In 2016, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued Joint Guidance for Human Resource Professionals warning that no-poach agreements restricting employee hiring may violate the antitrust laws.[1] That guidance, along with pre-guidance litigation, has established some clear ground rules. Naked no-poach agreements are per se illegal under §1 of the Sherman Act,[2] while ancillary no-poach agreements, those related to legitimate, procompetitive joint ventures[3] and corporate acquisitions,[4] are subject to the rule of reason, which considers whether the agreement is, on balance, anticompetitive.

Yet, four years later, there remain stubborn pockets of disagreement—for example, no-poach clauses in franchise agreements. Federal courts are struggling to reach a consensus on how to analyze them under the antitrust laws. And there’s a lot at stake. Statistics show more than 8 million Americans work in the franchise sector. The stakes are high for employers too. If the rule of reason applies, private litigation may be financially impractical; the necessity of proving a relevant geographic market in applying the rule of reason makes it difficult, if not impossible, to certify sizable class actions.[5] If the per se rule applies, the Sherman Act’s treble damages and attorneys’ fees provisions can prove disastrous.

The Current State of Confusion in the Federal Courts

Federal courts have taken at least four views on franchise no-poach agreements:

1. Franchisor-franchisee conspiracies are impossible: Courts in the Southern District of Florida, the Ninth Circuit[6] and the Western District of Washington[7] have held in no-poach cases that franchisors and franchisees are incapable of conspiring because they comprise a single corporate enterprise. In Arrington v. Burger King Worldwide, Inc., a Southern District of Florida case, the court cited the Supreme Court’s decision in Copperweld v. Independence Tube[8] and concluded: “Burger King’s relationship with its franchisees more closely resembles a corporation organized into divisions or de facto branches, or that of a parent-subsidiary, than the relationship between [competitors].”[9] In support, the court cited the franchisees’ “payment of royalties” to the franchisor, as well as their “joint advertising budget” and “uniform menu,” among other factors.[10] “The relationship here is more than symbiotic,” the court observed, “it is totally derivative.”[11] The ruling has been appealed to the Eleventh Circuit, where it is currently pending.[12]
2. The categorical per se rule applies: Courts in the Southern District of Illinois and the Eastern District of Pennsylvania[13] have concluded, at the motion to dismiss stage, that the per se rule may apply. In Butler v. Jimmy John’s Franchise, LLC, a Southern District of Illinois case, the franchise agreement provided, “franchisees are third-party beneficiaries of the no-hire provision” and therefore “enjoy[] an independent right to enforce the no-hire provision against another franchisee.”[14] Jimmy John’s franchise agreement also “g[a]ve . . . franchisees significant amounts of [operating] independence.”[15] As the court concluded, the plaintiff plausibly alleged Jimmy John’s had “orchestrated an agreement amongst the franchisees,” metaphorically dubbed a “hub-and-spoke conspiracy,” and, “while the contract in question may have been vertical, the effects are felt strictly at the horizontal level.”[16] Therefore, the court held: “[If after discovery] the evidence of franchisee independence is Herculean, then the per se rule might . . . apply.”[17]
3. The rule-of-reason balancing test applies: A number of courts have applied the rule of reason to franchise no-poach provisions. These decisions tend to conclude no-poach provisions are (1) ancillary to legitimate, pro-competitive franchise agreements and/or (2) vertically oriented, at least in part, and therefore unlikely to categorically pose a threat to competition. For example, in Ogden v. Little Caesar Enterprises, Inc., an Eastern District of Michigan case, the court rejected the per se rule and explained: “[T]he Sixth Circuit has an automatic presumption in favor of the rule of reason standard, while the per se rule is reserved only for those infrequent occasions of clear-cut cases in which the trade restraint is so unreasonably anticompetitive that they present straightforward questions for reviewing courts.”[18] The court concluded the no-poach provision was not a clear-cut case because it was vertical, at least in part, and was ancillary to the franchise agreement.[19]
4. The burden-shifting quick-look test applies: Courts in the Northern District of Illinois and the Western District of Washington[20] have turned to the quick-look test. In Deslandes v. McDonald’s USA, LLC, a Northern District of Illinois case, the court viewed the franchise no-poach clause at issue as a “horizontal restraint” that is nonetheless “ancillary” to a “procompetitive” franchise agreement.[21] It concluded, however, that the quick-look rule, rather than the rule of reason, applied because “even a person with a rudimentary understanding of economics would understand that if competitors agree not to hire each other’s employees, wages for employees will stagnate.”[22]

Adding to the confusion created by federal case law, antitrust enforcers also disagree about the appropriate test for analyzing franchise no-poach agreements. In Stigar v. Dough Dough, an Eastern District of Washington case, the DOJ argued that the rule of reason generally applies to franchise no-poach agreements unless (a) the franchisor itself competes with franchisees for employees or (b) franchisees directly agree not to hire employees.[23] Disagreeing with the DOJ, the Washington attorney general’s office filed an amicus brief arguing that, under Washington law, the per se rule should apply because there are horizontal aspects to franchise no-poach agreements.[24]

Legislative and Regulatory Reform May Be on the Horizon

As these decisions percolate up through the circuit courts, there is mounting evidence that the Biden administration and the states may try to explicitly address no-poach agreements in legislation or through agency rulemaking.

