A federal appellate court held that Burger King and its franchisees may violate Section 1 of the Sherman Act (antitrust) by engaging in concerted action when entering into “no-hire” agreements. The appellate court reversed dismissal of antitrust claims brought by current and former Burger King restaurant employees.

The plaintiffs claimed that between 2010 and 2018, Burger King had a “No Hire” clause in its franchise agreement, prohibiting Burger King and franchisees from hiring people previously employed by the franchisor or by any Burger King franchisee for six months after leaving a location, unless the first Burger King employer consented.

The plaintiffs argued the “No Hire” clause violated the Sherman Act by prohibiting franchisees from competing to attract or keep employees. The plaintiffs alleged the resulting hiring prohibition lowered wages, reduced employee benefits, and deprived employees of job mobility.

Burger King and its franchisees moved to dismiss the claims, arguing they could not violate the antitrust law because they are a single economic entity and cannot engage in requisite “concerted action.” The district court agreed and dismissed the action, holding that Burger King and its franchisees were not separate actors for antitrust purposes, and that the No-Hire clause was an internal agreement to implement a single policy.

The appellate court disagreed, finding Burger King and its franchisees were distinct entities. Burger King’s franchise agreement said: “no fiduciary relationship between [franchisor and franchisee] exists”; that Burger King restaurants “may” face competition from one another; each franchisee is an independent contractor; and each franchisee is responsible for its own hiring decisions. The court declined to rule whether franchise agreements with no-poach provisions are presumed to violate antitrust laws.

Franchisors should be mindful of antitrust risk and other claims if their franchise agreements contain no-poach provisions. Franchisors should consult franchise counsel regarding antitrust risks in franchise agreements and employment agreements (i.e., non-compete) to reduce exposure.