Applying the Rule of Reason, District Courts Reject Nationwide Classes in Franchise No-Poach Cases

Two recent district court decisions out of the Seventh Circuit illustrate the difficulty of maintaining antitrust class actions that seek to challenge employer “no-poach” agreements.  In DeSlandes v. McDonald’s USA, LLC, No. 17-C-4857, 2021 WL 3187668 (N.D. Ill. Jul. 28, 2021), the court denied plaintiff’s motion to certify a nationwide class of fast-food workers alleging that a no-poach provision in their employers’ franchise agreements violated Section 1 of the Sherman Act.  The provision barred McDonald’s franchises from employing or soliciting each other’s workers for up to six months after the worker left the company, which plaintiff alleged decreased workers’ mobility and suppressed their wages.  The court denied certification based on a finding that plaintiff failed to satisfy the predominance requirement of Rule 23(b)(3).  Days later, another district court in the same circuit followed suit, refusing to certify a nationwide class of Jimmy John’s restaurant workers making substantially the same allegations.  See Conrad v. Jimmy John’s Franchise, LLC, No. 18-cv-00133, 2021 WL 3268339 (S.D. Ill. Jul. 30, 2021).

Relying on the United States Supreme Court’s recent decision in NCAA v. Alston,      U.S.     , 141 S. Ct. 2141 (2021), both courts held that the rule of reason applies to no-poach provisions in franchise agreements.  The rule of reason is one of three standards of review (the per se rule and the quick look test being the others) used by courts to analyze whether any particular restraint on trade is unreasonable under federal antitrust law.  Under the rule of reason test, the fact finder must weigh all of the circumstances of the case to decide whether the questioned practice imposes an unreasonable restraint on competition.  The courts rejected plaintiffs’ arguments that the agreements should be subject to more abbreviated forms of review and either declared per se illegal or rejected after only a quick look.  In Alston, the Supreme Court observed that such blanket condemnations of industry practices should be rare, noting that “we take special care not to deploy these condemnatory tools until we have amassed ‘considerable experience with the type of restraint at issue[.]’” Id. at 2156 (citation omitted).  The McDonald’s court found that it did not have enough experience with no-poach provisions in franchise agreements to condemn them without undertaking the fuller review offered by the rule of reason.  For its part, the Jimmy John’s court held that the rule of reason applied because a nationwide franchise’s use of “intrabrand restraints,” such as no-poach provisions, arguably helps the company compete with other brands by ensuring cooperation among the franchisees.

Having determined the rule of reason applies, both district courts found that the analysis required under the rule raised individual issues precluding class certification.  In McDonald’s, the court focused on the rule of reason’s requirement that plaintiffs show a substantial anticompetitive effect in the relevant market.  The court rejected plaintiff’s theory that McDonald’s workers sell their labor in one national market, finding instead that the relevant market for each plaintiff’s labor is “a small, geographic area” and there are likely “hundreds or thousands of relevant markets among the class members.”  McDonald’s, 2021 WL 3187668, at *13.  The court found that in some of those markets, McDonald’s restaurants will have so many competitors that a no-poach agreement is unlikely to have anticompetitive effects.  However, the court found that, in markets with little outside competition, a no-poach agreement restricting the movement of workers between franchises could lead to wage suppression and other harms.  Because the effects on each market will have to be judged separately, the court concluded that individualized questions predominate over common ones.  Echoing that same reasoning, the Jimmy John’s court found that “individualized inquiries would . . . be needed to determine whether a given Jimmy John’s employee could have been injured given the varied and dynamic labor markets across the country.”  Jimmy John’s, 2021 WL 3268339, at *11.

The Jimmy John’s decision also underlines other difficulties plaintiffs may face in certifying a class in this area.  The court there held that because franchises unevenly enforced the no-poach provision, with some ignoring it outright and others granting waivers to select employees, individual proof would be needed to establish which franchises were involved in the alleged conspiracy.  The court also found that individual inquiries arose from the fact that different franchise agreements incorporated different no-poach language, with some barring the hiring of managers (but not workers) and others prohibiting the solicitation of workers alone.  In addition, the court found that the testimony of Jimmy John’s damages expert showed that while some workers saw lower wages as a result of the no-poach provision, others suffered no wage suppression at all.  The court found these individual issues “overwhelm[ed]” the questions common to the proposed class.  Id. at *9.

The Jimmy John’s court separately found that the named plaintiff was atypical of the class under Rule 23(a)(3) because he did not try and thus was never denied the opportunity to move from one franchise to another.  The court also found that he was not an adequate class representative pursuant to Rule 23(a)(4) because, as a manager charged with enforcing the no-poach provision, his interests conflicted with those of rank-and-file employees.

While the McDonald’s decision may be appealed to the Seventh Circuit (the Jimmy John’s case has since settled), the decisions call into question whether a nationwide class can be certified in no-poach cases, where individual issues related to hundreds of local labor markets are likely to predominate.  More broadly, the cases illustrate the potential roadblocks facing plaintiffs who seek to challenge restraints scrutinized under the rule of reason, as the individual inquiries that rule entails may frustrate plaintiffs’ ability to show predominance.