Burger King Loss Tees Up Test of Franchise No-Poach Liability

Burger King Corp.‘s loss at the Eleventh Circuit over its no-poach agreements involving franchisees provides a road map for how the issue will be litigated and signals such pacts potentially run afoul of antitrust law.

The US Court of Appeals for the Eleventh Circuit declined to rule on whether Burger King’s agreements with franchisees that ban franchisees from hiring each others’ workers is presumed to be a violation of antitrust laws. But it remanded the former Burger King workers’ case, saying a district court judge erred in dismissing the lawsuit.

The opinion sheds more light on the potential illegality of such agreements even if the appeals court declined to address them head-on, said Jonathan Masur, an antitrust professor at University of Chicago Law School.

The ruling includes ample allegations from the plaintiffs that the agreement in question was a horizontal restraint of trade conducted among competitors, not by a single entity, Masur said. Therefore, the allegations are potentially subject to a presumption of illegality, he said. Such a finding is likely if the district court follows the Eleventh Circuit’s logic and the evidence bears it out, he said.

Franchisors and other companies should also be aware that they might be opening themselves to antitrust scrutiny if they seek to avoid certain labor requirements by arguing they’re not direct employers of their workers.

The decision is likely to encourage plaintiffs’ attorneys to redouble their scrutiny of franchise no-poach provisions across the country, Masur said. Courts have yet to develop a consistent test to determine under which standard the agreements should be analyzed.

“What the court was really ruling on was whether franchises can act in concert, or whether they’re immune,” Masur said. “It said they can act in concert. Now if you look at the type of concerted action they’re engaging in: here, a horizontal restraint of trade. Generally, horizontal agreements in restraint of trade are presumptively unlawful.”

District Court Judge Jose E. Martinez initially granted Burger King’s motion to dismiss the case because franchises and their brand franchisors are economically one entity and cannot compete for workers.

But Judge Robin S. Rosenbaum, writing for the Eleventh Circuit, said precedent clearly shows that similarly situated companies can compete in certain markets, such as labor, even if they have economic ties.

‘Lots of Hints’

Rosenbaum provided a litany of evidence from the plaintiffs’ complaints. Franchise job listings indicate individual Burger King locations compete directly for workers by offering a variety of incentives, such as a month’s access to a Jeep Wrangler or the opportunity to work for a “wonderful company.”

“I think there’s no doubt the alleged agreement would be viewed as horizontal,” Masur said. “The court gave lots of hints” that it doesn’t see it in any other way.

Burger King, which is owned by Restaurant Brands International, declined to comment.

The US Department of Justice has reversed course from its Trump administration stance that the agreements should be subject to the more lenient rule of reason, now arguing that they are per se unlawful.

“This opinion provides a signaling function that appellate courts are willing to look at these franchise agreements with less difference than the DOJ under the prior administration would have wanted,” said Christine Bartholomew, a law professor at the University at Buffalo School of Law.

The ruling should put employers on notice, said Hiba Hafiz, a law professor at Boston College Law School. Franchisors often argue they are not joint employers of the workers at their franchised locations, in part to avoid legal liability for instances of harassment, for example.

But such labor-focused arguments open them up to antitrust litigation, because they indicate those franchised locations act with a certain level of independence, Hafiz said. And if they are independent, they can compete, meaning agreements not to poach workers restrain trade, she said.

The order may not have dealt with the joint employer issue directly, but employers should be aware of the risks it implies, Hafiz said. That could extend to gig companies such as Uber Technologies Inc. and Lyft Inc., which argue that they work with independent contractors rather than employees. An antitrust case in California state court against the rideshare behemoths is being brought under a similar theory.

“On one hand, they say ‘We have no control of the workers,’” Hafiz said. “When it’s convenient for them to be the same entity, they say ‘No, we’re exactly the same, and we have the same economic interests.’ They’re constantly engaging in strategic contradictory litigation.”

The case is Jarvis Arrington, et al v. BKW, et al, 11th Cir., no. 20-13561, 8/31/22.