The recency of the vertical franchising cases, combined with a lack of judicial guidance, however, has left a key question unanswered: which antitrust standard should the courts apply when analyzing vertical no-poach provisions? That is, will courts treat vertical no-poach provisions as automatically per se illegal, conduct a less rigorous quick look rule of reason analysis, or will courts decide to weigh the legality of such provisions under the more stringent full rule of reason?
Background: No-Poach Cases Challenging Horizontal Agreements
In 2010, a Department of Justice (“DOJ”) investigation uncovered that several Silicon Valley technology companies, including Adobe Systems, Inc., Apple, Inc. Google, Inc., Intel Corp., and Intuit, Inc. as well as two animation companies, Pixar and Lucasfilm, had entered into “Do Not Cold Call” agreements – restricting unsolicited hiring calls to each other’s employees – and brought civil suits against those companies, alleging that they had engaged in naked horizontal restraints that constituted per se violations of Section 1 of the Sherman Act. Two years later, the DOJ brought a similar action under the Sherman Act in conjunction with California’s Attorney General, which sought liability under both the Sherman Act and state antitrust law, alleging that eBay had engaged in a per se illegal horizontal restraint by way of a “handshake agreement” between eBay’s executives and an executive at Intuit, Inc., to refrain from recruiting or hiring each other’s employees.
Further pursuing this hardline approach, in April 2018, the DOJ brought an action against competing major rail-equipment suppliers, Knorr-Bremse AG and Wabtec, challenging as per se unlawful agreements among the competitors in which they allegedly had agreed not to compete, not to hire, and not to solicit each other’s employees. Further supporting it’s per se illegality approach to horizontal no-poach agreements, the DOJ filed a Statement of Interest in a subsequent multi-district class action brought by former and current employees of those rail-equipment suppliers, in which it argued for per se illegality.
Indeed, two years earlier, the DOJ and Federal Trade Commission (“FTC”) jointly issued 2016 Antitrust Guidance for Human Resource Professionals, announcing that the DOJ would “proceed criminally against naked wage-fixing or no-poaching agreements” between competing companies because such agreements are per se illegal under the antitrust laws. Shortly thereafter, in January 2018, DOJ Assistant Attorney General Makan Delrahim, announced that the DOJ would treat horizontal no-poach agreements entered into after October 2016, when the Guidance was issued, as criminal conduct.
Vertical No-Poach Agreements Within the Same Franchise System
Unlike situations where two separate companies are agreeing not to poach each other’s employees, no-poach clauses frequently have appeared in agreements between franchisors and their franchisees. These provisions restrict the franchisees from hiring employees of other franchisees within the same franchise system, allegedly restraining the ability of employees to obtain pay increases within the system. Apparently, many fast food franchisors as well as franchisors in other industries such as tax advising, parcel services, and lease-to-own restaurants have adopted such prohibitions. Starting in 2017, such agreements have become the subject of antitrust suits instituted by both government and private enforcers.
To date, the most aggressive governmental enforcer combating vertical no-poach agreements has been Attorney General Bob Ferguson of the state of Washington. Apparently inspired by a 2017 New York Times article, “Why Aren’t Paychecks Growing? A Burger-Joint Clause Offers a Clue,” and a study conducted by Princeton economists highlighting the harms employees allegedly face by no-poach provisions, Ferguson launched a state-wide investigation into no-poach clauses in January 2018. While the Washington AG initially targeted fast-food chains, his efforts sought to determine which companies in various industries used no-poach provisions in franchise agreements within his state. As a result of his efforts, 66 corporate chains operating in Washington have signed binding commitments to eliminate no-poach provisions from their franchising agreements.
This increase in state antitrust action sparked current and former employees from corporate franchises to bring their own private actions against the franchisors involved. Notably, state AG’s, like Ferguson, have differed in their approach to the legal standard for judging franchise no-poach provisions, arguing that such agreements constitute per se violations of Section 1 of the Sherman Act as well as state antitrust laws. The DOJ on the other hand, has adopted the position that vertical franchise no-poach provisions are subject to a rule of reason analysis.
Under a per se standard, the alleged anticompetitive behavior is deemed so inherently anticompetitive and damaging to the market that a court need not inquire into the effects on the market or the existence of a pro-competitive justification; the conduct is automatically considered illegal. Contrarily, under a rule of reason standard, the court engages in a three-step analysis focusing on the state of competition, considering whether the alleged restraint results in an anticompetitive effect harmful to consumers or whether the restraint stimulates competition. Notably, the Supreme Court has held that vertical intrabrand restrictions are subject to a rule of reason analysis. A quick look rule of reason review, which has been sought in some of the private suits, is an abbreviated version of the rule of reason analysis, under which the court need not conduct a rigorous analysis of the market and anticompetitive effects required under a full rule of reason analysis; rather, the court assumes that the conduct has anticompetitive effects (usually because the defendant’s conduct is of the type that appears very likely to have such effects), and the defendant has the obligation to show procompetitive aspects of the practice, with the court then determining whether such benefits outweigh the anticompetitive aspects of the conduct.
Because cases involving vertical restraints imposed by franchisors on their franchisees are a recent trend, the only decisions to date are those granting or denying motions to dismiss. Tellingly, courts in several of the cases have held that plaintiffs had alleged facts sufficient for a per se or quick-look analysis of the franchisor’s no-poach provisions. A few have alleged a per se unlawful downstream hub-and-spoke conspiracy simply based on the fact that the franchisor itself owned some retail locations. A few examples of pending suits follow.
The Per Se Illegality Claim Against Jimmy Johns
In January 2018, a former Jimmy John’s employee brought a class action lawsuit in the
Southern District of Illinois against the sandwich chain alleging that the franchisor had engaged in a “naked per se violation” of the Sherman Act (but, in the alternative, alleged a “quick look” analysis could be applied) as a result of a no poach provision preventing the chain’s franchisees from competing for each other’s employees. The employees survived a motion to dismiss last summer, and recently, the court denied Jimmy John’s motion to certify an interlocutory appeal of the court’s prior denial on the sandwich chain’s motion to dismiss, refusing to decide which standard to apply to analyze the alleged restraint prior to a summary judgment motion.
The Quick Look Claim Against McDonald’s
In 2017, a former McDonald’s manager filed a no-poach franchise case against the franchise in the Northern District of Illinois. In its denial of McDonald’s motion to dismiss, the court refused to view the no-poach provision as per se illegal but determined to allow the vertical restraint to be analyzed under a quick look analysis.
The Hybrid Approach in The State of Washington
As plaintiffs have argued that either a per se standard or quick look analysis should apply in these cases, the franchisors in response have argued that the rule of reason should apply. For example, in The State of Washington v. Jersey Mike’s Franchise Systems Inc. et al., Jersey Mike’s and its franchisees argued that the rule of reason should apply; however, the court allowed the case to move forward with the Washington attorney general’s per se claim and, in the alternative, a quick look claim.
Due to the recency of the vertical franchisor-franchisee no-poach cases, predicting the outcome of such cases poses a challenge. The only available precedent to date surrounding the cases are orders granting or denying motions to dismiss, and thus, further development in case law is not only needed but will provide guidance on how trial courts in various parts of the country are likely to rule. Accordingly, we will have to wait to see if a trend develops in the vertical franchise industry cases as they approach the summary judgment stage.