Mergers & Antitrust Law News

INSIGHT: DOJ Distinguishes ‘No-Poach’ Franchise Agreements

March 21, 2019, 8:00 AM

On March 7, the Department of Justice filed a statement of interest in three related cases in the Eastern District of Washington dealing with alleged no-poach agreements between three fast food franchisors—Carl’s Jr, Auntie Anne’s, and Arby’s—and their franchisees.

In the statement, the DOJ attempted to clarify its October 2016 antitrust guidelines regarding employee hiring and compensation practices, including the use of “no-poach” agreements. Specifically, it addressed the distinction between “naked” no-poach agreements and the type of agreements typically found in the franchise context. (Stigar v. Dough Dough Inc. et al., No. 2:18-cv-00244, statement of interest of the United States of America (March 7, 2019)).

The distinction may spell trouble for many of these class action lawsuits. On March 18, plaintiffs in the Eastern District of Washington, potentially seeing the writing on the wall, quickly settled their suits less than two weeks after the DOJ Statement. Plaintiffs around the country may follow.

The No-Poach Boom

More than two years have passed since the Federal Trade Commission and DOJ released antitrust guidelines regarding employee hiring and compensation practices, including the use of “no-poach” agreements. Those guidelines warned that no-poach agreements could contravene the antitrust laws and that the DOJ intended to proceed criminally against “naked” no-poach agreements.

In response, state attorneys general launched investigations into these no-poach agreements and soon after there was a surge of class action lawsuits filed by private plaintiffs. Many of the class actions initially targeted fast food franchises, but have recently expanded to other types of franchises. In their haste to get in on the action, however, some private plaintiffs may have outpaced themselves.

When the 2016 antitrust guidelines suggested the possibility of criminal charges for no-poach agreements, it wasn’t long before antitrust enforcers and private plaintiffs sought to take advantage of the favorable view. The attorney general for Washington led the way launching an investigation in January 2017 that has resulted in more than 50 settlements thus far.

Private lawsuits were also filed in numerous industries, from chicken farming to tax preparation. Since early 2017, at least 20 class actions have been filed in the franchise context alone.

Plaintiffs enjoyed some early successes in these cases. Judges in the Northern District of Illinois and Western District of Washington applied a quick look analysis to no-poach agreement lawsuits and at least four judges have declined to grant motions to dismiss. Motions to dismiss remain pending in several other lawsuits.

Through these early results, the DOJ remained largely uninvolved. On Jan. 25, however, the DOJ indicated its interest in filing a statement of interest and did so on March 7.

Naked or Vertical

The DOJ’s statement of interest distinguished between “naked” no-poach agreements between competitors and the kind of no-poach agreements in the franchise context that are typically vertical restraints between the parent company and the individual franchisee.

According to the DOJ, naked no-poach agreements should be analyzed as per se, or presumptively anticompetitive and illegal under Section 1 of the Sherman Act, while most vertical restraints should be analyzed under the rule of reason which requires some balancing of potential harms and benefits.

This distinction follows from the language in the 2016 antitrust guidelines:
“Naked … no-poaching agreements among employers … are per se illegal under the antitrust laws. … [I]f the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects. Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.”

Despite this language, many plaintiffs cited the guidelines for the proposition that no-poach agreements in the franchise context should be treated as per se illegal. The DOJ’s clarification, if accepted by courts, will make these cases more difficult to prove.

There are, however, at least two situations where no poach agreements between franchisors and franchisees could still be governed by per se analysis.

The first is in a situation where the “franchisees operating under the same brand name agreed amongst themselves (and wholly independent from the franchisor)” not to hire each other’s employees. (See DOJ’s statement of interest at 11). This may amount to a “naked” no-poach agreement, and per se analysis may be appropriate.

The second is in an agreement between a franchisor and franchisee relating to competition in a market where they actually compete. “If operating in the same geographic market, they both could look to the same labor pool to hire, for example, janitorial workers, accountants, or human resource professionals. In such circumstances, the franchisor is competing with its franchisee.” (Id. at 13). If such agreement is not ancillary to any legitimate and procompetitive joint venture, it may also warrant per se treatment.

Procompetitive Benefits or Anticompetitive Effects

The DOJ took this position because no-poach agreements between parent companies and individual franchisees may actually offer procompetitive benefits.

By promoting a brand and restricting quality dilution, franchises can increase competition with other brands. The DOJ notes this potential for increased interbrand competition can outweigh losses in intrabrand competition, interbrand competition “is the primary concern of antitrust law,” after all. (Cont’l T.V. Inc. v. GTE Sylvania Inc., 433 U.S. 36, 55 (1977)).

Regardless of the outcome, courts must at least balance the relevant effects.

In the statement, the DOJ specifically noted territorial allocation agreements as another example of potentially procompetitive restrictions in the franchise context, which would warrant the rule of reason. Going forward, much of the analysis in these cases will likely center on whether the no-poach agreements have plausible procompetitive benefits or are merely anticompetitive restraints.

For many private plaintiffs, proving antitrust violations in the franchise context may have become more difficult. It remains to be seen whether courts will credit the DOJ’s view on this matter, but defendants now have a new arrow in the quiver.

Author Information

Nicole L. Castle, a partner at McDermott Will & Emery in New York, provides legal counsel on complex civil and criminal antitrust litigation. She regularly represents clients in complex, multidistrict class action antitrust litigation alleging Sherman Act violations and defends mergers and acquisitions before the DOJ and FTC.

Matt Evola, an associate at McDermott Will & Emery in Washington, D.C., focuses on antitrust, regulatory and litigation matters. He has assisted clients across a variety of industries where he advises on mergers and acquisitions and counsels clients on antitrust compliance.