Antitrust Counseling

If I Were You…I’d Listen to this Podcast about Residential Real Estate & Antitrust

April 4, 2024 | Bona Law PC

Author: Molly Donovan & Aaron Gott

This Episode Is About: Residential Real Estate and Antitrust

Why: A settlement has been reached between the National Association of Realtors (or NAR) and the class action plaintiffs that would resolve the $1.8 billion verdict out of Missouri finding illegal collusion in the residential real estate industry. But the settlement raises its own antitrust concerns and this podcast provides actionable guidance for avoiding them. You can listen to this podcast here.

Some Background: The Missouri case focused on the NAR’s mandatory commission rule requiring the home seller to pay a non-negotiable commission to the broker representing the buyer. Plaintiffs alleged this resulted in a complete lack of competition for buy-side rates—which were artificially inflated. Before this lawsuit and copycat suits, virtually all brokerages in the industry operated under the rule and were aware that everybody else was operating in the same way.

But under the settlement, the NAR has agreed to implement a new rule prohibiting offers of buy-side compensation to be posted on the MLS (or multiple listing service, where most homes are listed for sale). Individual brokers can pursue buy-side commissions, but only off the MLS through negotiations. Assuming the settlement is approved, this change will go into effect in mid-July 2024.

Here’s what brokerages and local real estate associations need to know:

Bullet #1: Collusion often takes place after major industry disruptions like this one. Competitors panic and seek comfort in knowing how others in the industry plan to cope – we could call them “crisis cartels.” In this case, brokerages who are supposed to be competing should not discuss with one another how they plan to react to the eradication of the mandatory commission rule. Each brokerage should determine by itself how it will compete, what commissions it will seek, and from whom.

Bullet #2: Brokerages need to ensure that there isn’t a reversion back to a de facto mandatory commission rule. While some commentary suggests that disclosing to sellers and buyers that commissions are negotiable may be enough, we think that, in addition to disclosures, there must be an accessible process that prompts and facilitates bona fide arms-length negotiations over commissions. Commission negotiations should not be discouraged in any way. Disclosures to home sellers and buyers that commissions are negotiable should be understandable, easy to find and accompanied by an explanation of the actual process for negotiating.

Bullet #3: Buy-side commissions should be commensurate with the “value add” brought by the buy-side broker. This may require detaching the buy-side commission from the sale price of the home and documenting the rationale behind the final rate chosen. This shows that the rate is competitive and not an “industry-standard” or “fixed” commission.

Bullet #4: No steering. Buy-side brokers should present to clients, equally and fairly, all homes that fall within their specifications. And conversely, sale-side brokers should treat all offers equally notwithstanding commissions. Brokerages must be careful not to steer clients towards dealing with other brokerages that are known to “cooperate” with respect to commission sharing, and must not steer clients away from dealing with brokerages that are “uncooperative,” i.e., taking a unique approach to competition for clients.

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Best Practices for Merger Reviews before the Federal Agencies and the California Attorney General’s Office

February 5, 2024 | Bona Law PC

Author: Paul Moore²

Introduction

Over the past several decades State Attorneys General have become increasingly involved in merger reviews in tandem with the Federal Trade Commission and/or the U.S. Department of Justice’s Antitrust Division (the Regulatory Agencies). This increase in state merger reviews has been in parallel with states raising their merger and non-merger profile and general antitrust enforcement efforts statewide and nationally. This trend has occurred, in part, as Attorneys General expanded their staffs and have become increasingly experienced in antitrust enforcement efforts and merger analysis. While many states, including California, do not have statutes mandating proposed merger registration, Attorneys General have statutory authority to investigate conduct to ensure no laws have been violated³. This means that an Attorney General can decide to review a proposed merger whenever they think it may violate a state’s antitrust laws. Therefore, it makes sense to notify an Attorney General when a proposed merger may have a competitive impact in a specific state and is likely to trigger an in-depth analysis at the federal level. Some examples might be a merger between two competitors who have substantial overlapping retailing assets, service routes, or service areas in one state. Such a notification to a state allows parties to avoid duplicative and possibly successive investigations. Best practices have emerged around how to conduct a merger investigation with a Regulatory Agency and tandem with the California Attorney General’s office.

