Let’s review the status of activity restrictions in franchise agreements. Do they serve the purpose intended? Are they enforceable? Are they worth it? The Pennsylvania Supreme Court’s decision in Pittsburgh Logistics Systems v. Beemac Trucking, 2021 WL 1676399 (PA 4/29/2021) applies an analysis usually used to evaluate covenants not to compete, and concludes that on the facts presented, the no-poach clause was unenforceable as written. The case is instructive for all franchisors because its reasoning will be followed in other states.
No poach clauses and no solicitation clauses are post-employment restrictions against competition. In franchise agreements, these clauses usually are drafted to prevent franchisees from raiding the employees of other franchisees or of the franchisor. Sometimes, these clauses appear in agreements with critical vendors and business partners, so that no raids will cannibalize the staff. Application of the clauses stabilize the staff of the contracting parties but restricts the mobility of their employees. These employees did not agree to these restrictions, nevertheless, an invisible hand eliminates their opportunities.
Covenants not to complete are restrictions on competition, both during the term of the franchise agreement and after. These are evaluated based on the scope of the restriction, the period of the restriction and the geographic scope of the restriction. The in-term covenant against competition usually precludes engaging in competitive activity which would be disloyal to the franchisor or would impact the franchised business, and with a few exceptions, need not be limited in geographic scope. The post-term covenant precludes competition against the franchisor or other franchisees, and to be enforceable, must be reasonably limited in scope, time, and geography.
As restrictions on competition, these clauses may be regulated by federal antitrust laws, state antitrust laws and state common law. Certain states, like California and Washington, prohibit the enforcement of such restrictions as against public policy, subject to certain exceptions. For example, Washington state entirely prohibits no poach agreements as anticompetitive. The attorney general of Washington negotiated the nationwide elimination of no poach agreements with over 200 franchisors if they wanted to continue to do business in the state of Washington. California has a statute which states that non-compete agreements are unenforceable, but exceptions exist for very narrow restraints in franchise agreements and for protection of trade secrets. See Bamboo Franchising, LLC v. Nguyen, 2021 WL 1839664 (N.D. Cal. May 7, 2021) (enforcing non-compete under the trade secret exception).
The jurisprudence in this area is changing rapidly. The Department of Justice and the Federal Trade Commission in 2019 concluded that no poach clauses should be analyzed under a rule of reason analysis because of pro-competitive benefits of such clauses. Antitrust attack on no poach agreements are difficult because of proving the necessary elements of antitrust damages, and these are expensive cases to prepare and try.
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