Franchise No-Poach Agreements: Is Reform on The Horizon?

In 2016, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued Joint Guidance for Human Resource Professionals warning that no-poach agreements restricting employee hiring may violate the antitrust laws.[1] That guidance, along with pre-guidance litigation, has established some clear ground rules. Naked no-poach agreements are per se illegal under §1 of the Sherman Act,[2] while ancillary no-poach agreements, those related to legitimate, procompetitive joint ventures[3] and corporate acquisitions,[4] are subject to the rule of reason, which considers whether the agreement is, on balance, anticompetitive.

Yet, four years later, there remain stubborn pockets of disagreement—for example, no-poach clauses in franchise agreements. Federal courts are struggling to reach a consensus on how to analyze them under the antitrust laws. And there’s a lot at stake. Statistics show more than 8 million Americans work in the franchise sector. The stakes are high for employers too. If the rule of reason applies, private litigation may be financially impractical; the necessity of proving a relevant geographic market in applying the rule of reason makes it difficult, if not impossible, to certify sizable class actions.[5] If the per se rule applies, the Sherman Act’s treble damages and attorneys’ fees provisions can prove disastrous.

The Current State of Confusion in the Federal Courts

Federal courts have taken at least four views on franchise no-poach agreements:

1. Franchisor-franchisee conspiracies are impossible: Courts in the Southern District of Florida, the Ninth Circuit[6] and the Western District of Washington[7] have held in no-poach cases that franchisors and franchisees are incapable of conspiring because they comprise a single corporate enterprise. In Arrington v. Burger King Worldwide, Inc., a Southern District of Florida case, the court cited the Supreme Court’s decision in Copperweld v. Independence Tube[8] and concluded: “Burger King’s relationship with its franchisees more closely resembles a corporation organized into divisions or de facto branches, or that of a parent-subsidiary, than the relationship between [competitors].”[9] In support, the court cited the franchisees’ “payment of royalties” to the franchisor, as well as their “joint advertising budget” and “uniform menu,” among other factors.[10] “The relationship here is more than symbiotic,” the court observed, “it is totally derivative.”[11] The ruling has been appealed to the Eleventh Circuit, where it is currently pending.[12]
2. The categorical per se rule applies: Courts in the Southern District of Illinois and the Eastern District of Pennsylvania[13] have concluded, at the motion to dismiss stage, that the per se rule may apply. In Butler v. Jimmy John’s Franchise, LLC, a Southern District of Illinois case, the franchise agreement provided, “franchisees are third-party beneficiaries of the no-hire provision” and therefore “enjoy[] an independent right to enforce the no-hire provision against another franchisee.”[14] Jimmy John’s franchise agreement also “g[a]ve . . . franchisees significant amounts of [operating] independence.”[15] As the court concluded, the plaintiff plausibly alleged Jimmy John’s had “orchestrated an agreement amongst the franchisees,” metaphorically dubbed a “hub-and-spoke conspiracy,” and, “while the contract in question may have been vertical, the effects are felt strictly at the horizontal level.”[16] Therefore, the court held: “[If after discovery] the evidence of franchisee independence is Herculean, then the per se rule might . . . apply.”[17]
3. The rule-of-reason balancing test applies: A number of courts have applied the rule of reason to franchise no-poach provisions. These decisions tend to conclude no-poach provisions are (1) ancillary to legitimate, pro-competitive franchise agreements and/or (2) vertically oriented, at least in part, and therefore unlikely to categorically pose a threat to competition. For example, in Ogden v. Little Caesar Enterprises, Inc., an Eastern District of Michigan case, the court rejected the per se rule and explained: “[T]he Sixth Circuit has an automatic presumption in favor of the rule of reason standard, while the per se rule is reserved only for those infrequent occasions of clear-cut cases in which the trade restraint is so unreasonably anticompetitive that they present straightforward questions for reviewing courts.”[18] The court concluded the no-poach provision was not a clear-cut case because it was vertical, at least in part, and was ancillary to the franchise agreement.[19]
4. The burden-shifting quick-look test applies: Courts in the Northern District of Illinois and the Western District of Washington[20] have turned to the quick-look test. In Deslandes v. McDonald’s USA, LLC, a Northern District of Illinois case, the court viewed the franchise no-poach clause at issue as a “horizontal restraint” that is nonetheless “ancillary” to a “procompetitive” franchise agreement.[21] It concluded, however, that the quick-look rule, rather than the rule of reason, applied because “even a person with a rudimentary understanding of economics would understand that if competitors agree not to hire each other’s employees, wages for employees will...