Best Practices When Cooperating with Staff

Contacting the federal agency likely to review a transaction before submitting an HSR filing is increasingly becoming part of merger review practice. Since there is no statutory requirement to seek regulatory authority to merge at the state level in California a best practice is to invite the Attorney General to participate in the review process to avoid subsequent investigations that could have been run in parallel with other agencies and possibly avoid efforts by the staff ex-post to unwind a transaction⁴. Contacting the California Attorney General (Cal-AG) before an HSR is filed is generally well-received by staff and is typically considered a smart strategy because it allows the staff assigned to the transaction the ability to begin reviewing the transaction before the 30-day statutory clock has started. This extra time allows staff more time to conduct a review before any enforcement decisions need to be made and in some cases provides the time necessary to avoid one altogether. In addition, a pre-filing notification to both staffs permits the two agencies to interact freely since there is no HSR confidence to maintain.

We are in an era where many meetings are conducted over video. Generally, saving time and client resources is a good thing; however, visiting a State Attorney General’s staff in their office at the beginning of a merger can pay significant dividends. An in-person visit can establish the foundation for a positive working relationship, allow for clear communications⁵ and most importantly, communicate to the staff and Attorney General that you are aware of the importance of their involvement and welcome their participation. The in-person visit makes a significant first-step in ensuring that things start off on the right foot.

Once the HSR is submitted, the Cal-AG is able to file her Form 712 and to continue the interagency dialogue with the benefit of the documents and filings the parties have made. The Cal-AG’s staff can also begin to reach out to third parties and seek waivers that permit the FTC/DOJ to share what is produced with the states. This is more efficient for the producing parties as well, as they can make what amounts to a single production to satisfy both reviewing agencies⁶. Securing these waivers early in the process also allows the staffs to communicate freely, to share economic analyses based on produced information, and for the CAL-AG staff to join party meetings with the FTC/DOJ⁷. This level of cooperation benefits all involved as it prevents parties from making the same presentation twice and it allows both regulatory agencies to hear the same information simultaneously.

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Did You Receive an FTC or DOJ Subpoena? Be Sure To Preserve Everything Ephemeral

February 2, 2024 | Bona Law PC

Authors: Steven Cernak & Molly Donovan

The Federal Trade Commission and the Department of Justice are reminding companies that, in responding to grand jury subpoenas and second requests, there is an obligation to preserve data and communications created using “new methods of collaboration and information sharing tools, even including tools that allow for messages to disappear via ephemeral messaging capabilities.” The government has specifically called out Slack, Microsoft Teams and Signal as being some of the applications of concern “designed to hide evidence.”

The government says that while there has always been an obligation to produce information from ephemeral messaging applications in investigations and litigations, the purpose of the reminder is to ensure that counsel and clients do not “feign ignorance” when choosing to use ephemeral messaging to do business. Thus, the FTC and DOJ will include new, explicit language in subpoenas and other requests specifically stating that data from ephemeral messaging applications must be preserved. A failure to meet that obligation could result in obstruction of justice charges.

More generally, once a company has been served with a subpoena, a document hold should be prepared and circulated right away. A document hold is a written notification to relevant employees not to delete, destroy or alter any electronic or paper materials potentially relevant to the subpoena. The notice must unpack what that language means in plain English and should be conservative in describing what “potentially relevant” means—(remember that just because something is being preserved does not necessarily mean it will have to be produced.)

The document hold should apply to all types of messaging (text, IM, DMs, ephemeral) to ensure that all existing and going-forward materials will not be deleted. The relevant persons with IT expertise should certify internally that preservation is occurring effectively, that all auto-delete functions have been turned off, and that back-up tapes are not being purged automatically.

