In 2016, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) jointly issued “Antitrust Guidance to Human Resource Professionals,” addressing employee no-poach agreements – agreements between two or more employers that restrict employee recruiting or hiring.[1] According to the agencies, these agreements may violate Section 1 of the Sherman Act by depressing wages and impeding employee mobility. No-poach agreements also fall within the purview of various state consumer protection statutes, such as California’s Cartwright Act and Washington’s Consumer Protection Act.
Recently, private litigants and state enforcers have targeted no-poach clauses in franchise agreements spanning the economic spectrum, including fast-food, fitness studio, hotel/motel, automotive service, and tax preparation chains. Typically, these franchise no-poach agreements restrict franchisees from hiring employees of the franchisor or other franchisees. Discussed in detail below, Stigar v. Dough Dough spotlights the antitrust debate over franchise no-poach agreements and underscores the discord over the appropriate legal standard.
The purpose of this alert is to demystify the antitrust implications of franchise no-poach agreements by (1) providing an overview of the potentially applicable legal standards, (2) discussing the current judicial split over their application, (3) forecasting which standard will eventually prevail, and (4) proposing general guidelines to avoid liability in the meantime.
The Significance of Different Legal Standards
Much of the antitrust debate over franchise no-poach agreements focuses on the applicable legal standard, which effectively can determine the outcome of a case. There are three contenders:
- The rule of reason requires the government or plaintiff to prove that the agreement in question is, on balance, anti-competitive. It protects agreements that are pro-competitive (meaning they lower prices, increase output, and promote innovation), even if they have some offsetting anti-competitive consequences. The rule of reason is the presumptive or default standard and is generally applied to “vertical agreements” – those between noncompeting firms at different levels of the market (e.g., manufacturers vs. distributors).[2] The rule of reason can also apply where an otherwise anti-competitive agreement is ancillary to a legitimate transaction, such as a corporate spinoff[3] or joint venture, and is reasonably necessary to accomplish its purpose.
- The per se rule requires the government or plaintiff only to prove the existence of an agreement to which the per se rule applies. As its name suggests, it is more of an outright ban rather than a test. The per se rule applies to certain types of “horizontal agreements” – those between direct competitors – such as price fixing or customer allocation. In United States v. eBay, the Northern District of California held that an executive-level agreement between eBay and Intuit not to recruit or hire each other’s employees could be a per se violation of the antitrust laws.[4]
- The quick-look rule is a truncated version of the rule of reason that requires the government or plaintiff to show an agreement has some anti-competitive effects, at which point the burden of proof shifts to the defendant to provide a pro-competitive justification. Rarely applied, it is reserved for situations where “an observer with even rudimentary understanding of economics could conclude that the arrangements in question would have an anti-competitive effect on customers and markets.”[5]
Stigar v. Dough Dough: The Debate in a Nutshell
Stigar v. Dough Dough, Inc. displays the variety of arguments concerning the legal standard that should apply in franchise no-poach cases. In Stigar, Auntie Anne’s, a franchisor, and Dough Dough, a franchisee, signed a franchise agreement stating in part: “You further agree that you will not employ or seek to employ an employee of...
