Introduction
No-poach agreements, wherein companies agree not to solicit or hire employees away from a competitor, have been targeted by the White House,1 the Federal Trade Commission (FTC) and the Antitrust Division.2 Although the DOJ’s four criminal prosecutions stemming from no-poach agreements have yet to yield any guilty verdicts for Sherman Act violations, the Seventh Circuit recently weighed in on the potential legality under the antitrust laws of employee no-poach provisions in fast-food franchise agreements.
On August 25, 2023, Judge Easterbrook of the Seventh Circuit penned a highly anticipated decision in Deslandes v. McDonald’s USA, LLC, 2023 WL 5496957 (7th Cir. Aug. 25, 2023), involving ongoing efforts by fast-food restaurant employees to challenge no-poach provisions in franchise agreements.3 The court reinstated claims by two former McDonald’s employees that no-poach provisions in franchise agreements violate Section 1 of the Sherman Act as per se unlawful restraints.4
The decision is notable as the first time an appellate court has opined that a no-poach agreement between competing employers may qualify as an illegal naked restraint under the per se rule. In addition, the court highlighted that it is no defense under the ancillary restraints doctrine if the no-poach provisions help franchise agreements increase output (and benefit consumers in the market for food) if the no-poach provisions harm workers in a separate market for labor. As a result, it would be wise for companies with no-poach provisions in any of their commercial contracts (e.g., a joint venture or supply agreement with a competitor) to take stock of the potential antitrust implications of those provisions.
You Want Fries With That?
Until 2017, McDonald’s franchise agreements contained no-poach provisions that prohibited franchise operators from soliciting or hiring employees away from a different franchise, or from the McDonald’s company, “until six months after the last date that person had worked for McDonald’s or another franchise.”5 A resulting class action lawsuit alleged that these provisions violated Section 1 of the Sherman Act as per se antitrust violations.
The district court dismissed the plaintiffs’ case, concluding that the no-poach agreements were not illegal per se but instead were justified under the ancillary restraint doctrine because the no-poach provisions helped expand output as part of a franchise agreement.6 The district court also ruled that, as an ancillary restraint, the no-poach provision must be measured through a rule of reason analysis but that the plaintiffs’ failure to allege market power was fatal to such a claim.7
On appeal, the FTC and the Antitrust Division filed a joint amicus brief arguing that while the district court correctly recognized that no-poach provisions could be per se illegal as employee allocation agreements among horizontal competitors, that court failed to require the defendants to establish that the no-poach provisions were “reasonably necessary to a procompetitive objective” of the franchise agreement under the ancillary restraints doctrine.8
Judge Easterbrook agreed with the FTC and DOJ, holding that the district court “jettisoned the per se rule too early,” and detailed how the plaintiffs adequately alleged a horizontal restraint (i.e., a potentially per se illegal relationship between competitors) because McDonald’s no-poach provisions constrained worker mobility between corporate outlets and franchises.9
Turning to ancillarity, the appeals court flagged two problems with the conclusion that the no-poach provisions helped expand the output of burgers and fries. First, the court noted that antitrust law does not permit “benefits to consumers (increased output)” to justify “detriments to workers (monopsony pricing).”10 Second, the court questioned how a no-poach provision “promotes the production of restaurant food.” The court opined that “[m]aybe it just takes advantage of workers’ sunk costs and helps each business’s bottom line, without adding to output.”11
The Seventh Circuit concluded that the legality of the no-poach provision would require further analysis at the district court level of its purpose. If McDonald’s merely used no-poach agreements to protect a franchise’s investments in employee training, that “could in principle justify restraints on poaching.” But complex questions would need to be answered at the trial court level in discovery, including, for example, why the no-hire restriction lasted six months after employment, to make an adequate determination on ancillarity. As a result, the Seventh Circuit vacated and remanded, encouraging the district court to also revisit the denial of class certification.12
Where’s the Beef?