It’s also a good idea to instruct employees not to talk to each other about the subpoena or the underlying subject matter. When employees talk to each other, it can create the appearance of collusion—i.e., employees are coordinating with each other about what to say or not say to the lawyers or to the government. This can raise obstruction suspicions that may only grow if the discussions occur over ephemeral messaging applications that employees think will not leave a paper trail behind.

If employees believe that they or others have violated, or behaved inconsistently with, company policies or relevant laws, employees should discuss that only with in-house or outside counsel—not with each other.

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Best Antitrust Practices for Exchanging Competitive Information via Third Parties

January 4, 2024 | Bona Law PC

Authors: Steve Cernak & Molly Donovan

There is no guaranteed safety zone for exchanging competitively sensitive information amongst competitors. Practices once deemed relatively safe—like subscribing to a third-party data services provider to manage the exchange—now carry increased risks. This is mostly because machine learning and AI have made it possible to predict a specific competitor’s future strategies even if a third party has aggregated and anonymized the underlying data and even if the underlying data is old.

While antitrust compliance is best assessed on a case-by-case basis, there are general guideposts that third parties and their subscribers should understand before gathering, providing, and/or exchanging price, production, procurement, employment or other competitively sensitive data that competitors would not (or should not) share directly with each other.

Antitrust concerns are at their peak if the exchanged information allows competitors to increase price or restrict output in explicit or even tacit collusion with each other in a joint effort to raise profits industry wide. To steer clear of even the appearance of such conduct, these pointers matter:

Avoid exchanging data that is comprehensive, detailed and current. Any one of these is a concern, but the combination is very concerning.

Comprehensive means the information covers every aspect of business planning and strategy: how to procure, how to price, how to set production levels, and how to compensate workers and executives. Have you been asked to provide entire internal business plans? That should raise flags.

Detailed means the data reveals information broken down by specific production facilities or specific products, as examples. The higher level, the better. More detailed, lower-level information entails more risk.

Current means the information exposes what your business is doing in real time. The government once said that data should be at least 3 months old before it is exchanged, but machine learning and complex algorithms have since increased the value of historical data—making it possible that subscribers might be able to use even months-old data to discern future-facing strategies.

Don’t fill in the donut hole. Even when the information exchanged is not comprehensive, make sure that it is not the missing piece that, when combined with information that “everyone knows,” allows subscribers to act collusively. Even after the information exchange, those subscribers should still not be certain about how their competitors will act and react.

Asymmetry can be a bad fact. Suspicions are raised if the third-party reports are available only to companies who compete at the same level of the supply chain—and not to their suppliers, employees, and/or customers. The “give to get” idea (i.e., you must be able to provide the relevant data to receive the relevant data) can appear collusive.

The antitrust risks from all exchanges are not equal. Exchanging price, production, and cost information is risky. Exchanging tips on organization of a parts warehouse is less risky (though not riskless). Your antitrust reaction should be calibrated to the different levels of risk.

Voluntary surveys and periodic polling are preferred over direct downloads of internal ledgers and reports. You obviously would not share the latter directly with a competitor, so you should exercise equal caution before sharing it with a third party.

Don’t couple sensitivity with deanonymization. Flags should go up if subscribers are able to deanonymize sensitive information, i.e., identify which competitor supplied what information.

Even aggregated data poses risks. Ask whether subscribers can use algorithms or other methods to disaggregate data to predict competitors’ pricing or output strategies.

Complete or near-complete industry participation could appear collusive. If the data being shared represents all or most of the relevant industry, talk to counsel about risk mitigation. The risks increase if the third party discloses the identities of the participants (or they are otherwise known, obvious or can be inferred) and/or the industry is concentrated.

Third-party consultants should not advise subscribers how to use the information to raise total industry profits. Nor should consultants in their reports to subscribers identify opportunities to raise prices or restrict output or tell one subscriber how other subscribers are using the information.