State Legislation: In 2019, New York Senators Brad Hoylman and Shelley Mayer introduced legislation titled the “End Employer Collusion Act.”[25] The bill voids “agreements between certain employers restricting . . . current or future employment” and explicitly defines “restrictive employment agreement” as “any agreement that (i) is included in a franchise agreement and (ii) prohibits or restricts one or more franchisees from soliciting or hiring the employees or former employees of the franchisor or another franchisee.” It also creates a private right of action for actual and punitive damages and attorneys’ fees and costs. In December 2020, the bill was sent to the Senate Rules Committee.

The New York bill has recent precedent elsewhere. In 2019, Washington passed legislation regulating noncompete agreements, effective January 1, 2020, that contains a provision explicitly addressing franchise no-poach agreements: “No franchisor may restrict, restrain, or prohibit in any way a franchisee from soliciting or hiring any employee of a franchisee of the same franchisor,” and “[n]o franchisor may restrict, restrain, or prohibit in any way a franchisee from soliciting or hiring any employee of the franchisor.”[26]

Federal Legislation: President-Elect Joe Biden has been a critic of no-poach agreements since at least 2016, when he played a significant role in the Obama administration’s efforts to promote labor-market competition. During the 2020 presidential campaign, Mr. Biden criticized no-poach agreements on Twitter: “It’s simple: companies should have to compete for workers just like they compete for customers. We should get rid of non-compete clauses and no-poaching agreements that do nothing but suppress wages.”[27] His election campaign website says: “As president, Biden will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets, and outright ban all no-poaching agreements,” including those “imposed within the same company’s franchisee networks.”[28]

There is evidence that the Biden administration may be able to push legislation through Congress even with a divided government. The past several years have seen bipartisan effort to promote competition in the labor markets. In 2019, for example, Republican Senator Marco Rubio introduced the Freedom to Compete Act, which would amend the Fair Labor Standards Act to restrict noncompete agreements between employers and low-wage workers.[29] Following the introduction of Senator Rubio’s bill, Democratic Senator Chris Murphy and Republican Senator Todd Young introduced the Workforce Mobility Act in October 2019.[30] That bill states, “no person shall enter into, enforce, or threaten to enforce a noncompete agreement,” and contains exceptions, such as one for the sale of “goodwill or ownership interest” in a business. Violations would be subject to enforcement by the FTC as “unfair or deceptive acts or practices” under the Federal Trade Commission Act.

Agency Rulemaking: Even if Congress lacks the appetite for legislation, Mr. Biden has an opportunity to influence no-poach agreements through his FTC appointments. Already, attorneys general from 19 states have written to FTC Chairman Joseph Simons “requesting that the FTC initiate a rulemaking to classify abusive worker non-compete clauses as an unfair method of competition and per se illegal under the FTC Act for low wage workers.”[31] The FTC’s two Democratic commissioners, Rohit Chopra[32] and Rebecca Kelly Slaughter,[33] have endorsed rulemaking on noncompetes. Commissioner Noah Phillips’[34] term will expire in September 2023,[35] and Chairman Simons may resign shortly after Mr. Biden’s inauguration, a fairly common practice when the White House changes political parties.

As courts struggle to consistently apply the Sherman Act’s general proscription of “contract[s], combination[s] . . . or conspiracy[ies] in restraint of trade,” the issue may be settled by legislation or the Biden administration’s agency appointments. Stay tuned.

[1] Department of Justice and Federal Trade Commission, Antitrust Guidance for Human Resource Professionals, October 2016, available at https://www.justice.gov/atr/file/903511/download.

[2] Id. at 3 (“Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws.”).

[3] Id. (“Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.”).

[4] Eichorn v. AT&T, 248 F.3d 131, 142-46 (3d Cir. 2001) (“In this vein, courts have characterized covenants not to compete executed upon the legitimate transfer of ownership of a business as ancillary restraints on trade. So long as these covenants are reasonable in scope, there is no antitrust violation under the rule of reason.” (internal citations omitted)).

[5] Deslandes v. McDonald’s USA, LLC, No. 17 C 4857, 2018 WL 3105955, at *8 (N.D. Ill. June 25, 2018) (“Plaintiff . . . seeks to represent a nationwide class, and allegations of a large number of geographically-small relevant markets might cut against class certification.”).

[6] Williams v. I.B. Fischer Nevada, 999 F.2d 445, 447 (9th Cir. 1993) (in case involving “no-switching” agreement barring franchisees from hiring other franchise managers, court held: “The evidence cited by the district court clearly demonstrates that [franchisor] and [franchisee] comprise a common enterprise.” (internal citation, quotations omitted)).

