In order to avoid a lawsuit by the Washington State Attorney General, seven fast-food chains with store locations nationwide agreed to no longer enforce “no-poach/no-hire” provisions in their franchise agreements and to remove the employment restrictions from any future franchise agreements. Bob Ferguson, the Washington State Attorney General, announced that his office is negotiating similar agreements with other fast-food franchisors.
No-poach and no-hire provisions prohibit franchisees from recruiting or hiring each other’s employees. While these provisions are intended to protect franchisees from having their employees recruited away by other franchisees, these provisions have recently been the subject of antitrust scrutiny on the basis that they are anticompetitive. In the last year, no-poach and no-hire provisions ancillary to franchise agreements have received considerable attention from law enforcement agencies, politicians and class action lawyers. As we reported in an April 2018 Client Alert, the U.S. Department of Justice, Antitrust Division, and the Federal Trade Commission issued joint guidance that they consider “naked” no-poach or no-hire provisions to be illegal restraints of trade in violation of the Sherman Act. The DOJ has threatened to pursue criminal charges against participants in these agreements, and filed suit against a number of railroad brake manufacturers for using no-poach and no-hire provisions.
In Washington, Senators Cory Booker and Elizabeth Warren proposed legislation earlier this year to make no-poach and no-hire provisions in franchise agreements illegal. On the civil litigation front, class action lawsuits on behalf of affected employees have been brought against fast-food franchisors McDonalds, Pizza Hut, Jimmy John’s and Carl Jr.’s in state and federal courts across the country. And, on July 9, attorneys general in 10 states and the District of Columbia announced that they are similarly investigating no-hire provisions in franchise agreements of fast-food franchisors.
Whether no-poach or no-hire agreements ancillary to franchise agreements are illegal under the Sherman Act is an open question. No court has yet ruled that a no-hire agreement between a franchisor and franchisee is either per se illegal or illegal under a rule-of-reason analysis. This legal uncertainty has not been comforting to fast-food chains, but it seems they have determined that the litigation expense and risk of defending a no-hire provision outweighs its business benefit.
In light of these developments, challenges to no-poach/no-hire provisions from law enforcement agencies and the class action bar likely will increase. Companies using no-hire or no-poach provisions, particularly those that are sweeping in scope and time, should review the reasons behind them and ensure that a procompetitive benefit flows from them. If there is no logical and demonstrable connection between the provision and that procompetitive benefit, then the provisions should be eliminated. If the provisions are reasonably necessary to achieve one or more procompetitive benefits, companies should ensure that the provisions are drafted narrowly. Companies undertaking reviews of these types of arrangements should be sure to conduct the review with counsel in order to protect the factual investigation and legal assessment.