The recent antitrust attacks on no-poach clauses encourage insomnia among franchise lawyers. But is the attack serious or just a flash in the pan, soon to be extinguished?
The insomnia began in the tech industry, where front-line players with huge market shares agreed not to poach each other’s employees. No-poach agreements among dominant market players, the Department of Justice opined, would have a significant depressive effect on employee salaries. The DOJ asserted that such agreements were per se illegal under the Sherman Act. The DOJ’s Statements of Interest in several cases attacking no poach agreements prompted several consent decrees banning the clauses.
No-poach provisions are a common feature of Franchise Agreements, so of course the DOJ’s actions caused a minor panic in the franchise industry, prompted civil lawsuits, and influenced enforcement actions by various state antitrust enforcement agencies. The state of Washington has been especially aggressive, extracting agreements to refrain from enforcing no-poach clauses throughout franchise systems. The DOJ, however, saw a clear distinction between no poach clauses in franchise agreements and those in other contexts. In franchise agreements, no poach clauses are ancillary to a business relationship in which the clause functions to support working relationships among those in the system. This was the case in Deslandes v. McDonald’s USA, LLC, 2018 WL 3105955 (N.D. Ill. June 25, 2018).
As ancillary restraints, no poach clauses in bona fide franchise agreements are generally subject to rule of reason (“ROR”) antitrust analysis. ROR analysis analyzes in detail the actual competitive impact of the restraint in the affected marks. A per se violation, by contrast, is automatically illegal regardless of market impact. Market power is essential to a Sherman Act ROR analysis. The franchisor that enjoys dominance over a market segment is as rare as a white rhino. No market power, no Sherman Act violation. However, the State of Washington has not acceded to the DOJ’s view and may still pursue nationwide relief in challenging such clauses.
Bottom line (with some hazy crystal ball gazing): No reason to panic (unless you’re in Washington), but consider carefully whether a no-poach clause is critical to the franchise system. If not, why run even a small risk?