No-poach agreements appear common in fast food. At least one research study indicated that these agreements not to compete for labor are included in approximately 58% of major franchisors’ contracts, including those issued by McDonald’s, Burger King, Jiffy Lube and H&R Block.13
The Seventh Circuit’s decision in Deslandes helps further antitrust law’s treatment of no-poach agreements by (1) solidifying what several lower courts have held: that no-poach agreements may be per se illegal under the Sherman Act; and (2) elucidating a framework by which litigants and district courts can examine—through “careful economic analysis”—the ancillary restraint defense and whether there are procompetitive benefits of no-poach provisions, such as the prevention of free riding (as McDonald’s claimed) or recoupment of employee training costs.
A district court decision with analysis of a robust record of economic evidence about the purpose and effects of no-poach provisions may take quite a while before further appellate review. Nonetheless, given the Seventh Circuit’s notice that such agreements may be per se unlawful under the antitrust laws, employers who have no-poach provisions as part of any agreement with a competing employer should think long and hard about eliminating or attempting to enforce those ancillary provisions, especially in light of the aggressive focus by federal and state antitrust enforcers on labor markets.
1 White House, Executive Order on Promoting Competition in the American Economy, § 1 (July 9, 2021) (“To address agreements that may unduly limit workers’ ability to change jobs, the Chair of the FTC is encouraged to consider working with the rest of the Commission to exercise the FTC’s statutory rulemaking authority under the Federal Trade Commission Act to curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/07/09/executive-order-on-promoting-competition-in-the-american-economy/.
2 Federal Trade Comm’n and DOJ, Antitrust Div., Antitrust Guidance for Human Resource Professionals (Oct. 2016) (“Going forward, the DOJ intends to proceed criminally against naked wage fixing or no-poaching agreements. These types of agreements eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers, which have traditionally been criminally investigated and prosecuted as hardcore cartel conduct. Accordingly, the DOJ will criminally investigate allegations that employers have agreed among themselves on employee compensation or not to solicit or hire each others’ employees.”), https://www.justice.gov/atr/file/903511/download.
3 See Butler v. Jimmy John’s Franchise, LLC, 331 F. Supp. 3d 786, 790 (S.D. Ill. 2018) (class action over “no-hire” provision that “one Jimmy John’s franchisee cannot hire the employee of another Jimmy John’s franchisee, unless that employee has not worked at a Jimmy John’s shop in over a year.”); Jeff Stein, States Launch Investigation Targeting Fast-Food Hiring Practices, Wash. Post (July 9, 2018, 11:21 AM), https://www.washingtonpost.com/news/wonk/wp/2018/07/09/11-states-launch-investigation-targeting-fast-food-hiring-practices/.
4 Deslandes, 2023 WL 5496957, at *2.
5 Deslandes, 2023 WL 5496957, at *1.
6 Deslandes v. McDonald’s USA, LLC, No. 17 C 4857, 2018 WL 3105955, at *7 (N.D. Ill. June 25, 2018) (“In this case, plaintiff has alleged a horizontal restraint that is ancillary to franchise agreements for McDonald’s restaurants. Each time McDonald’s entered a franchise agreement, it increased output of burgers and fries, which is to say the agreement was output enhancing and thus procompetitive.”).
7 Id. at *8.
8 See Amicus Curiae Brief for the United States of America and the Federal Trade Commission in Support of Neither Party, at 25-26, Deslandes v. McDonald’s USA, LLC, 2023 WL 5496957 (7th Cir. Aug. 25, 2023), https://www.ftc.gov/system/files/ftc_gov/pdf/2022-11-09-Deslandes-v.-McDonald%27s-USA-Amicus-Brief-FINAL.pdf.
9 Deslandes, 2023 WL 5496957, at *2.
10 Id.
11 Id.
12 Id. at *4.
13 Alan B. Krueger & Orley Ashenfelter, Theory and Evidence on Employer Collusion in the Franchise Sector, 57 J. Hum. Res. S324, S327 (Supp. 2022) (“A total of 58 percent of the franchise agreements contained some restriction on franchisees’ ability to recruit and hire employees away from another franchise or corporate unit in the same franchise chain.”).