The Complexities of Litigating a No-poach Class Claim in the Franchise Context
| Publication year | 2019 |
| Author | By Jason Hartley and Fatima Brizuela |
By Jason Hartley and Fatima Brizuela1
After a week of training at Returns R Us ("RRU"), Paloma Navarro was excited to start her new job as a tax preparer. Although her starting hourly wage was not very high, she saw a future with RRU, a nationwide tax services company with nearly 1,000 stores in 30 states. At least it was a big improvement over her prior work as an executive assistant who did little more than run menial errands for an arrogant senior law partner. RRU presented Paloma with the opportunity to start a career and grow. After all, Paloma knew that RRU had hundreds of locations around the country. She could build her experience at her local branch, work hard, and eventually move to a store near the coast, fulfilling her dream of living by the ocean.
Paloma applied to location after location in her favorite coastal cities. But she could not even get an interview despite responding to advertisements from RRU franchises that were specifically looking for workers with her precise skills, and each advertising a nearly identical compensation range for Paloma's position. It was not until she followed up with a call to one of those places that she learned the real reason for her rejections. "We can't hire you," said the manager of that RRU store. "There is a no-poaching provision in our franchise agreement. We aren't allowed to solicit or hire anyone who works at another RRU location. Sorry." This was devastating news to Paloma. She could not believe that her years of hard work for RRU meant that she had to work for that same RRU franchise or change companies. She decided to see a lawyer.
Karen Danielle was an accomplished trial lawyer. She had scored some of the largest verdicts for her employment clients, both individually and in class actions. Paloma came to her distraught. After some consoling, Karen answered Paloma's first question, "What, exactly, is a no-poach agreement?"
A no-poach agreement is made between two or more entities (including franchisees of the same company or competitors within an industry) not to compete for each other's employees, either during their active employment or for a period after termination of their employment. No-poach agreements may include agreements not to recruit, solicit, hire or do anything that could create opportunities for an employee to move from one company to another, or even from one location to another.
"Do I have a case and if so, can you take it?" asked Paloma. Karen paused. Paloma could have a case, and Karen could conceivably take it, but Karen had to evaluate this developing area of law. She had not litigated a no-poach case before, and was unsure how courts were treating them. In particular, whether no-poach provisions were legal in the franchise context seemed a potentially thorny question. Plus, she was not terribly experienced with antitrust law. Karen promised to do some research and get back to Paloma very soon. She started with the standard that a court would use when reviewing these antitrust claims.
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Section 1 of the Sherman Act prohibits every contract, combination, or conspiracy, in restraint of trade or commerce among the several States.2 These restraints can be "horizontal" in nature, such as a conspiracy between competitors to jointly raise the prices of the commodity product they sell, or "vertical," such as agreements to restrain trade between companies at different levels of distribution.
There are three major standards of review in federal Section 1 antitrust cases. The first is the per se standard, which is a bright-line test that holds that certain conduct is automatically illegal if it is proven to have occurred such that no further inquiry into the effect on the market or intent of those engaged in the violative conduct is necessary. Most horizontal restraints, such as price-fixing, market allocation agreements, tying agreements, bid-rigging, and certain group boycotts are subject to per se antitrust liability.3 These horizontal agreements between separate and unrelated competitors have "such predictable and pernicious anticompetitive effect and such limited potential for procompetitive benefit that they are deemed unlawful per se."4
The second standard of review is the rule of reason—a multi-factored reasonableness test designed to evaluate the purpose and effect of the challenged conduct.5 Many vertical agreements are subject to the rule of reason standard, including loyalty discounts, bundling, exclusive dealing, and resale price maintenance agreements under federal law. Courts applying the rule of reason must examine the likely anticompetitive effects of the vertical agreement at issue, along with its beneficial and legitimate business justifications.6 The policy behind this higher standard of proof is that some agreements among vertically-involved companies may actually deliver efficiencies to the market, be pro-competitive, or are ancillary to a legitimate competitive agreement.