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New York Is Not Okay with Non-Competes

January 1, 2024 | Bona Law PC

Author: Molly Donovan

Update: In December 2023, New York Governor Kathy Hochul vetoed the legislature’s proposed prohibition against employee non-competes. The Governor indicated that her “top priority was to protect middle-class and low-wage earners, while allowing New York’s businesses to retain highly compensated talent.” Carve-outs to the bill for highly-compensated employees and executives were discussed, but no agreement as to an income cut-off could be reached. Senator Sean Ryan has said that he expects the legislation to be reintroduced in 2024.

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$1.8 Billion Antitrust Verdict Against Realtor Groups Provides Lessons for Brokerages, Realtor Associations, and Multiple Listing Services Nationwide

November 7, 2023 | Bona Law PC

Authors: Molly Donovan & Aaron Gott

A Missouri jury awarded a class of home sellers $1.8 billion dollars in finding that the National Association of Realtors (“NAR”) and some of the nation’s largest real estate brokerages “conspired to require home sellers to pay the broker representing the buyer of their homes in violation of federal antitrust law.”

At the center of the case was NAR’s rule requiring sellers to pay a non-negotiable commission awarded to the buyer’s broker at a transaction’s closing (“Mandatory Payment Rule”). The brokerages then compelled their agents to belong to the NAR and adhere to the NAR’s rules. The resulting lack of competition for buy-side commissions caused inflated prices that were forced upon home sellers. Every brokerage in the industry understood that every other brokerage was behaving in this same way.

In addition to inflated buy-side rates, the scheme was reinforced by other anticompetitive practices, including “steering”—where buyer brokers “steer” their clients toward homes attached to a non-negotiable buy-side commission—as opposed to homes for-sale-by owner where an automatic buy-side commission may not be offered.

Another resulting problem is that small brokerages looking to attract buyers have a tough time competing. Most importantly, there’s no opportunity to compete on price because the local NAR groups have locked prices in with the following of the major brokerages. Because of that rule—and other NAR rules—innovations with respect to process or pricing have been very difficult to achieve.

So, why has the scheme worked if it’s so bad for consumers and innovators? Because the NAR has near-exclusive control over the MLS or multiple-listing service.

The MLS is an essential database for listing homes because most homes sold in the United States are found there. If a broker does not belong to NAR and/or does not follow the NAR’s rules, it cannot access the MLS and, therefore, cannot effectively compete for selling or buying clients.

This is of antitrust concern in its own right. And certainly, the Mandatory Payment Rule is not the only rule in the industry that has—or could—draw antitrust scrutiny. Rules against buying/selling homes that are “coming soon,” for example, are also restraints of trade that could be a problem. So are rules that fix any of the terms or conditions of selling or buying a home.

Many predict the entire industry will change as a result of the Missouri verdict, the ongoing competition-law litigations and investigations, and the reality that today, home buyers can do their own legwork to find homes without needing a broker’s access or market knowledge. A buyer broker’s role can sometimes be relegated to accessing lock boxes, providing fill-and-sign access to standard forms, and collecting the check.

So what can a brokerage do now to anticipate the changes and guard against future antitrust concerns? Here is some high-level guidance that brokerages ought to consider:

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Antitrust for Kids: Watch Out for Predatory Halloween…Pricing!!

October 19, 2023 | Bona Law PC

Author: Molly Donovan

At Argo Elementary, a group of kids gathers daily at lunch to buy and sell candy. The trading activity is a longtime tradition at Argo and it’s taken very seriously—more like a competitive sport than a pastime.

Candy trading doesn’t end once a 5^th grader graduates from Argo. It continues across town at Chicago Middle School—but instead of lunch, candy trading happens there at the close of each school day. (The middle school had banned lunchtime trading due to several disputes that grew out of hand.)

Now here’s where it gets complicated, and nobody knows why it works this way, but the average lunchtime price at Argo determines the starting price for trades later in the day at Chicago.

For example: the average selling price for a candy bar on Monday, lunch at Argo is $2.50. Monday after-school prices at Chicago also will start at $2.50.

