Washington v. Washington: State Of No-Poach

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The Department of Justice backed off no-poach challenges in franchise agreements in 2019, but the state doubled down. The result? Washington state challenged a raft of no-poach/no-hire provisions in 225 franchise systems, resulting in agreements requiring franchisors to agree not to enforce the offending provisions not just in Washington but nationwide. On April 28, 2020, Washington AAG Rao declared victory, characterizing the DOJ’s approach as “somewhat misguided.”

Does Washington State’s victory celebration mean that other franchisors needn’t worry about enforcing such clauses? I think the answer is a clear NO. Although the Department of Justice has redirected its concern from no-poach/no-hire provisions in franchise agreements, Congress has not. Bills outlawing such provisions have been filed in the House and the Senate, e.g., H.R. 5710 and S. 2614. While the future of these legislative attempts is unclear, we can expect the efforts to continue. In addition, several states have enacted legislation prohibiting these provisions, and notably banded together to pursue settlements banning the enforcement of such restrictions in franchise agreements.

Perhaps most perilously, the federal-state tug of war over these provisions has sparked private litigation and a divergence of judicial views as to whether the restrictions are per se antitrust violations or whether their anticompetitive effects (and potential illegality) should be assessed under the more forgiving rule of reason or in between “quick look” analysis. Private litigation and the battle over the appropriate analysis is likely to continue.

And I’m not betting against Washington State cranking its enforcement engine back up.

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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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