An important federal appeals court has clarified a key principle of antitrust law in a way that potentially makes it more difficult for an employer to win a motion to dismiss, and thereby avoid expensive discovery, with respect to company agreements that contain commonly used hiring restrictions. The appeals court ruled that trial courts must not decide at the pleading stage whether the “ancillary restraints doctrine” prevents per se (automatic illegality) treatment of so-called no-poach agreements, thereby depriving employers of a defense that they often have used to dismiss claims or convert them into antitrust “rule of reason” claims, which are far harder for plaintiffs to win.
In cases under Section 1 of the Sherman Act, the legality of an agreement that contains a “restraint” on competition (restriction of parties’ or third parties’ ability to compete) hinges on whether the agreement is assessed under the per se rule, which means automatic illegality, or the Rule of Reason, which requires a court to weigh the alleged anticompetitive effects of the agreement against its procompetitive benefits and business justifications. Under the “ancillary restraints doctrine,” an agreement that is subordinate and collateral to a separate, clearly procompetitive transaction, and reasonably necessary to achieve the goals of that other transaction is assessed under the Rule of Reason, even if the subordinate agreement would typically be assessed under the per se rule if it were standing alone. Employers often justify hiring restrictions in agreements as ancillary restraints, reasoning that, for example, no-poach or non-solicit provisions are necessary for two companies to feel comfortable introducing each other’s key employees to the other’s during the course of a business collaboration.
On August 25, 2023, the U.S. Court of Appeals for the Seventh Circuit, in an opinion authored by Judge Frank Easterbrook, revived McDonald’s workers’ antitrust suit against the McDonald’s corporation, providing useful clarification on pleading standards for the ancillary restraints doctrine in Section 1 complaints and the extent to which courts should decide fact intensive questions at the motion to dismiss stage. Importantly, the Seventh Circuit’s ruling provides a signpost to lower courts that the classification of “ancillary restraints” should not be hastily reached on the pleadings. And it reinforces that no-poach agreements continue to receive heavy scrutiny in courts and by regulators. Judge Easterbrook emphasized that “[a] restraint does not qualify as ‘ancillary’ merely because it accompanies some other agreement that is itself lawful.” In implementing any provisions that limit output or affect employee wages or mobility, it is essential for businesses to heed the associated risks and narrowly tailor the provisions to achieve the goals of any legitimate business objective that may be at issue.
The suit centers on 2017 allegations by plaintiffs, who formerly worked as managers at Florida and Kentucky McDonald’s locations. According to the plaintiffs, McDonald’s enforced a policy in which franchisees were prohibited from poaching workers from one another or from corporate-owned stores, which caused them to lose out on higher paying jobs and professional growth opportunities. The plaintiffs initially sought class certification but were unsuccessful in their efforts, and so they continued forward only on their own behalf. After multiple years of discovery, in June 2022, District Judge Jorge L. Alonso granted McDonald’s judgment on the pleadings after finding that the no-poach provisions were subject to the Rule of Reason as ancillary restraints that resulted in pro-competitive benefits, and that the plaintiffs had failed to allege McDonald’s market power in the relevant markets.
The plaintiffs appealed the district court’s judgment and, ultimately, succeeded in convincing the Seventh Circuit that the district court had erred. In vacating the district court’s opinion and remanding for further proceedings, the Seventh Circuit held that the district court incorrectly concluded that the no-poach agreements were “ancillary” restraints and had judged the merits of the plaintiffs’ claims too early. According to Judge Easterbrook, the district court “jettisoned the per se rule too early” by prematurely deciding that the no-poach provisions were ancillary simply “because [they] appeared in franchise agreements.” Instead, the district court should have answered important questions about the scope, length, restrictiveness, and objectives of the no-poach provisions. Judge Easterbrook emphasized that “[t]hese are all potentially complex questions, which cannot be answered by looking at the language of the complaint,” and “require careful economic analysis.” Accordingly, the Seventh Circuit remanded the case to the district court to answer those questions and determine whether the no-poach provisions were, in fact, ancillary or, instead, should be assessed under the per se rule.
For more discussion by the V&E team on no-poach issues, please see: