DOJ’s Statements of Interest

The DOJ recently filed Statements of Interest in several of these civil antitrust cases pending in Eastern District of Washington. The DOJ asserted that franchisor-franchisee no-poach agreements should be subject to a rule of reason analysis, and not the more stringent per se standard. See Myriah Richmond, et al. v. Bergey Pullman Inc., et al., No. 2:18-cv-00246-SAB, (E.D. Wash.); Stigar v. Dough Dough Inc., et al., No. 2:18-cv-00244 (E.D. Wash.); Harris v. CJ Star LLC, et al., No. 2:18-cv-00247 (E.D. Wash.). 

The DOJ noted that “horizontal” agreements between competing fast-food companies not to hire each other’s employees could constitute a per se violation of the Sherman Act. However, the DOJ argued, the franchisor-franchisee relationship is vertical, and is therefore properly assessed under the rule of reason. However, it bears noting that where a franchisor owns and operates its own stores, it may be viewed as having both a vertical and horizontal relationship with its franchisees and, depending upon the relevant facts, the DOJ’s analysis might not apply. The DOJ’s Statements of Interest demonstrate its intent to closely scrutinize the relationship between entities to determine which standard applies (per se or rule of reason), which will likely result in a highly fact-intensive inquiry if the case proceeds beyond the motion to dismiss phase, as all such cases have to date.

In its Statements of Interest, the DOJ also rejected the plaintiffs’ arguments that the agreements between the franchisors and franchisees constituted a “hub-and-spoke conspiracy.” The DOJ noted that to successfully state a claim based on this doctrine, the plaintiffs would need to plead that there was a horizontal agreement among “spokes” – here, franchisees – not to hire from each other, and that the franchisor “hub” agreed to participate in that horizontal agreement. The plaintiffs would also need to demonstrate the existence of a “rim” to the wheel in order to form an agreement among the horizontal competitors. The DOJ argued that the plaintiffs in the three cases had not pled the existence of a rim, but that even if they did, the franchise relationship is a legitimate business collaboration and thus no-poach agreements qualify as ancillary restraints that would qualify for rule of reason analysis.

The DOJ also rejected the plaintiffs’ position that a “quick-look” analysis – a subset of the rule of reason – should apply, noting that such analysis should be employed only when the conduct’s anticompetitive effects can easily be ascertained and it is “implausible” that the procompetitive benefits would outweigh harm to competition. Here, the DOJ argued that because franchise no-poach agreements may indeed provide procompetitive benefits and promote interbrand competition, they do not qualify for quick-look analysis.²

The Washington State Attorney General weighs in

Notably, the Washington State Attorney General sought leave to file an amicus brief in response to the DOJ’s Statements of Interest in these cases, which the court granted. In its briefing, the Washington Attorney General argues in part – at least as to the antitrust claims under state law, including Washington’s Consumer Protection Act, RCW 19.86.920 – that franchise-based no-poach deals should be considered per se unlawful as a form of market allocation. See, e.g., Stigar, No. 2:18-cv-00244, Doc. No. 36. In support, the Washington Attorney General notes that at least one state court judge (in the decision in Jersey Mike’s, discussed above) has already rejected arguments that a franchisor’s use of no-poach provisions in its franchise agreements should be analyzed under the rule of reason, preserving the State’s per se and quick-look claims under the Washington Consumer Protection Act.

Conclusions and key takeaways

The DOJ chose to file Statements of Interest in the private, civil cases pending in the Eastern District of Washington. It presumably did so both to potentially influence the outcome of those cases and to state publicly that while it can and will aggressively enforce the antitrust laws against “naked” restraints on hiring between competitors, it recognizes that some no-poach agreements might, on balance, be procompetitive and may survive antitrust scrutiny under the more lenient rule of reason standard.

However, the law is evolving in this area and, as reflected in the recent amicus brief filed by the State of Washington in litigation pending in the Eastern District of Washington, no-poach agreements that may pass muster with the DOJ might still be subject to investigation and an enforcement proceeding by a state attorney general. And, in the current enforcement environment, in which many state attorneys general are actively seeking to fill what they view as an enforcement void in federal law enforcement, including antitrust enforcement, this risk should not be treated lightly. Also, at a minimum, the DOJ’s filings in no way mitigate the antitrust enforcement risk that companies face from agreeing with their direct competitors to any restraints in their hiring practices.

In sum, in evaluating their current no-poach provisions, or when considering such agreements in the future, companies should keep the following in mind:

• The DOJ has made clear that it intends to continue to aggressively bring enforcement actions to prohibit naked no-poach agreements between companies that compete in the labor market – that is, agreements that are not part of a legitimate business transaction – as per se unlawful.
• The DOJ’s Statements of Interest recognize that there are circumstances in which an employer has a legitimate, procompetitive reason to enter into a no-poach agreement. This may be the case where a supplier or franchisor wishes to restrict the ability of its franchisees or distributors to compete with one another for employees: that is, the relationship between the parties is vertical.
• Although not addressed by the DOJ in its filings, a no-poach agreement may also be considered procompetitive where such an agreement is part of a legitimate business transaction between horizontal competitors: such as the sale of assets or of a business where the value of the assets or business purchased hinges in part on the existing employees remaining in place for some period of time.
• In either case – a purely vertical agreement or one that is ancillary to a legitimate business transaction – the terms of the no-poach agreement will be assessed for their reasonableness, taking into account a variety of relevant facts.
• Regardless of the DOJ’s position, state enforcers, such as the Washington State Attorney General, may argue for the application of the more stringent per se standard under respective state laws.

In light of these considerations and the heightened level of antitrust scrutiny that no-poach agreements receive today, companies should consult with experienced antitrust counsel when evaluating their legitimate procompetitive bases for including such provisions in their business agreements, both now and in the future.

1. Read our prior alert on this guidance.
2. The DOJ went so far as to argue that the court should reject the decisions of two other federal district courts that have recently allowed antitrust claims challenging no-poach agreements to survive motions to dismiss and have seemed to indicate that a quick-look analysis may be appropriate in analyzing these franchisor-franchisee no-poach agreements. See, e.g., Butler v. Jimmy John’s Franchise, LLC, 331 F. Supp. 3d 786 (S.D. Ill. 2018).

Client Alert 2019-064