Two former
The workers want the court to hold the agreement is a per se violation of federal antitrust law, and reject McDonald’s position that the no-hire provision was ancillary to the franchise agreement as to protect training investments and encourage cooperation.
A federal judge in Illinois denied the workers class status and ruled for McDonald’s, holding that the agreement was ancillary and the workers had waived a rule of reason claim by failing to allege that the company exercised market power in any relevant market.
If the US Court of Appeals for the Seventh Circuit affirms the district court’s decision, “franchisors and other lead firms will feel comfortable using no poach and no hire contracts in their franchise agreements” because the court “has said they are vertical and therefore entitled to the rule of reason,” Sandeep Vaheesan, legal director at the Open Markets Institute said. “The rule of reason means effective legality because these cases are notoriously hard to win.”
Daniel Gilman, senior scholar at the International Center for Law & Economics, doesn’t believe this type of agreement is unlawful, but said if the courts don’t allow it franchises will figure out ways to deal with that, as some of them have already.
The Federal Trade Commission, which announced a proposed ban on noncompetes in January, will participate in the oral argument as a neutral party. According to the FTC and the Department of Justice, the district court misapplied the ancillary-restraints doctrine and misread the US Supreme Court’s opinion in Nat’l Collegiate Athletic Ass’n v. Alston.
“The Justice Department has ongoing prosecutions and investigations of companies involving various kinds of no poach and non compete agreements and so forth,” Weil, Gotshal & Manges LLP partner Mark Perry said, and per se treatment in this case would make such violations easier to prove. “There’s very little precedent on these types of labor agreements” he said, and the DOJ’s “own formal guidance on these issues characterizes them as generally vertical agreements because that’s the nature of the industry.”
The agreement at issue, which is no longer in effect, provided that franchisees wouldn’t employ or seek to employ current employees without a letter of release or a McDonald’s employment gap of at least six months, which allegedly prevented workers Leinani Deslandes and Stephanie Turner from moving to higher-paying McDonald’s locations. The workers allege McDonald’s-owned McOpCo stores privately agreed to reciprocate the agreement as well.
Restraint Label Debate
The workers also challenge the district court’s finding that the agreement was purely vertical and thus called for the fact-specific rule of reason analysis. The no-hire agreement qualifies as a horizontal employment restraint and is a per se violation because it was between rival employers, among franchisees and between franchisees and McOpCos, they said.
McDonald’s argues 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.
“When a horizontal agreement is per se unreasonable, a vertically-related firm’s participation in the agreement does not alter the agreement’s horizontal character,” the FTC contended. The Open Markets Institute, National Legal Advocacy Network, and Towards Justice echoed that sentiment in their brief, asserting that the court should “recognize the actual adverse economic effects on workers and acknowledge the specious justification for these contracts” instead of “relying on formalistic labels” to drive its analysis.
Current FTC leadership wants to get at both vertical and horizontal constraints, Gilman, a former FTC attorney advisor, said, but “we’re not looking at an FTC or DOJ investigation” here.
The FTC is “trying to develop this new position and blend what have long been considered distinct routes to analyzing vertical and horizontal restraints, so part of this may be planting the flag for them. But I don’t buy it,” Gilman said.
The case illustrates the problems with the horizontal vertical dichotomy in antitrust law, Vaheesan said, because “it shows that some vertical restraints can actually be quite harmful too, and courts have applied this frankly, simplistic binary when evaluating some of these cases.”
Market Definition
If the rule of reason is deemed the applicable standard, the workers say they satisfied it either by providing substantial evidence of anticompetitive effects, or by proof of market power in a relevant market. They point to expert calculations that proposed class members each lost approximately $910 per year due to suppressed wages, and describe a market where thousands of independently‐owned McDonald’s franchisees and McOpCos are a discrete group of buyers and hundreds of thousands of workers who received McDonald’s training are a discrete group of sellers. The lower court improperly ignored its anticompetitive evidence because it found it depended upon a single, nationwide geographical market, they said.
“A nationwide market of McDonald’s (and only McDonald’s) restaurant workers, is implausibly over and underinclusive,” McDonald’s said. The International Center for Law & Economics and scholars agreed in their brief, citing studies that found low-wage restaurant employees sell their labor locally to McDonald’s and many other substitute buyers.
Appellants argue that their evidence is preferable to a “surrogate for detrimental effects” such as an inquiry into market definition and power. “In theory, at least, there’s a route to what’s called direct proof of anticompetitive effects, but in practice, it is invariable that no one gets far in an antitrust litigation of any kind without being able to tell the judge who’s competing and who isn’t,” New York University law professor and former FTC deputy director Daniel Francis said.
It’s crucial to preserve the avenue of direct proof, Francis said, because a “contentious” footnote in the Supreme Court’s 2018 Ohio v. AmEx decision said one must prove a market definition in a vertical case, and it’s “important for courts not to blind themselves to actual evidence of harm.” Still, no one who has litigated an antitrust case “thinks that you’re ever going to get far with a story of harm to competition without, as part of that story, saying ‘and these are the people who compete and here is some sense of their relevance, and relative competitive strength.’”
Ohio and Alston together essentially “say unless conduct has been basically condemned forever, then the rule of reason applies,” said Perry, who was an author of ICLE’s brief. Conduct that has always been per se will continue to be per se, but the court isn’t going to make new per se condemnations and “these kinds of labor agreements have not been historically condemned that way.”
“Antitrust law today is so hostile to plaintiffs, it’s so hard to win what seems like a slam dunk case,” Vaheesan said. Despite proffered evidence of harm, “odds probably favor McDonald’s, just because of how muddled and defendant-friendly the law happens to be.”
McDonald’s declined to comment.
Lieff Cabraser Heimann & Bernstein LLP and McCune Wright Arevalo LLP represent plaintiffs. Gibson, Dunn & Crutcher LLP represents McDonald’s.
The case is Deslandes v. McDonald’s USA LLC, 7th Cir., Nos. 22-2333, 22-2334, appellants’ brief 11/18/22.
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