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.
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.
The decision is an important one for future litigants dealing with no-poach agreements that are part of a larger arrangement—being part of some larger arrangement is not enough by itself to escape per se liability or even discovery. The no-poach restraint must be justifiable on its own merits. The decision is also important for companies that are being asked now to agree (or asking others to agree) to no-poach, non-solicitation or other provisions that restrict competition for labor. Be sure to consult antitrust lawyers as these agreements are becoming increasingly dangerous. Per se liability subjects defendants to joint and several liability and trebled damages, plus criminal exposure: the DOJ, too, has stated that it will treat naked, horizontal agreements among competitors to restrain competition for labor as per se violations of the antitrust laws.