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From Silicon Valley to the Burger Joint: The Evolving Landscape of Vertical “No-Poach” Cases

Related Lawyers: Jeanette Bayoumi
Related Practice Areas: Antitrust / Competition
Authors: By Jeanette Bayoumi*

“No-poaching agreements”, or “no-poaching provisions” within a broader agreement, restrict two or more parties from hiring – “poaching” – each other’s employees and may include an agreement not to solicit or recruit each other’s employees without prior approval. These sorts of restraints have recently been under the antitrust spotlight, as the Antitrust Division of the federal DOJ, state attorneys general, and employees in private suits have all ramped up efforts to prevent and punish such practices. Moreover, while traditionally, governmental enforcers and private suits seeking treble damages have pursued horizontal no-poaching agreements that constitute interbrand restraints, recent efforts by state attorneys general and private parties have targeted vertical no-poaching agreements imposed by franchisors upon franchisees, prohibiting the franchisees from hiring employees within the same franchise system.

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.[1] 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.[2]

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.[3]

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.[4]

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.[5] 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,”[6] 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.[7] 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.[8]

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.[9] The DOJ on the other hand, has adopted the position that vertical franchise no-poach provisions are subject to a rule of reason analysis.[10]

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.[11] 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.[12]

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.[13] 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.[14] 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.[15] 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,[16] 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.[17] 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.[18]

Conclusions

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.

Footnotes

[1] The DOJ filed its complaint against Adobe, Apple, Google, Intel, Intuit, and Pixar on September 24, 2010, and another complaint against Lucasfilm and Pixar on December 21, 2010. See In re Animation Workers Antitrust Litigation, 123 F. Supp. 3d 1175, 1180 (N.D. Cal. 2015); see also In re High-Tech Employee Antitrust Litig., 856 F. Supp. 2d 1103 (N.D. Cal. 2012). All defendants stipulated to final judgments – entered by the D.C. District Court in March and June of 2011 – in which the companies were “enjoined from attempting to enter into, maintaining or enforcing any agreement with any other person or in any way refrain from . . . soliciting, cold calling, recruiting, or otherwise competing for employees of the other person.” In re High-Tech, 856 F. Supp. 2d at 1109-10.

[2] See United States v. eBay, Inc., 968 F. Supp. 2d 1030, 1032, 1036, 1040 (N.D. Cal. 2013).

[3] See Statement of Interest of the United States at 19-24, In re Ry. Indus. Emp. No-Poach Antitrust Litig., 326 F. Supp. 3d 1381 (W.D. Pa. Feb. 8, 2019).

[4] Comments were made at the January 19, 2018 Antitrust Research Foundation Conference held at the Antonin Scalia Law School at George Mason University. See Matthew Perlman, Delrahim Says Criminal No-Poach Cases Are in the Works, Law360 (Jan. 19, 2018), https://www.law360.com/competition/articles/1003788/delrahim-says-criminal-no-poach-cases-are-in-the-works.

[5] Rachel Abrams, Why Aren’t Paychecks Growing? A Burger-Joint Clause Offers a Clue, The New York Times, Sep. 27, 2017, https://www.nytimes.com/2017/09/27/business/pay-growth-fast-food-hiring.html.

[6] Id.

[7] See Press Release, Wash. State Office of the Att’y Gen., AG Ferguson’s Initiative Ends No-Poach Clauses at Four More Corporate Chains Nationwide (Aug. 8, 2019), https://www.atg.wa.gov/news/news-releases/ag-ferguson-s-initiative-ends-no-poach-clauses-four-more-corporate-chains.

[8] Id.

[9] See Press Release, Wash. State Office of the Att’y Gen., AG Ferguson’s Initiative to End No-Poach Clauses Nationwide Secures End to Provisions at Seven More Corp. Chains (Feb. 15, 2019).

[10] In 2018 – the same year that the DOJ announced it would treat horizontal no-poach agreements as criminal conduct – the DOJ filed Statements of Interest supporting a rule of reason approach to vertical no-poach agreements in three private antitrust class-actions filed in the Eastern District of Washington brought by former employees of fast-food franchisors. See Statement of Interest of the United States (Corrected), Harris v. CJ Star, LLC, No. 18-CV-00247-TOR (E.D. Wash. Mar. 8, 2019), ECF No. 38; Statement of Interest of the United States (Corrected), Richmond v. Bergey Pullman Inc., No. 18-CV-00246-SAB (E.D. Wash. Mar. 8, 2019), ECF No. 45; Statement of Interest of the United States (Corrected), Stigar v. Dough Dough, Inc., No. 18-CV-00244-SAB (E.D. Wash. Mar. 8, 2019), ECF No. 34.

[11] Continental T.V. v. GTE Sylvania, Inc., 433 U.S. 36 (1977); Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717 (1988) (emphasizing that non-price vertical restraints have “real potential to stimulate Interbrand competition”).

[12] See, e.g., FTC v. Indiana Federation of Dentists, 476 U.S. 447 (1986); Polygram Holding, Inc. v. FTC, 416 F. 3d 29 (DC Cir. 2005). To date, this approach has been limited to horizontal restraints. See United States v. American Express Co., 138 S. Ct. 2274, n.7 (2018).

[13] See Blanton v. Domino’s, No. 18-13207, 2019 WL 2247731 (E.D. Mich. May 24, 2019) (plaintiffs plausibly alleged an illegal horizontal restraint under both per se and quick-look analysis); Yi v. SK Bakeries LLC, No. 18-CV-05627-RJB (E.D. Wash. Nov. 13, 2018) (plaintiffs plausibly alleged conduct could be deemed unlawful under quick-look analysis); Deslands v. McDonald’s, No. 17-C-4857, 2018 WL 3105955 (N.D. Ill. June 25, 2018) (same).

[14] See e.g., Butler v. Jimmy John’s, 331 F. Supp. 3d 786 (S.D. Ill. July 2018); Blanton v. Domino’s, No. 18-13207, 2019 WL 2247731 (E.D. Mich. May 24, 2019).

[15] See First Amended Complaint, Conrad v. Jimmy John’s Franchise, LLC, No. 18-cv-00133-NJR-RJD (S.D. Ill. Feb. 25, 2019).

[16] Memorandum and Order, Conrad v. Jimmy John’s Franchise, LLC, No. 18-cv-00133 (S.D. Ill.

[17] Deslandes v. McDonald’s USA, LLC, No. 17-c-4857 (N.D. Ill. 2017).

[18] The State of Washington v. Jersey Mike’s Franchise Systems Inc. et al., No. 18-2-25822-7 (King Cty. Superior Court, WA 2018).

*Jeanette Bayoumi is an associate in New York.