No-poach Agreements Continue to Take Center Stage in 2019


Background

‘No-poach’ agreements between businesses not to compete with each other for employees have long been held unlawful under Section 1 of the Sherman Antitrust Act, which prohibits certain restraints on trade and competition. Historically, the Department of Justice (“DOJ”) has filed civil enforcement actions against businesses entering into no-poach agreements with other businesses.

In October 2016, however, DOJ and the Federal Trade Commission (“FTC”) issued joint Antitrust Guidance, establishing a stronger stance on enforcement actions and putting businesses on notice that ‘naked’ no-poach agreements (between competing employers not to solicit, recruit, or hire each other’s employees or to compete on terms of compensation) are illegal. The Guidance threatened severe consequences for business entering into such agreements: civil enforcement actions, criminal prosecution, and the prospect of treble damages for individuals harmed by such agreements. This joint Antitrust Guidance spurred activity by states’ attorneys general and private litigants regarding no-poach agreements, and into the first quarter of 2019, no-poach agreements remain frequent focus of litigation.

In the first case filed by DOJ since the Antitrust Guidance was issued, the Departments’ Antitrust Division alleged that the defendant railroad equipment suppliers had agreed not to poach each other’s employees from 2006 through 2015 in violation of Section 1 of the Sherman Act.  This action resulted in the defendants entering into a consent decree under which the companies agreed to stop entering into, maintaining, or enforcing any unlawful no-poach agreements. U.S. v. Knorr-Bremse AG, 2018 WL 4386565 (D.D.C. Jul. 11, 2018). On the heels of the consent decree, more than fifteen private lawsuits were filed by current and former employees. These actions were consolidated in the Western District of Pennsylvania. In re: Railway Industry Employee No-Poach Antitrust Litig., 2:18-mc-00798 (W.D. Pa., Feb. 8, 2019). Following oral argument on February 25, 2019, the defendants’ joint motion to dismiss remains pending.

State Enforcement Efforts and Private Litigants Gain Traction

DOJ’s enforcement initiative appears to have sparked several states to undertake investigations and enforcement actions against no-poach agreements in a variety of industries. In particular, Washington State Attorney General Bob Ferguson has led the effort to deter no-poach agreements among employers. In January 2018, Ferguson’s office opened an investigation into no-poach agreements used by franchise businesses in Washington state. Since that time, Ferguson’s office has entered into agreements with over 50 national chains operating in the state. Under these “Assurance of Discontinuance” agreements, the franchise chains agreed to stop enforcing existing no-poach provisions, to remove no-poach clauses from agreements in Washington within 120 days, and to remove such clauses from their contracts nationwide as they come up for renewal.

Several other states have emulated Ferguson’s efforts. On July 9, 2018, a coalition of attorneys general from ten states—California, Illinois, New York, Maryland, Massachusetts, Minnesota, New Jersey, Oregon, Pennsylvania, Rhode Island, and the District of Columbia—sent a letter to eight franchise-based fast food chains requesting information related to no-poach provisions in their franchise agreements.

While investigations into the practices of three of the chains (Burger King, Popeye’s, and Panera) are still underway, and while one of the chains (Wendy’s) denied ever using no-poach provisions in its franchise agreements, four of the chains (Dunkin’ Donuts, Arby’s, Five Guys, and Little Caesars) entered into a multistate settlement on March 12, 2019, agreeing to end their use of no-poach agreements. A press release announcing the settlements stated that the companies have agreed to stop including no-poach provisions in any franchise agreements and to stop enforcing existing no-poach provisions. The franchisors also agreed to request that their franchisees remove no-poach provisions from their existing contracts, and to notify the attorneys general if any of their franchisees attempted to enforce a no-poach provision. Attorney General Brian Frosh of Maryland stated that the settlements “mean fairer hiring practices for thousands of workers in Maryland and across the country” because “no-poach agreements limit a worker’s job opportunities and earning potential.”

The DOJ Seeks to Clarify the Applicable Legal Standard

In addition to federal, state, and administrative enforcement actions, there has been a surge of private lawsuits brought by employees attacking the use of no-poach agreements. Many of these suits allege that the inclusion of a no-poach provision constitutes an unlawful restraint on competition in violation of Section 1 of the Sherman Act.

One hotly contested question which has arisen in these private suits is the legal standard to be applied at the motion to dismiss stage. Plaintiffs advocate for a per se standard, under which plaintiffs need only allege that the conduct occurred in order to state a claim. By contrast, under the ‘rule of reason’ standard advocated for by defendants, the court must balance the pro- and anti-competitive benefits to determine whether the agreement poses an unreasonable restraint on competition.

Initially, DOJ remained relatively quiet as the number of state and private actions involving no-poach agreements ballooned. In January 2019, even before the government shutdown ended, however, DOJ announced its intent to file statements of interest in such cases and its plan to weigh in on the debate over the appropriate standard of review. Throughout February and March of 2019, DOJ filed statements of interest in lawsuits concerning no-poach agreements for rail industry employees, medical school faculty members, and fast food franchise employees. In the cases involving rail industry employees and medical school faculty, DOJ urged the court to evaluate the alleged no-poach agreements under a per se standard if the court found that the employers entered into naked no-poach agreements. Notably, in contrast to the aggressive enforcement stance taken its 2016 Antitrust Guidance, the statement of interest filed in the fast food franchise cases clarified that no-poach agreements should not automatically warrant per se review.

