Why Franchise Businesses Should Be Re-Evaluating Their “No-Poach” Provisions

Smart Summary

  • Non-compete and no-hire provisions in franchise agreements have come under scrutiny from the DOJ and FTC in recent years
  • There has been a corresponding rise in class action suits filed against franchise businesses alleging practices that suppress wages + injure workers
  • Franchisees should re-consider whether they need these restrictions in their franchise agreements, as having them may expose the business to costly litigation
  • Non-competition provisions between franchisees and their employees may be a less risky alternative

Employee non-competition restrictions contained in an agreement between an employee and his or her employer typically escape antitrust scrutiny because restrictions on individual employees typically have no meaningful impact on the greater market for employee services. More recently, however, employee non-competition restrictions have come under increased scrutiny based upon a feeling that these restrictions unfairly inhibit employee job mobility. During the Obama administration, some agencies within the federal government expressed opposition to employee non-competition restrictions.

Franchise Businesses Face Increased Antitrust Scrutiny Nationwide

In 2016, the U.S. Department of Justice and the Federal Trade Commission announced that agreements among employers not to “poach” each other’s employees would be a special focus of the agencies’ enforcement efforts. Agreements between competitors never enjoyed the same legal protection granted to agreements between employers and their employees. Rather, agreements between competing employers were viewed as anti-competitive restrictions that directly implicated federal antitrust law.

As one example, the attorney general of Washington has placed an emphasis on challenging “no-poach” provisions in franchise agreements. These challenges are based upon the premise that franchisors and franchisees are potential competitors for employees and that the no-poach restrictions should be viewed as an agreement between employers that suppresses the market for employee labor and the wages of such employees. Notwithstanding the fact that the Washington AG’s enforcement efforts have failed to produce any increase in franchisor and franchisee employee wages, the enforcement efforts have proven to be lucrative for the Attorney General’s Office. Enforcement efforts target franchisors who have a presence in Washington State (including a franchise location or locations in the state) and extract settlements pertaining to the franchisor’s entire franchise system.

Class Action Suits on the Rise

“No-poach” provisions in franchise agreements typically prevent franchisees from hiring employees of the franchisor or other franchisees. The theory behind challenging such provisions is that they impact the market for employee labor by limiting employee mobility and suppressing wages. The primary defenses to such claims are that:

  • the restrictions are permissible in the context of the franchisor/franchisee relationship;
  • there is no wage suppression as a result of such agreements; and
  • there is no injury created by such agreements that is of the type that the antitrust laws were intended to prevent (i.e. antitrust injury).

Encouraged by enforcement authority opposition to franchisor/franchisee “no-poach” restrictions, private plaintiffs and class action lawyers are exploiting this opposition to these contractual restrictions, and there has been an increase in class action lawsuits challenging “no-poach” agreements and “no-hire” agreements.

This trend has special significance for franchisors and franchisees. Last week, a federal court in Chicago denied a motion to dismiss a proposed class action suit against McDonald’s that alleged that McDonald’s and its franchisees agreed not to poach one another’s employees. (Turner v. McDonalds USA, LLC, et al., Case No. 19-C-5524 (N.D. Ill.)) Of particular interest is the Court’s conclusion that, although the plaintiff had not applied for work at any other McDonald’s restaurant, she still may have suffered an injury. The Court held that, because she alleged her wages were suppressed due to the “no-hire” agreement, she may have suffered injury that gives her standing to sue. The Court did not find that the plaintiff did, in fact, suffer injury, but is allowing the case to move forward and giving the plaintiff the opportunity to conduct discovery and prove injury.

By contrast, at the end of last month, a federal district court in Florida held that franchisors and franchisees are not separate entities for legal purposes of conspiring with one another, and the court dismissed the plaintiffs’ claims challenging “no-hire” provisions in a Burger King franchise agreement. (Arrington v. Burger King Worldwide, Inc., Case No. 1:18-cv-24128 (S.D. Fla., March 24, 2020)). The outcome in the Burger King case in Florida is irreconcilable with the outcome of the McDonald’s case in Illinois. While the decisions focused on different legal principles, both decisions relate to the fundamental question of whether contractual restrictions between a franchisor and franchisee related to employee hiring implicate economic and legal principles of antitrust law. At the moment, the answer to that question is still disputed.

Recommendation for Franchise Businesses

The authors of this article remain skeptical of the viability of antitrust legal theories premised upon the notion that “no-poach” and “no-hire” restrictions have a negative economic impact upon the market for employee services and wages.

Nevertheless, given the legal expense involved in defending against such claims, particularly in the context of putative class action litigation, franchisors should re-evaluate the necessity of “no-poach” and “no-hire” restrictions in their franchise agreements. This is especially true for franchisees lacking high geographic concentration among store locations, where there may be little, if any, benefit to the franchisor from such provisions. In most cases, such provisions are included primarily to prevent intra-system squabbles among franchisees, rather than to protect any actual economic competitive interest.

A less risky alternative to the inclusion of “no-poach” and “no-hire” restrictions in franchise agreements is to have franchisors and franchisees directly enter into non-competition restrictions in agreements between the employers (store owners/operators) and their employees.

Ralph Breitfeller is of counsel with Kegler Brown and has decades of experience advising clients in antitrust and competition matters. He can be reached directly at [email protected] or (614) 462-5427.

Robert Cohen chairs Kegler Brown’s litigation department and was recognized as the 2019 Lawyer of the Year for Antitrust Litigation in Columbus by The Best Lawyers in America. He can be reached directly at [email protected] or (614) 462-5492.

Kacie Davis is the chair of Kegler Brown’s Franchise + Distribution practice where she counsels franchisees and franchisors on their comprehensive business and employment strategy. She can be reached directly at [email protected] or (614) 462-5402.