Eleventh Circuit’s Burger King opinion raises antitrust risks in franchising
Sherman Act challenges to “no-poach” clauses in franchise agreements have been languishing in federal courts for a few years now, but with evidence of decreasing vigor. Many franchisors have omitted such clauses in new agreements and/or committed to their non-enforcement. Burger King did both. And yet, the clause remained in extant agreements, prompting litigation by three employees of franchisees in the Southern District of Florida, Arrington et al v. Burger King Worldwide, Inc., Case No. 1:18-cv-24128.
Most private antitrust actions challenging no-poach clauses have been dismissed at the pleading stage, and indeed this was the case with the Burger King decision in the district court. The district court held on a motion to dismiss that the franchisor and its franchisees were incapable of forming an antitrust conspiracy, as they were a single economic entity for antitrust purposes. On the last day of August, the Eleventh Circuit reversed, Case No. 20-13561.
While the reversal itself may be unsurprising, the grounds for reversal are not only surprising but have the potential to expose the franchise model to antitrust claims in other situations. The Eleventh Circuit concluded that, in fact, franchisees and franchisors were capable of forming an antitrust conspiracy to restrain the market for labor. The franchise agreement, the court noted, afforded the franchisee discretion as to matters of employment, including hiring, firing, and rates of pay. Yet through the franchise agreement, the franchisor and its franchisees agreed to constrain those discretionary rights to prohibit movement of employees from one franchisee to another. That agreement constituted a contract, combination or conspiracy, in the words of the Sherman Act, under the antitrust laws.
Why should this concern franchisors and franchisees? If franchisors and franchisees can form an antitrust conspiracy, any meeting or agreement (even the franchise agreement itself, as in Burger King), poses an antitrust risk. For instance, franchise agreements typically allow the franchisee some discretion in forms of advertising; if the franchisor forms a regional ad counsel that dictates matters of advertising, is that an antitrust conspiracy? Advertising companies that are excluded from competing for franchisee’s business may think so. More pernicious is the fact that this decision suggests that all meetings between franchisors and franchisees, whether in a group or singly, should be curated by legal counsel to control the agenda and steer participants away from risky topics – and the Burger King opinion suggests that mundane topics like employment is among the risky topics.
In my humble opinion, antitrust claims challenging no-poach clauses in franchise agreements should ultimately fail unless they are limited to highly compensated or uniquely-situated employees. The potential effects of the Burger King opinion pose a greater danger beyond that context.