7th Cir. Revives Ex-McDonald’s Workers’ No-Poach Antitrust Suit

The Seventh Circuit on Friday revived a lawsuit over McDonald’s Corp. contracts that barred franchisees from pursuing or hiring current McDonald’s employees without a letter of release or within six months after their employment ended.

The workers’ lawsuit sufficiently alleged an antitrust claim, Judge Frank Easterbrook said for the US Court of Appeals for the Seventh Circuit. Easterbrook remanded the case to the trial court to consider a series of inquiries, including whether the no-poach clause protected the franchises’ investments in training or allowed them to appropriate the value of workers’ own investments, its national scope, and the time restriction.

The district court had rejected the workers’ theory that the contracts were per se illegal because the anti-poach clause wasn’t a naked restraint on trade but was ancillary to each franchise agreement—and, as every new restaurant expanded output, the restraint was justified.

The “district judge jettisoned the per se rule too early,” Easterbrook said. “The complaint alleges a horizontal restraint, and market power is not essential to antitrust claims involving naked agreements among competitors,” Easterbrook said.

The decision allows two former employees to proceed with a proposed class action alleging the provision violated federal antitrust law and prevented workers from moving to higher-paying locations.

Judge Kenneth F. Ripple concurred in a separate opinoin, saying that in further proceedings before the trial court, McDonald’s bears the burden of establishing that the no-poach clause in the franchise agreement qualifies as an ancillary restraint.

Procompetitive Justifications

McDonald’s claimed that the provision was necessary to prevent franchisees from stealing others’ employees and free riding of training costs, in addition to improving procompetitive, brand-enhancing consistency and quality.

Former employees Leinani Deslandes and Stephanie Turner argued that the district court wrongly concluded a no-hire provision was ancillary to the franchise agreement.

Justice Department attorney Stratton Strand, arguing in support of the former employees, contended that the lower court failed to assess whether the provision was “reasonably necessary to achieve pro competitive benefits of that collaboration.”

Easterbrook and Judge Diane P. Wood questioned McDonald’s proffered competitive reasoning during the March 31 oral argument. In response to the restaurateur’s justification that the provision reduced friction among franchises, Easterbrook laughed, saying, “Let’s reduce friction, we don’t like these price wars, so we’ll all just fix the price.”

Vertical vs. Horizontal Restraint Debate

The plaintiffs asserted that the no-hire agreement qualifies as a horizontal employment restraint and is a per se antitrust violation because it was between rival employers, among franchisees and between franchisees and company-owned restaurants.

The thousands of franchises are independent employers, and aren’t the same brand to the workers, workers’ counsel, Dean Harvey of Lieff Cabraser Heimann & Bernstein LLP, said.

The fast food purveyor countered that the agreement’s vertical elements are “embodied in the relationship between McDonald’s and its franchisees,” and that there is no allegation of “actual agreement” among the thousands of franchisees. Because it was a vertical restraint, it should be subject to the fact-specific rule-of-reason analysis that the workers can’t satisfy, McDonald’s said.

The workers’ allegation that McDonald’s operated many restaurants itself or through a subsidiary and that it enforced the no-poach clause at those restaurants made the arrangement horizontal as workers at franchised outlets couldn’t move to corporate outlets, or the reverse, Easterbrook said.

McCune Wright Arevalo Vercoski Kusel Weck Brandt APC also represents the workers. Gibson Dunn & Crutcher LLP represents McDonald’s.

The case is Deslandes v. McDonald’s USA LLC, 7th Cir., Nos. 22-2333, 22-2334, 8/25/23.