The third standard of review is the product of judicial rule-making, and is something of a hybrid between the other two standards. It involves a "quick look" version of the rule of reason and requires that the defendant advance an affirmative defense in the form of a legitimate justification for suspect conduct before the court can proceed to a fuller assessment of any competitive effects.
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Notably, Section 1 of the Sherman Act is not limited to arrangements to fix sales prices. Agreements among competing buyers to fix the prices at which they purchase can also violate Section 1, and it is this formulation that brings no-poach agreements within the purview of the Sherman Act.7 A no-poach agreement between competing employers is certainly not the traditional commodity sales price-fixing agreement. But it is an agreement among employers to lower the price paid for labor, and thus, it violates the antitrust laws. Antitrust laws can and have been applied to labor markets using the same analytical approach used in evaluating consumer product markets.8 Whether this approach is in fact suitable when analyzing challenges to no-poach franchise agreements remains to be seen.
When competing in the same labor markets, no-poach agreements between any two or more employers are considered horizontal restraints, regardless of whether the employers are competitors in the downstream product markets for the sale of goods or services. Thus, naked no-poach agreements between totally separate horizontal labor market competitors are subject to the less-stringent per se standard of review.9 Such agreements are condemned by the courts, the Department of Justice ("DOJ") and the Federal Trade Commission ("FTC"). In fact, both the DOJ and the FTC together announced their policy against no-poach agreements as per se violations of Section 1. In the Fall of 2016, the DOJ and the FTC jointly issued written guidance entitled, "Antitrust Guidance for Human Resource Professionals."10 According to the Antitrust Division, "[n]o-poach agreements are naked if they are not reasonably necessary to any separate, legitimate business collaboration between the employers . . . [and] are per se unlawful because they eliminate competition in the same irredeemable way as agreements to fix product prices or allocate customers."11 From that point forward, the DOJ "intended to proceed criminally against naked no-poach and wage-fixing agreements."12
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In an unusual move, however, in March 2019 the DOJ modified its position with respect to no-poach agreements made within a single franchise, reasoning that because single-franchise no-poach agreements are part of a larger franchise agreement between the parties, they do not qualify as "naked" restraints.13 The DOJ's 2019 position clashed with the position taken by several state attorneys general, led by the State of Washington, condemning no-poach agreements within franchises as per se antitrust violations. In fact, the Washington Attorney General ("AG") had been so successful in its enforcement actions that by August 2019 it had convinced dozens of companies to willingly withdraw their franchise no-poach agreements without filing a single complaint.14 The AG's position that such no-poach agreements constitute per se violations no doubt influenced negotiations between the companies and the States. This placed the AGs and the DOJ at odds on the issue of franchise no-poach agreements.
The DOJ's Statement of Interest sparked significant opposition from the AG and the American Antitrust Institute ("AAI").15 The AAI drafted a position letter to the DOJ characterizing the DOJ's position on the standard of proof in franchise no-poach agreements as "misguided" and expressed that it was "concerned that the Statement of Interest threatens to lead district courts astray and discourage antitrust challenges to patently anticompetitive labor-market restraints that exploit the most vulnerable workers in the franchise sector."16 Indeed, more than half of the major franchise companies in the U.S. include no-poach clauses in their franchise agreements, and these agreements are more often adopted in low-wage, low-skilled industries.17 In support of its position, the DOJ responded to the AAI, citing an AAI legal policy paper published in 2018 for the proposition that the rule of reason is the applicable standard, "unless the arrangement amounts to a hub-and-spoke conspiracy."18 In its position letter, however, the AAI made perfectly clear that it was prepared to "clarify that [it] disagrees with the interpretations of the law offered in the Statement of Interest . . . and to explain the basis for [AAI's] belief that the Division's approach to franchise no-poaching cases is unsound."19
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The conflicting positions...
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