Franchise No-Poach Agreements – the Debate of Standard of Review

A Michigan federal judge recently ruled against Domino Pizza’s motion to dismiss a lawsuit accusing it of violating antitrust laws with a no-poach agreement that prevented a franchisee from hiring employees away from other Domino’s locations. Additional suits have been filed by employees of other franchisors, including McDonald’s and Pizza Hut. Employees argue that because no-poach clauses prevent them from applying for jobs at other locations within the same chain, they are denied potential promotions and higher pay.

This year, the Department of Justice (“DOJ”) filed Statements of Interest in three no-poach class actions brought by former employees of Arby’s, Auntie Anne’s and Carl’s Jr. DOJ contends that in the absence of an agreement among franchisees, restrictions in a franchisor-franchisee agreement that prevent franchisees from poaching each other’s employees are a vertical restraint of trade. According to DOJ, these types of vertical agreements have potential consumer benefits, such as the promotion of inter-brand competition, and the no-poach class actions should be judged under the rule of reason standard. DOJ further argues that courts should weigh the potential anticompetitive effects against these consumer benefits, which renders the “quick-look” form of rule of reason analysis inapplicable.

Several states are at odds with DOJ’s position, including the state of Washington. Washington’s Attorney General filed a Statement of Interest opposing DOJ in the same three cases, asserting that not all franchisor-franchisee agreements should be viewed as vertical restraints, and to the extent that such agreements include horizontal restraints they should be analyzed under the per se standard. For example, a franchisor and franchisees can be horizontal competitors in a specific employment market if the franchisor operates company-owned locations in the same market as a franchisee.

The three cases in which DOJ and the Washington Attorney General filed their Statements of Interest settled before any ruling was issued regarding the legal standard workers must meet to prove that no-poach agreements between a franchisor and franchisee are illegal. The Domino’s case, if it does not settle, will probably consider the applicable legal standard. Market- and franchise-specific factors, including whether the franchisor owns and operates competing locations, will likely be determinative. Despite the lack of rulings on legal standards, franchisors have responded to these no-poach class action suits and state attorney generals’ investigations. Many, most notably fast food restaurants, have agreed to cease their use of no-poach clauses that prevent employees from moving among locations.

Vice President Erica E. Greulich is an empirical microeconomist who consults on employment and antitrust matters.