District Court Dismisses Franchise No-Poach Case, Applies Antitrust Rule of Reason

18 August 2022 Legal News: Distribution & Franchise Publication
Author(s): Elizabeth A. N. Haas Ian T. Hampton

A recent federal district court decision may have lasting consequences for plaintiffs mounting antitrust challenges to no-poach agreements, at least in the context of franchises. No-poach restrictions can take many forms but, at their core, they restrict one employer from soliciting or hiring another employer’s workers. No-poach provisions have come under close scrutiny in the last several years from both government enforcement authorities and private plaintiffs, challenging these provisions as unreasonable restraints on trade.  

Plaintiffs in Deslandes v. McDonald’s USA, LLC, No. 17-C-4857 (N.D. Ill.) challenged no-poach provisions in McDonald’s franchise agreements as violations of Section 1 of the Sherman Act. The provisions in question barred McDonald’s franchisees from employing or soliciting each other’s workers for up to six months after the worker left another franchise, which plaintiffs said prevented them from taking higher-paying jobs at other McDonald’s restaurants. 

As we reported here, the court previously rejected the plaintiffs’ bid to certify a nationwide class of McDonald’s workers. The court denied class certification primarily because individual issues would predominate over common ones. That conclusion stemmed from the court’s holding that the antitrust rule of reason applied to the no-poach provisions, which meant that plaintiffs would need to establish anticompetitive effects in each individual relevant market. The court found that because there were “hundreds or thousands” of potentially relevant local labor markets at issue, individual questions about the no-poach provisions’ effects within those markets, like the number of McDonald’s competitors who could blunt the provisions’ impact on wages, precluded class certification. The court’s ruling left only the individual claims of the two named plaintiffs in the case.

The court recently dismissed those remaining claims. Deslandes v. McDonald’s USA, LLC, No. 17-C-4857, 2022 WL 2316187 (N.D. Ill. June 28, 2022). In so doing, the court reaffirmed its earlier holding that the rule of reason applies to no-poach provisions in franchise agreements. The court rejected plaintiffs’ arguments that the agreements should be either declared per se illegal or rejected after only a quick look. 

The court relied heavily on the Supreme Court’s recent decision in NCAA v. Alston     U.S.     , 141 S.Ct. 2141 (2021). There, the Supreme Court held the Sherman Act “presumptively” calls for rule-of-reason analysis and that “quick look” analysis is reserved “only for restraints at opposite ends of the competitive spectrum … rather than restraints in the great in-between….” Id. at 2155.  The Deslandes court found that the no-poach provisions at issue fell in the “great in-between” of restraints that require rule-of-reason analysis. It further concluded that courts do not have enough experience with no-poach provisions in franchise agreements to “predict with confidence that they must always be condemned.” The court also reasoned that the no-poach provisions could not be illegal per se because they were “ancillary” to the underlying franchise agreements, which served a procompetitive purpose in that the underlying agreements “increased output of burgers and fries.”

Having determined the rule of reason applies, the court found that the plaintiffs did not allege either a relevant market or market power. The court rejected as implausible plaintiffs’ attempt to define the relevant market narrowly as employment at McDonald’s restaurants, finding that plaintiffs could have sold their labor to other fast-food outlets. The court also found that plaintiffs could not plausibly allege that McDonald’s had market power in the markets where they worked, given that there were hundreds of other competing fast-food restaurants nearby. For that reason, the court additionally denied as futile plaintiffs’ request to amend their complaints, noting that it had already given the plaintiffs a chance to fix the complaints. 

The decision’s reverberations are already being felt. Defendants in the first private follow-on suit to the Department of Justice Antitrust Division’s (DOJ) criminal antitrust case against DaVita, Inc. (In re Outpatient Medical Center Employee Antitrust Litigation) filed a notice of supplemental authority in support of their motion to dismiss, citing the Deslandes decision days after it came down. Defendants argued that like the no-poach provisions in Deslandes, the alleged non-solicitation agreements in their case fall in the “great in-between” of restraints subject to the rule of reason and not the per se rule as plaintiffs claimed. The DOJ, which had previously intervened in the case, promptly responded. The DOJ argued that the no-poach provisions in Deslandes were ancillary to a franchise agreement, whereas the agreements in Outpatient Medical Center were so-called “naked” or stand-alone restraints on trade. Thus, while taking no position on whether Deslandes was correctly decided, the DOJ sought to contain the precedential effect of the decision, arguing “it held only that the rule of reason applies to ancillary no-hire agreements in the franchise context, which are distinct from the naked agreement (outside of the franchise context) alleged here.”

Whether Deslandes will have a lasting effect and what it might be are now in the hands of the Seventh Circuit, where plaintiffs have taken an appeal.

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