There are rules about what kind of candy can be traded—so that one trade can be easily compared to another (candied apples-to-candied apples) for purposes of determining who’s “winning.”

And sometimes kids—particularly the older ones at Chicago—place bets on what will happen on a particular trading day in the future, e.g., I bet prices will reach $3 or I bet no more than 50 candy bars will get sold this Friday.

That’s it by way of background. Here’s our story.

Arthur D. Midland (“ADM”) is 9. He is the link between Argo and Chicago. Each day, ADM leaves Argo Elementary when school lets out, walks to Chicago Middle, announces the “start-of-trade” Chicago price based on the lunchtime Argo price, and Chicago trading begins. (ADM’s mother allows this because ADM’s older brother (Midas) also trades at Chicago—so the two boys can watch each other.)

At the start of the school year, ADM contrived a very clever scheme. He bet Midas that, on Halloween, Chicago prices would be very low—as low as $1. Midas said, “No way! September prices are already at $2.50. If anything, prices will increase as kids go candy crazy in October. I’ll take that bet.”

So, for every candy bar sold at Chicago on Halloween for $1 or less, Midas would owe ADM $1. And for every candy bar sold at Chicago for more than $1, ADM would owe Midas $1.

With that bet front of mind, ADM became the primary candy seller at Argo, and as Halloween neared, he flooded Argo with candy and sold it intentionally at very low prices—50 cents for a Snickers! (ADM had the requisite inventory because he was an avid trick-or-treater and had saved all his Halloween candy from years past.)

Due to ADM’s scheme, Argo prices got so low that some kids packed up their candy and went home—refusing to trade there at all.

Well, Halloween finally came and, as you can imagine, ADM made a killing on the bet—100 candy bars were sold at Chicago on Halloween at less than $1, forcing Midas to pay ADM his entire savings. This more than compensated ADM for whatever losses he incurred for under-selling at Argo.

Once Midas realized ADM’s trick, he was furious. Didn’t ADM cheat? Midas assumed—as did all candy traders—that bets derived from candy sales would be based on real—not artificial—market forces.

Did ADM get away with it?

So far, no.

My Muse: For now, plaintiff Midwest Renewable Energy has survived a motion to dismiss its Section 2 monopolization claim against Archer Daniels Midland.

The claim is based on allegations of predatory pricing—basically that the defendant’s prices were below an appropriate measure of its costs and that the low prices drove competitors from the market allowing the defendant to recoup its losses. (For more on predatory pricing, read here.)

In the ADM case, Midwest alleges that ADM manipulated ethanol-trading prices at the Argo Terminal in Illinois to create “substantial gains” on short positions ADM held on ethanol futures and options contracts traded on the Chicago Mercantile Exchange. Because the Argo prices determined the value of the derivatives contracts, by flooding Argo with ethanol that ADM sold at too-low prices, ADM allegedly was able to win big on the derivatives exchange—recouping whatever losses it incurred on the underlying asset.

On its motion to dismiss, ADM argued that Midwest had not sufficiently alleged that ethanol producers had exited the market due to ADM’s low prices or that ADM subsequently recouped its losses in the ethanol market. (ADM classed these arguments as going to antitrust injury.)

The Court agreed that Midwest was required to allege both that rivals exited the market and that recoupment was ongoing or imminent, but the court ruled Midwest’s allegations sufficient to do so.

Specifically, Midwest had alleged that 12 ethanol producers had either stopped or decreased ethanol production—which is enough at the motion to dismiss phase. The court said whether that alleged “handful” of plant closures had a discernible effect on consumers is a fact-intensive analysis not susceptible to resolution on the pleadings.

