Anti-Poaching Clauses Continue to Draw Focus of State Regulators and Plaintiffs’ Lawyers
On December 20th, the Washington State Attorney General announced that it had reached agreements with another 7 franchisors to eliminate anti-poaching clauses from their franchise agreements, joining 39 others who signed similar agreements with the state earlier in the year. On December 4th, Papa John’s became the latest franchisor to be sued in a class action alleging that its franchise agreement’s anti-poaching clause violated antitrust laws. In the latter half of 2018, at least three courts permitted similar claims to survive motions to dismiss. These enforcement and litigation trends are likely to continue in 2019. With renewal season quickly approaching, franchisors who still have anti-poaching clauses in their franchise agreements should take action to remove them from their agreements.
The Department of Justice kicked off 2018 by targeting its criminal and civil enforcement efforts against anti-poaching agreements between employers. The Department has taken the position since 2016 that “naked” anti-poaching agreements violate antitrust laws. State regulators and plaintiffs’ lawyers have heard the Department’s message, and quickly ramped up their own enforcement and litigation activities against franchisors in the latter half of 2018.
The Washington State Attorney General has led the charge on behalf of state regulators, now boasting 47 agreements with franchisors to eliminate anti-poaching clauses from their franchise agreements nationwide in exchange for avoiding enforcement actions. Led by the Massachusetts Attorney General, attorneys general in California, Illinois, Maryland, Maine, Minnesota, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, and Washington D.C. have also signed on to conduct investigations into franchisor use of anti-poaching clauses in their own states.
There are now numerous class actions pending against franchisors across the country seeking to recover damages for wage suppression on the basis that their franchise agreements’ anti-poaching clauses violate anti-trust laws. These claims are attractive to plaintiffs’ lawyers because of the potential for large class sizes, treble damages, joint and several liability, and attorneys’ fees. The most recent franchisors to be named as defendants in antitrust class actions are Papa John’s,1 Jiffy Lube,2 and H & R Block.3
No franchisors have been successful in obtaining dismissal of the recent antitrust class action claims arising from anti-poaching clauses. In fact, three courts have denied franchisors’ motions to dismiss the claims. Most recently, in Yi v. Cinnabon Franchisor SPV, LLC,4 the district court held that the plaintiff’s allegations regarding the franchisor’s anti-poaching clause could constitute a horizontal restraint in violation of antitrust laws under either a full or intermediary analysis of its reasonableness, but did not constitute a per se violation. Earlier in 2018, the district court in Deslandes v. McDonald’s USA LLC reached a similar result,5 but in Butler v. Jimmy Johns Franchise LLC,6 the district court left open the possibility that the anti-poaching clause could constitute a per se violation of antitrust laws.
Nevertheless, franchisors have several strong defenses to antitrust claims arising from anti-poaching clauses, which are not truly “naked” restraints on trade, but are instead ancillary to the license granted under the franchise agreement. As a result, courts should evaluate the reasonableness of anti-poaching clauses in an intra-brand context by balancing the pro-competitive effects of encouraging training and promoting the brand over others offering similar goods and services in the applicable output market. Plaintiffs will also face challenges establishing that individual franchisors have sufficient market power to suppress wages where the relevant input market must include not only employment in the franchisor’s system but also employment with reasonable substitutes for the franchisor’s system. As with most class actions, the real issue may turn on class certification, as plaintiffs will need to establish that all of the class members suffered actual injury based on more than just pure statistical modeling.
Anti-poaching clauses are intended to promote the brand by protecting franchisees’ investments in their employees. They also benefit employees, who are more likely to receive training opportunities when franchisees are not concerned about losing their investments to others in the system. But there is a growing trend against restrictive employment covenants across many sectors of the economy. In recent years, courts and legislatures have begun to impose limits on restrictive employment covenants, requiring that they be narrowly tailored to serve legitimate business interests and prohibiting their applicability to low wage, non-managerial positions. Franchising is now the latest target of this trend as a result of its regulated nature and important role in the economy.
As a result of the actions of state regulators and plaintiffs’ lawyers, the risks of anti-poaching clauses almost certainly outweigh their benefits. If you are a franchisor with anti-poaching clauses in your franchise agreements, you should contact an attorney with experience in this area for assistance with the upcoming renewal season.
1 Page v. Papa John’s International, Inc., Case No. 3:18-CV-835 (W.D. Kent. Dec. 18, 2018).
2 Fuentes v. Jiffy Lube International, Inc., Case No. 2:18-CV-5174 (E.D. Penn. Nov. 29, 2018).
3 Mauerlla v. H&R Block, Inc., Case No. 1:18-cv-07435 (N.D. Ill. Nov. 9, 2018).
4 Case No. 3:18-CV-05627 (W.D. Wash. Nov. 13, 2018).
5 2018 WL 3105955 (N.D. Ill. June 25, 2018).
6 2018 WL 3631577 (S.D. Ill. July 31, 2018).