DOJ Publishes Statements Clarifying Its Analysis of No-Poach Agreements – But Questions Remain

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Since issuing the DOJ/FTC Antitrust Guidance for Human Resource Professionals in 2016, the DOJ Antitrust Division has remained active in enforcing and commenting on agreements among employers not to compete for hiring employees (“no-poach” agreements). DOJ filed several statements of interest in private antitrust suits involving no-poach provisions to provide guidance to the courts on the proper application of the federal antitrust laws to such restraints. Although the statements of interest provided clarity on the analysis of “naked” no-poach agreements, questions remain about the appropriate standard for analyzing no-poach restraints in franchise agreements.

Naked No-Poach Agreements Are Per Se Unlawful

DOJ recently took the unusual step of filing an unopposed motion to intervene in a class action no-poach settlement to enforce the injunctive relief agreed upon by the parties. The proposed class action alleged that a no-poach agreement between Duke/Duke University Health System and UNC/UNC Health Care System harmed competition for skilled medical labor. The named plaintiff alleged she was denied a lateral move to UNC from Duke because of agreements between senior administrators and deans at the institutions. On May 22 the court approved DOJ’s motion to intervene.

In its statement of interest, DOJ argued that such restrictions on hiring are per se unlawful market-allocation agreements between competing employers. These agreements harm consumers (employees) by depriving them of the benefits of competition that may lead to better wages or terms of employment. A court or agency will not evaluate the competitive effects of a per se unlawful agreement. Unlike such “naked” restraints, agreements that are ancillary to a separate, legitimate competitor collaboration are not considered per se unlawful and are analyzed under the rule of reason. In this case, DOJ argued that Duke had not presented evidence to show that the restraint was ancillary to a legitimate collaboration. DOJ’s analysis of the alleged agreements in its statement further cements the agency’s stance that “naked” no-poach agreements are per se unlawful. DOJ’s statement of interest sends a strong signal that it is actively monitoring no-poach cases and will readily offer its views where a party is making arguments inconsistent with the agency’s interpretation of the law. DOJ’s intervention will also deter the parties from violating the settlement and send a clear signal to others that DOJ will aggressively pursue firms that enter into naked no-poach agreements.

Questions Remain as to the Appropriate Standard for Analyzing Employment Restrictions in Franchise Agreements

Also making their way through the courts are several cases against fast-food chains alleging that franchisor agreements prohibiting poaching among franchisees are unlawful. For example, a complaint against Jimmy John’s alleged that Jimmy John’s orchestrated no-solicitation and no-hire agreements between and among franchisees. Similar claims were made against Auntie Ann’s, Carl’s Jr., Domino’s Pizza and Arby’s, among others, with some food chains settling.

DOJ filed a statement of interest in Harris v. CJ Star, LLC, Richmond v. Bergey Pullman Inc., and Stigar v. Dough Dough, Inc. In its statement, DOJ took the position that most franchisor-franchisee restraints should be analyzed under the rule of reason. It reasoned the agreement was vertical in nature because it is between a franchisor and a franchisee (parties “at different levels of the market structure”). By way of example, DOJ pointed to territorial allocations among franchises that restrict intrabrand competition but increase interbrand competition (i.e. competition among other food chains). Such restraints are evaluated under the rule of reason.

DOJ also argued that where there is “direct competition between a franchisor and its franchisees to hire employees with similar skills, a no-poach agreement between them is correctly characterized as horizontal and, if not ancillary to any legitimate and procompetitive joint venture, would be per se unlawful.” But then DOJ stated that the hub-and-spoke nature of the franchise agreement was an ancillary restraint because “the typical franchise relationship itself is a legitimate business collaboration in which the franchisees operate under the same brand.” According to DOJ, if the no-poach agreements are reasonably necessary to the franchise collaboration and not overbroad, they constitute an ancillary restraint subject to the rule of reason.

By contrast, the Attorney General of Washington took the position in an amicus brief that franchise agreements that “restrict solicitation and hiring among franchisees and a corporate-owned store” should be analyzed as per se unlawful, at least under state law. The AG argued that these agreements have both vertical and horizontal characteristics. Given the horizontal component, the AG took the position that such agreements do not warrant analysis under the more lenient rule of reason. The AG further argued that franchisors have “a heavy burden” in showing that these restraints can be justified as ancillary to a legitimate collaboration. The American Antitrust Institute similarly critiqued DOJ’s approach in a letter. It argued that the franchise no-poach agreements at issue are not ancillary because “[a]greements that have no plausible justifications or cognizable efficiencies are never ancillary” since they “do not hold the promise of procompetitive benefits and are not ‘necessary’ to the broader integration.”

Courts hearing the fast-food cases will have to resolve these conflicting arguments as they consider various motions to dismiss. In late May, a judge refused to grant Domino’s Pizza’s motion to dismiss concerning a no-hire provision that was included in the chain’s franchise agreements. The clause prohibited franchisees from recruiting or hiring other Domino’s franchisee employees without prior written consent. The judge found that plaintiff had sufficiently pled a horizontal restraint between franchisees and did not need to decide at the motion to dismiss stage which standard should ultimately be applied. The court reasoned that more factual development would be needed to decide that issue, unpersuaded by Domino’s Pizza’s reliance on summary judgment and trial decisions that contained a more robust factual record. A recent order by a district court evaluating similar claims against Jimmy John’s highlighted the varying positions emerging, referring to a “dichotomy” between DOJ’s position and the American Antitrust Institute. Although it acknowledged that DOJ is a “titan in this arena,” the court stressed that the agency is “not the ultimate authority on the subject.”

For now, employers that are members of any no-poach agreement with a vertical component should proceed with caution. Although DOJ’s position is favorable to no-poach agreements they deem vertical in nature, questions remain as to whether these agreements warrant per se, quick look, or rule of reason analysis.[1] Courts are proceeding cautiously, and a consensus has not yet emerged. As the court in Jimmy John’s succinctly summarized: “[T]hese questions here are in their infancy, and this battle looks like one that will make its way through the courts for years to come.”

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[1] A “quick look” analysis is used “when the great likelihood of anticompetitive effects can easily be ascertained.” California Dental Assn. v. FTC, 526 U.S. 756, 770 (1999).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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