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Tell Me You’ve Never Run An Antitrust Compliance Program Without Telling Me You’ve Never Run An Antitrust Compliance Program

October 2, 2023 | Bona Law PC

Author: Steven Cernak

The Department of Justice’s challenge of certain Google actions raises interesting antitrust questions. But during the first week of the trial, the biggest issue seemed to be one aspect of Google’s antitrust compliance program. Some commentators were shocked to discover that Google’s lawyers advised the employees to avoid certain hot-button antitrust terms like “leverage” or “dominance.” Those of us who have implemented antitrust compliance programs for decades were shocked that anyone could be shocked by these ordinary compliance tactics. Below, I explain how such tactics can help meet the two goals of compliance programs.

Goal 1: Follow the Law

The first goal of compliance programs, obviously, is to help companies comply with the law. Everything else being equal, companies would prefer to avoid the real and reputational costs of being known as a law breaker. But complying with a law is not always easy. Sometimes the law is not clear — for example, Sherman Act Section 2 is very short but the actions that constitute monopolization are unclear at best. Sometimes the law, or its interpretation, changes — again, Section 2 is a good example as its interpretation has changed from 1960 to 2000 to today. Finally, the businesspeople who receive the training might be experts in business but definitely are not experts in all the laws that affect them. So, their lawyers must accurately, succinctly, and memorably tell them how to comply with the laws and then let them get back to their day jobs.

A list of words to avoid can be accurate, succinct, and memorable. The sales chief might not understand or remember all the intricacies of tying law but she might remember to ask for advice before using it in a memo or requiring the purchase of a second product before allowing sales of a wildly popular product.

Goal 2: Be Seen as Following the Law

Even if the compliance program does not work perfectly and the government or a private plaintiff accuses the company of violations, the compliance program can still help. For example, DOJ has started to give a company credit for a good, but not perfect, compliance program in its investigations and sentencing decisions.

More generally, a good program, perhaps even including a list of phrases to avoid, can also help the company explain to investigators, judges, or juries why its actions did not violate the law. During any investigation or trial, the lawyers will need to explain both those actions and the words used to describe them. Usually, the fewer explanations needed the better. So having the businesspeople avoid certain hot-button phrases, while still honestly getting their jobs done, will reduce the number of explanations necessary and ease the defense burden. The lawyers will still be forced to explain why a requirement to buy product B to get defendant’s wildly popular product A is not anticompetitive. But their burden will be eased if they do not also need to explain what some low-level marketing specialist meant two years ago in an email that suggested the company “leverage our dominance.”

As a result, the standard compliance advice is to be clear and honest in what you write. Will you remember six months or three years from now why you used that phrase? How will that phrase look on the front page of the [New York Times/Wall Street Journal/Automotive News/government’s brief]? To make that advice even clearer and more memorable for the businesspeople, sometimes the compliance program will give examples, even long lists, of words and phrases that will be difficult to explain and so should be avoided.

Why Such Advice Can Be Necessary

Now, that list of “forbidden words” cannot be the entire compliance program. As compliance specialists have known for a long time — and as the DOJ has made clear — multiple elements of a program must work together to create a “culture of compliance.” Merely avoiding certain words is unlikely to help if, say, the CEO mocks the need for such compliance programs or they are otherwise seen as merely “check the box” exercises foisted on busy workers by a busybody legal department.

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California Gets Even Tougher on Non-Competes

September 18, 2023 | Bona Law PC

Author: Molly Donovan & Luis Blanquez

California continues to lead the trend away from non-competes with a new law that packs yet another punch against employers’ use of these very common contractual restrictions on employee mobility.

Non-competes—also called restrictive covenants—typically prohibit an employee from taking employment with a rival firm once their current employment has ended. Their enforceability largely depends on their scope and the applicable state law.

In California, existing law already provides that, with few exceptions, “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” And, existing law also prohibits employers from trying to skirt the ban by trying to using forum-selection and choice-of-law provisions against California residents who work in California.

The new law goes even further. It states that non-competes are void regardless of where and when they were signed. It prohibits employers from attempting to enforce unlawful non-competes even if the employment occurred outside California. And finally, the law makes it a civil violation for an employer to enter into a prohibited non-compete. Employees can bring private actions against employers who violate the laws against non-competes, and prevailing employees are entitled to attorney’s fees.