[7] Danforth & Assoc., Inc. v. Caldwell Banker Real Estate, LLC, No. C10-1621, 2011 WL 338798, at *2 (W.D. Wash. Feb. 3, 2011) (in case involving “no-hire” franchise agreement, court held: “Defendant and Bain are in a franchisor-franchisee relationship and therefore cannot conspire within the meaning of the Sherman Act.”).

[8] Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 769 (1984) (“But it is perfectly plain that an internal ‘agreement’ to implement a single, unitary firm’s policies does not raise the antitrust dangers that §1 was designed to police. The officers of a single firm are not separate economic actors pursuing separate economic interests, so agreements among them do not suddenly bring together economic power that was previously pursuing divergent goals. Coordination within a firm is as likely to result from an effort to compete as from an effort to stifle competition. In the marketplace, such coordination may be necessary if a business enterprise is to compete effectively. For these reasons, officers or employees of the same firm do not provide the plurality of actors imperative for a §1 conspiracy.”).

[9] 448 F. Supp. 3d 1322, 1330 (S.D. Fla. 2020).

[10] Id.

[11] Id. at 1331.

[12] Case No. 20-CV-13561 (11th Cir.). The DOJ recently filed an amicus brief arguing that, at least as to hiring, franchisees operate as independent economic actors and are therefore capable of conspiring under the antitrust laws.

[13] Fuentes v. Royal Dutch Shell PLC, Civ. A. No. 18-5174, 2019 WL 7584654, at *1 (E.D. Pa. Nov. 25, 2019).

[14] 331 F. Supp. 3d 786, 790 (S.D. Ill. 2018).

[15] Id. at 789.

[16] Id. at 795.

[17] Id. at 797.

[18] 393 F. Supp. 3d 622, 633 (E.D. Mich. 2019).

[19] Id. at 633-34.

[20] Yi v. SK Bakeries, LLC, No. 18-5627, 2018 WL 8918587 (W.D. Wash. Nov. 13, 2018).

[21] No. 17-C-4857, 2018 WL 3105955, at *7 (N.D. Ill. June 25, 2018).

[22] Id.

[23] Stigar v. Dough Dough, Inc., No. 18-CV-244, Dkt. 30 (E.D. Wash. Aug. 3, 2018).

[24] Id. at Dkt. 36.

[25]https://www.nysenate.gov/node/7677776#:~:text=section%205%2D337%20that%20would,a%20current%20and%20future%20employer.&text=JUSTIFICATION%3A%20%22No%2Dpoaching%22,and%20freedom%20of%20their%20employees.

[26] Wash. Rev. Code 49.62.060 (2020).

[27] https://twitter.com/joebiden/status/1209263668736745473?lang=en.

[28] https://joebiden.com/empowerworkers/#.

[29] https://www.congress.gov/bill/116th-congress/senate-bill/124/text.

[30] https://www.congress.gov/bill/116th-congress/senate-bill/2614.

[31] https://oag.ca.gov/system/files/attachments/press-docs/11%2015%2019%20Multistate%20FTC%20Non-Compete%20Letter%20FINAL.pdf (California, Delaware, District of Columbia, Illinois, Iowa, Maine, Massachusetts, Maryland, Michigan, Minnesota, New Mexico, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington and Wisconsin).

[32] https://www.ftc.gov/system/files/documents/public_statements/1544564/chopra_-_letter_to_doj_on_labor_market_competition.pdf (“Earlier this year, the Commission received a petition for rulemaking on non-compete clauses. I strongly support opening up a docket for public comment on this petition to aid the Commission in crafting any potential rulemaking proposals.”).

[33]https://www.ftc.gov/system/files/documents/public_statements/1552477/171_0134_your_therapy_source_commissioner_slaughter_statement.pdf (“Finally, I note that wage-fixing cases such as this one are not and should not be the only way the Commission addresses harms imposed on workers. For example, I am deeply troubled by the pervasive use of non-compete clauses in employer-employee contracts, and I support calls for the Commission to consider banning such conduct by rule.”).

[34] Commissioner Phillips has expressed concern that rulemaking on the issue of unfair competition may run afoul of the non-delegation doctrine, which, he said, “requires Congress to provide an ‘intelligible principle’ to guide the agency to which it has delegated legislative discretion.” Noah Phillips, Commissioner, Fed. Trade Comm’n, Prepared Remarks at the Workshop Titled “Non-Compete Clauses in the Workplace: Examining Antitrust and Consumer Protection Issues,” Jan. 6, 2020, available at https://www.ftc.gov/system/files/documents/public_statements/1561697/phillips_-_remarks_at_ftc_nca_workshop_1-9-20.pdf.

[35] Although Commissioner Phillips was appointed in April 2018, the Commissioners’ seven-year terms run with the “seat,” not the appointee. Mr. Phillips’ seat was vacant for approximately two years before he was appointed.