To Poach Or Not To Poach

Fox Rothschild LLP

Fox Rothschild LLPFranchise systems, and many licensing arrangements contain anti-poaching provisions. These provisions are being tested under the antitrust laws as being anticompetitive. This article will discuss the benefits and burdens of including such provisions in your agreements.

These “no-poach” or “anti-poaching” clauses are standard provisions restrict franchisees from soliciting or hiring employees of the franchisor or another franchisee of the same franchise system. Formerly enforced by courts as legitimate efforts to prevent cannibalization of employees from one franchisee to another, are now the subject of scrutiny by 16 state Attorneys General and at least 7 federal district court cases. District Judge Anita Brody denied a motion under 12(b) (6) for dismissal of such an antitrust claim in Fuentes v. Royal Dutch Shell PLC, 2019 US. Dist. Lexis 224708 (EDPA November 25, 2019).

The no-poach provisions were previously justified as strengthening inter-brand competition, and promoting a uniform, non-competitive environment among the franchisees. Recent critics have argued that the data shows no-poach clauses might suppress employee wages and mobility. These arguments are data driven, so the antitrust analysis is necessary to sort through the issues.

I am unconvinced that a no-poach clause is a per se violation of the antitrust laws. Moreover, I am of the opinion that no-poach clauses are rarely enforced by anyone. The mechanics of enforcing such a clause, one franchisee against another or the franchisor, is rarely warranted.

If the clause is important to a system, I would probably recommend that the clause remain as it does not appreciably impact wages. But franchisors and licensees should expect more scrutiny of such clauses and be willing to defend such clauses. In some systems, I have recommended a system-wide statement that the clause will not be enforced, or an amendment of the Operations Manual to the same effect. In other systems, I have suggested that no action be taken as to existing franchise agreements. I generally recommend that in the new form of franchise agreement that a specific decision be made why such a clause should be included, with the suggestion that it not be included unless necessary. Franchisors should review their current agreements with counsel to decide whether it is necessary to defend such a clause if challenged.

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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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