The law was drafted by Orly Lobel, Warren Distinguished Professor of Law and Director of the Center for Employment and Labor Policy at the University of San Diego. Her research reveals that California employers still require employees to sign non-competes even when they are unenforceable under California law. Professor Lobel also found that non-competes continue to “stifle economic development, limit firms’ ability to hire,” “depress innovation and growth,” and are “associated with suppressed wages and exacerbated racial and gender pay gaps, as well as reduced entrepreneurship, job growth, firm entry, and innovation.”

Bona Law has extensive experience counseling companies and former employees about non-competes—an area that is increasingly dangerous under many states’ laws and can also draw scrutiny under federal antitrust law.

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McDonald’s & Monopsony: The Seventh Circuit Vacates District Court’s Dismissal of a Per Se No-Poach Theory

September 14, 2023 | Bona Law PC

Author: Molly Donovan

In an opinion written by Judge Easterbrook, and a major win for per se no-poach claims, the Seventh Circuit has vacated a district court’s dismissal of a Sherman Act, Section 1 no-poach claim against McDonald’s. The case involves clauses that McDonald’s formerly included, as standard language, in its franchise agreements that “barred one franchise from soliciting another’s employee.” The plaintiff claims that she was unreasonably restrained from switching franchises to take a higher-paid job because of the anticompetitive provisions.

The at-issue contract language was broad, covering solicitation and hiring and not ending until six-months after employment ended: “During the term of this Franchise, Franchisee shall not employ or seek to employ any person who is at the time employed by McDonald’s, any of its subsidiaries, or by any person who is at the time operating a McDonald’s restaurant or otherwise induce, directly or indirectly, such person to leave such employment. This paragraph [] shall not be violated if such person has left the employ of any of the foregoing parties for a period in excess of six (6) months.”

The restraint had teeth: an initial violation gave McDonald’s the right not to consent to a transfer of the franchise. Additional breaches gave McDonald’s the right to terminate the franchise.

And plaintiffs also alleged that the restraint “promote[d] collusion among franchisees, because each knew the other had signed an agreement with the same provision” – so long as everybody at least tacitly cooperated by not poaching, franchisees could keep wages below-market.

Plaintiff alleged only per se and quick look theories of liability—not rule of reason.

In the district court, the defendants argued that, because the restraint originated with McDonald’s corporate (the parent company), the restraint was merely vertical—and thus, not per se illegal. The district court disagreed: the provisions restrain competition for employees among horizontal competitors notwithstanding that the company at the top of the chain originated the agreement.

But the district court dismissed the per se theory because it found that the alleged restraint was ancillary to the franchise agreements. The analysis was curious because, although the court said that a restraint is ancillary only if it promotes enterprise and productivity, the court found it sufficient that the franchise agreements, taken as a whole, promoted enterprise because each franchise agreement increased output (more customers served). The district court did not examine whether the restraint itself promoted competition.

The Seventh Circuit held that was an error. While an “agreement among competitors is not naked if it is ancillary to the success of a cooperative venture,” increased output does not “justif[y] detriments to workers.” The antitrust laws are concerned with monopsonies (in this case, the cartelized cost of labor).

And simply because a franchise agreement increases output, the no-poach agreement itself may not promote output or any another pro-competitive goal. The question is: “what was the no-poach clause doing?” To be deemed ancillary, the no-poach itself must serve a procompetitive objective (such as preventing freeriding on a franchisee’s investment in worker training). The court suggested that an agreement’s duration and scope also may be relevant to resolving that question.

In any event, the Seventh Circuit ruled the answer to that inquiry could not be resolved on the pleadings because economic analysis is required. And “[m]ore than that: the classification of a restraint as ancillary is a defense, and the complaint need not anticipate and plead around defenses.”

In the end, the Seventh Circuit vacated the district court’s decision and remanded for its further consideration in light of the appellate review.

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