The Fast Food Franchise Cases Leave Open Questions

On March 7, 2019, DOJ filed statements of interest in three ‘no-poach’ class actions filed against fast food franchises in the Eastern District of Washington: Stigar v. Dough Dough Inc., No. 2:18-cv-00244 (E.D. Wash. March 8, 2019) (Auntie Anne’s), Richmond v. Bergey Pullman, No. 2:18-cv-00246 (E.D. Wash. March 8, 2019) (Arby’s), and Harris v. CJ Star, LLC, No. 2:18-cv-00247 (E.D. Wash. March 8, 2019) (Carl’s Jr.). In each case, the plaintiff employees alleged that no-poach agreements prevented franchisees from soliciting or hiring employees of the franchisor or other intrabrand franchisees in an effort to keep wages down. The statement of interest was filed as the defendants’ opposed motions to dismiss were pending, in which the parties expressed diverging views on two main issues: (1) whether a franchisor and franchisee can conspire with each other within the meaning of Section 1 of the Sherman Act; and (2) which legal standard governs the review of no-poach agreements. DOJ’s statement of interest sought to address these issues.

As to the first issue, DOJ argued that the court should not presume that a franchisor and franchisee are the same entity. Instead, the court should examine the particular facts of each case to determine whether the entities operate in such a way that they have distinct economic interests and are therefore capable of conspiring within the meaning of Section 1.

On the second issue, DOJ distinguished between horizontal (between and among rival employers in a franchise system) and vertical (between franchisee and franchisor) restraints, arguing that horizontal restraints should be reviewed under the per se rule, whereas vertical restraints should be evaluated under the ‘rule of reason’ standard. For example, agreements between competing franchises (i.e., McDonald’s and Burger King) not to hire each other’s employees should be considered a horizontal restraint and therefore per se unlawful. Franchisees that agree, independently from the franchisor, not to hire each other’s employees would likewise constitute a horizontal restraint subject to the per se rule.   

Importantly, DOJ opined that most franchisor-franchisee no-poach agreements (like those alleged in the complaints) should be reviewed under the ‘rule of reason’ as vertical restraints justified by legitimate pro-competitive benefits, such as intrabrand competition. DOJ further argued that the “quick-look” form of the rule of reason analysis, which removes the burden to demonstrate harm caused by the agreements, should not apply to no-poach agreements because the court must weigh the anti-competitive effects of the agreements against any valid pro-competitive justifications to determine whether the agreement unreasonably restrains competition. Indeed, DOJ’s statement urged the Court not to follow the reasoning of Deslandes v. McDonald’s USA, LLC, 2018 WL 3105955 (N.D. Ill. June 25, 2018) or Yi v. SK Bakeries LLC, slip op. at 9 (W.D. Wash. Nov. 13, 2018), which held that the plaintiffs plausibly alleged antitrust violations under a “quick look” analysis.

Additionally, DOJ rejected the position that the franchise model itself supports a hub-and-spoke conspiracy (in which franchisees agree with the franchisor and with each other not to compete – so that the franchisor serves as the ‘hub’ and franchisees serve as ‘spokes’ and all are connected by no poach agreements) unless a plaintiff alleges that individual franchisees also agreed with each other to enforce the agreements. To this point, DOJ urged the Court not to follow Butler v. Jimmy John’s Franchise, LLC, 331 F. Supp. 3d 786 (S.D. Ill 2018), which upheld a hub-and-spoke conspiracy claim based on allegations that the franchise agreements gave the franchisees a contractual right to enforce the no-hire agreements directly against each other.

On March 11, 2019, Washington A.G. Bob Ferguson filed a statement of interest opposing DOJ’s position in these cases for three main reasons. First, Ferguson argued that state antitrust laws are not bound to follow their federal counterpart and that the ‘rule of reason’ should not be applied to no-poach agreements challenged under the Washington State Consumer Protection Act. Second, Ferguson asserted that it would be a mistake to view all franchisor-franchisee agreements as vertical restraints, and that to the extent franchisor-franchisee agreements contain horizontal restraints, such agreements should be analyzed under the per se rule. Finally, he argued that the determination of whether there are valid pro-competitive benefits to a no-poach agreement is a question of fact which may not be resolved at the motion to dismiss stage. Ferguson further argued that defendants should face a heavy burden in demonstrating that no-poach agreements serve a valid pro-competitive purpose. Notably, Ferguson’s statement asserted that after investigating hundreds of no-poach agreements, his office had yet to find a no-poach clause that was reasonably necessary to a franchise’s legitimate collaboration.

Notwithstanding (or, perhaps, because of) the starkly differing views announced by DOJ and A.G. Ferguson and those of the litigants themselves, all three cases settled on March 18, 2019, just two days before the hearing scheduled on the defendants’ motions to dismiss. It remains to be seen how courts will treat these competing positions.

Conclusion

Despite its warning, DOJ has yet to file a criminal prosecution against an individual or corporation for entering into a naked no-poach agreement. Nevertheless, ongoing state and federal involvement in public and private actions suggests that defeating no-poach agreements will remain a top enforcement priority in the months and years to come. The uptick in private lawsuits will also keep no-poach agreements in the spotlight. Now, at the center of this effort to deter no poach agreements, is the question of the applicable legal standard left open by the recent settlements in the Eastern District of Washington. Courts adopting the position taken by DOJ—that the ‘rule of reason’ applies to nearly all franchisor-franchisee no-poach agreements—may lead to dismissals or early settlements, as plaintiffs will face heavy burden of demonstrating that anti-competitive benefits outweigh pro-competitive benefits to allege an antitrust violation. On the other hand, if courts are to adopt Ferguson’s view that the per se rule should apply to franchisor-franchisee agreements under state law, state enforcement efforts and private litigation may increase and shift its focus to state antitrust claims, as defendants would face the heavier burden of proving that no-poach agreements serve a valid pro-competitive purpose. Decisions on the legal standard will provide much needed clarity for litigants and will likely impact future enforcement efforts.

This blog was written by Karli Lubin at Miles & Stockbridge.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.