Department Of Justice Seeks To Intervene In No-Poach Class Action To Counter Arguments That Such Agreements Are Per Se Illegal
02/05/2019On January 25, 2019, the Justice Department’s Antitrust Division filed a Notice of Intent to File a Statement of Interest in Myrriah Richmond et al. v. Bergey Pullman Inc., et al., No. 2:18-cv-00246, in the United States District Court for the Eastern District of Washington. The Notice follows a barrage of settlements between fast-food chains and state antitrust enforcers involving the chains’ “no-poach” agreements—that is, agreements between a franchisor and franchisees that restrict the hiring of one franchisee’s employees by another franchisee. The Justice Department’s decision to involve itself in Myrriah Richmond is significant. By emphasizing—as its Notice did—that such franchisor-franchisee no-poach agreements are “vertical restraints” subject to the rule-of-reason (rather than illegal per se, or subject to only a “quick look” analysis of legality), the Justice Department provides analytic clarity and useful guidance as courts address the growing number of actions challenging different variations of no-poach agreements in different factual scenarios.
The Justice Department’s 2016 no-poach guidance (issued jointly with the Federal Trade Commission) stated that “naked no-poaching or wage-fixing agreements that are unrelated or unnecessary to a larger legitimate collaboration between the employers” are per se illegal. This guidance was frequently cited by plaintiffs in cases challenging restrictions in franchise agreements that restricted the ability of franchisees (often fast-food chains) to solicit or recruit each other’s employees. Contending that these restraints were in fact “naked” agreements not to compete and unnecessary for any legitimate purpose, these plaintiffs used the Department’s guidance to defend motions to dismiss on the grounds that their claims should be evaluated as allegations of per se illegal conduct, or required at most a “quick look” analysis, and that a full rule-of-reason analysis was unnecessary. Perceiving a need for clarity as to its position, the Department issued this Notice.
The Justice Department’s Notice carefully breaks the no-poach agreement analysis into different categories. First, some no-poach agreements are “vertical restraints” that traditionally fall under the rule of reason. Second, the Notice says, “certain restraints, such as customer- and market-allocation agreements among competitors, including no-poaching agreements, that are reasonably necessary to a separate, legitimate business transaction or collaboration between the companies, are also properly assessed under the rule of reason.” When the no-poach agreement is one between a franchisor and franchisee “within the same franchise system,” the Department stated, it will likely fall into one of the two categories above, absolving it from either “per se” or “quick look” treatment. The Notice does not expressly mention the third potential category of no-poach agreements – naked agreements between horizontal competitors that are not reasonably necessary to a legitimate business transaction or collaboration. Although the Notice does not say so, the Department likely will still seek to characterize these as per se illegal in appropriate circumstances and the threat of criminal prosecution remains open, as it warned in 2016.
To date, courts have not taken a uniform approach in addressing franchise no-poach agreements. By correctly clarifying that franchise agreements are vertical in nature, the Notice should serve as a guide to courts to analyze these suits under a rule of reason standard. As a practical matter, applying the rule of reason in these cases will present challenges for plaintiffs, particularly in defining the relevant product and geographic markets, making it harder to sustain complaints past a motion to dismiss. For complaints that survive a motion to dismiss, the requirement of proving a rule of reason violation and impact on a class-wide basis will also make class certification more difficult.