No-Poach Agreements Okay for Fast-Food Franchisees? DOJ says Maybe!
Earlier this month, the U.S. Department of Justice (DOJ) argued no-poach agreements between fast-food franchisors and individual franchisees may actually have certain consumer benefits. While not a perfect shield, this requires more work for challengers of such agreements to prove they are anticompetitive under the Sherman Act.
The Sherman Act is a federal antitrust statute that prohibits monopolies or combinations of companies to restrict or control interstate commerce. In 2016, the DOJ and the Federal Trade Commission (FTC) released Antitrust Guidance for Human Resource Professionals advising that “naked” no poach agreements are per se illegal. “Naked” no poach agreements are those which are not part of a broader, legitimate business agreement. They are meant simply to prevent poaching of employees. In January 2018, the DOJ announced it would continue to follow the 2016 Antitrust Guidance.
Earlier this year, theThe Sherman Act is a federal antitrust statute that prohibits monopolies or unreasonable combinations of companies to restrict or in any way control interstate commerce. In 2016, the Department of Justice and Federal Trade Commission released Antitrust Guidance for Human Resource Professionals alerting companies that “naked” no poach agreements constitute per se antitrust violations and would likely be prosecuted criminally. A “naked” no poach agreement is one that is not part of a broader, legitimate business collaboration, i.e., the only purpose of the agreement is to address poaching. In January 2018, the DOJ announced it would continue to follow the 2016 Antitrust Guidance. Now, the DOJ sought to intervene in three consolidated cases against Carl’s Jr., Arby’s and Auntie Anne’s challenging these types of agreements between fast food franchisors and franchisees. The DOJ’s position was such agreements should be analyzed under the “rule of reason” – an antitrust standard where the pro-competitive features of a business practice is weighed against its anti-competitive effects to determine whether or not the practice should be prohibited. The DOJ made it clear in January it planned to file a statement of interest in the cases, and it did just that on March 7. In its statement of interest, the DOJ argued against treating the franchisors’ alleged no-poach arrangements as per se illegal under the federal Sherman Act – a potentially devastating blow to the myriad of cases attacking no-poach agreements.
The DOJ is arguing only agreements restricting hiring between direct or “horizontal” competitors, e.g., franchisees, should be considered per se anti-competitive – not agreements between franchisor and franchisee, which are “vertical.” Vertical restraints on trade, the DOJ claims, are to be judged under the rule of reason, not the per se standard. The DOJ does, however, recognize that certain vertical agreements could be per se illegal if they are going after the same market of employees. The DOJ stated
[i]f a complaint plausibly pleads direct competition between a franchisor and its franchisees to hire employees with similar skills, a no-poach agreement between them is correctly characterized as horizontal and, if not ancillary to any legitimate and pro-competitive joint venture, would be per se unlawful.
The DOJ alleged plaintiffs in these suits are targeting “hub-and-spoke” conspiracies between franchisors and their franchisees. Hub-and-spoke conspiracies require one company to be at the center, with others on the “spokes,” and would be subject to per se treatment. However, what is missing here, the DOJ argues, is the “rim” of the hub-and-spoke, e.g., agreements between franchisees that completes the circle around the hub. No rim, no hub-and-spoke conspiracy, argues the DOJ.
It will be interesting to see what ramifications the DOJ’s intervention will have on these cases, and the litany of others like them which have been filed against franchisors across the country. We will continue to monitor and provide you with updates.
Brody and Associates regularly provides counsel on employment agreements, covenants not to compete, and employment litigation in general. If we can be of assistance in this area, please contact us at firstname.lastname@example.org or 203.454.0560.