 3, this structure indicates an object-based or per se approach, under which certain agreements are unlawful by their nature, without requiring a detailed analysis of their effects. 

However, this provision applies only to goods and services and does not define the term ‘service’. It is therefore unclear whether restrictions in the labour market fall within the scope of Section 3, under the scope of ‘service’. While courts could interpret ‘service’ broadly to include labour markets, comparative practice generally treats labour markets as a distinct category rather than classifying them as services. If courts adopt a strict or literal interpretation of Section 3, no-poach agreements may fall outside its scope altogether.

That said, competition law in principle does not distinguish between different types of markets, and there is no economic justification for treating labour markets differently from markets for goods or services. A purposive interpretation of the Act, guided by its preamble and its objective of protecting competition and consumer welfare, could therefore support the application of competition law to labour market restraints. If no-poach agreements restrict labour mobility in a way that reduces innovation, efficiency, or product quality, the resulting harm may ultimately be felt by consumers in downstream markets. In such cases, courts may be inclined to assess no-poach agreements using an effects-based or rule-of-reason approach, despite the apparently object-based structure of Section 3.

In the absence of clear judicial precedent or regulatory guidance, the application of Nepal’s competition law to no-poach agreements remain uncertain and will largely depend on how courts interpret the scope and purpose of the Act.

Section 517: The silent guardian against employee poaching traps?

Section 517 of the National Civil Code, 2074 (Civil Code) of Nepal renders void any contract that restrains a person from exercising a lawful profession, trade or business, unless such restraint is permitted by law. The Civil Code also invalidates contracts that are contrary to law, relate to matters prohibited by law, or pursue an illegal objective. For a contract to be enforceable, its purpose must therefore be lawful and consistent with public policy.

In the context of no-poach agreements, Nepali law does not expressly state whether such arrangements are illegal or contrary to law. However, strong arguments can be made that no-poach agreements impose unreasonable restrictions on labour mobility by limiting workers’ access to employment opportunities and their ability to exercise a lawful profession. Because these agreements are typically concluded between competing employers and not with the consent of employees, they are difficult to justify on pro-competitive grounds, particularly when they operate as naked horizontal restraints. As a result, no-poach agreements may be vulnerable to being declared void under Section 517 of the National Civil Code.

Conclusion 

In Nepal, no-poach agreements continue to remain uncertain as neither the competition law nor the civil code address them expressly. While the Competition Promotion and Market Protection Act may offer a possible avenue for scrutiny, its applicability to labour market restraints remains unclear due to its focus on goods and services. By contrast, Section 517 of the National Civil Code provides a more direct basis to question no-poach arrangements, as it invalidates contracts that unreasonably restrict the lawful exercise of a profession or trade. Until courts or regulators provide clearer guidance, the treatment of no-poach agreements will remain unsettled, and there needs to be legal clarity to ensure that labour markets are not insulated from competition principles.