A PYMNTS Company

Franchise No-Poach Agreements: Is Reform on The Horizon?

 |  January 28, 2022

By: Jeffrey Martino &Tyson Herrold  (Antitrust Advocate)

In 2016, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued Joint Guidance for Human Resource Professionals warning that no-poach agreements restricting employee hiring may violate the antitrust laws.[1] That guidance, along with pre-guidance litigation, has established some clear ground rules. Naked no-poach agreements are per se illegal under §1 of the Sherman Act,[2] while ancillary no-poach agreements, those related to legitimate, procompetitive joint ventures[3] and corporate acquisitions,[4] are subject to the rule of reason, which considers whether the agreement is, on balance, anticompetitive.

Yet, four years later, there remain stubborn pockets of disagreement—for example, no-poach clauses in franchise agreements. Federal courts are struggling to reach a consensus on how to analyze them under the antitrust laws. And there’s a lot at stake. Statistics show more than 8 million Americans work in the franchise sector. The stakes are high for employers too. If the rule of reason applies, private litigation may be financially impractical; the necessity of proving a relevant geographic market in applying the rule of reason makes it difficult, if not impossible, to certify sizable class actions.[5] If the per se rule applies, the Sherman Act’s treble damages and attorneys’ fees provisions can prove disastrous.

The Current State of Confusion in the Federal Courts

Federal courts have taken at least four views on franchise no-poach agreements:

  1. Franchisor-franchisee conspiracies are impossible: Courts in the Southern District of Florida, the Ninth Circuit[6] and the Western District of Washington[7] have held in no-poach cases that franchisors and franchisees are incapable of conspiring because they comprise a single corporate enterprise. In Arrington v. Burger King Worldwide, Inc., a Southern District of Florida case, the court cited the Supreme Court’s decision in Copperweld v. Independence Tube[8] and concluded: “Burger King’s relationship with its franchisees more closely resembles a corporation organized into divisions or de facto branches, or that of a parent-subsidiary, than the relationship between [competitors].”[9] In support, the court cited the franchisees’ “payment of royalties” to the franchisor, as well as their “joint advertising budget” and “uniform menu,” among other factors.[10] “The relationship here is more than symbiotic,” the court observed, “it is totally derivative.”[11] The ruling has been appealed to the Eleventh Circuit, where it is currently pending.[12]