Hunton Employment & Labor Perspectives

Two years after jointly issuing its 2016 Antitrust Guidance for Human Resource Professionals with the FTC, the DOJ is now taking active steps to clarify its stance on no-poaching agreements.  On January 25, 2019, the DOJ filed a Notice of Intent to File a Statement of Interest in three different class action lawsuits brought by employees of fast-food franchises against their employers alleging that no-poaching agreements in franchise agreements violate antitrust law.

At issue in the class actions is whether agreements prohibiting franchises from hiring each other’s employees contained in agreements between a franchisor and franchisee within the same franchise system should be analyzed under the rule of reason, the per se rule, or the “quick-look” analysis.  Under the rule of reason, courts analyze whether a restraint is illegal by considering a variety of factors such as “specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.”  State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).  In contrast, a restraint is illegal per se “once experience with a particular kind of restraint” allows courts “to predict with confidence that the rule of reason will condemn it.”  Id.  According to the Notice filed by the DOJ, the quick-look rule is a “rarely-applicable version” of the rule of reason that is “unlikely to apply for the typical vertical franchisor-franchisee agreements.”

In the Notice, the DOJ takes the position that like vertical restraints, “certain horizontal restraints such as customer- and market-allocation agreements among competitors, including no-poaching agreements, that are reasonably necessary to a separate, legitimate business transaction or collaboration between the companies, also are assessed properly under the rule of reason.”  The Notice further provides that a no-poaching agreement between a franchisor and franchisee within the same franchise system is likely a legitimate business transaction or collaboration, and is therefore subject to analysis under the rule of reason.  And, the franchise model by itself does not constitute a “hub and spoke” conspiracy that warrants per se or quick-look treatment.  In contrast, the FTC and DOJ’s 2016 guidance provides that “naked” no-poaching agreements are “per se illegal,” and the DOJ may “bring criminal, felony charges against the culpable participants in the agreement, including both individuals and companies.”

The DOJ’s position on no-poaching agreements contained in franchise agreements is a welcome update for franchises following the 2016 guidance.  While a per se rule would automatically deem such agreements unlawful, applying the more-lenient rule of reason will allow at least some no-poaching agreements to be permissible.

The DOJ is expected to file its Statement of Interest prior to a motion to dismiss hearing in the class actions currently set for March 20, 2019.