Fast-Food Franchise Cases Hash Out Standard Of Review For Labor Market Restrictions
07/20/2021The parties in two separate cases involving labor market restrictions submitted supplemental briefing within days of one another following the Supreme Court’s ruling in the much-anticipated NCAA v. Alston case on June 21, 2021. The unanimous opinion, written by Justice Neil Gorsuch with a full concurrence by Justice Brett Kavanaugh, was levied to support arguments by both sets of defendants and plaintiffs on the appropriate standard of review in each of their cases. This battle is being fought in a broader context of increased activity by the Department of Justice in pursuing “no-poach” agreements between employers, and President Biden’s July 9th Executive Order, which specifically addressed labor non-compete agreements.
This year has seen the Department of Justice move on its first ever criminal prosecutions of employee no-poach and wage-fixing agreements between competing employers. These legally novel cases were brought more than four years after the Antitrust Division first announced its intention to criminally prosecute such agreements as per se violations of the antitrust laws. Prior to 2016, they were treated exclusively as civil offenses. This shift in approach has led to some questioning of whether the per se standard is the right one through which to review these kinds of cases. The per se designation is normally reserved for narrow classes of conduct that, through long judicial experience, has been proven to be inherently anticompetitive.
The Supreme Court in NCAA v. Alston – a case closely watched for potential guidance on the correct standard of review for different kinds of labor market restrictions – said the lower courts properly applied “rule of reason” to the NCAA in striking down the organization’s limits on athletes’ compensation, including in the form of student benefits. Although the decision provides some guidance in this area, it has been interpreted in different ways, as reflected in the supplemental briefs filed in the Jimmy John’s and McDonald’s cases.
Defendant in Butler v. Jimmy John’s Franchise, LLC et al, filed a Notice of Supplemental Authority on July 2, 2021, appending the Alston decision. That case concerns a former employee of the Jimmy John’s sandwich chain seeking to certify a class action that accuses the company of imposing anticompetitive, no-poach policies on its franchises. In its filing, Jimmy John’s argued that the case clarifies that the rule of reason should be used when assessing labor-market restrictions within ‘complex business arrangements’ with procompetitive effects. Specifically, it notes that these situations can “‘present complex questions’ for which the quick look framework is inappropriate.”
Plaintiffs countered that Jimmy John’s was twisting the holding in Alston, and that the Supreme Court had simply confirmed that the legal decision of whether to apply the rule of reason, quick look, or per se standard turns on the particular facts at the merit stage. According to plaintiffs, when the facts demonstrate market divisions among competing employers, anticompetitive effects should be presumed under the per se test.
In Deslandes v. McDonald’s USA, LLC et al, McDonald’s is similarly being sued by former employees over its past use of no-poach provisions in its franchise agreements. In a supplemental brief filed on July 9, 2021, McDonald’s (represented by the same counsel as Jimmy John’s), argued that the Alston ruling confirms that the rule of reason applies to “all but the most obvious antitrust claims” and that such a test turns on a careful analysis of the market. Expanding on this, defendant states that, under Alston, quick look analysis is “expressly limited to those cases where courts ‘have amassed considerable experience with the type of restraint at issue’ and ‘can predict with confidence that it would be invalidated in all or almost all instances.’” Defendants argued that courts have “no such ‘considerable experience’ with no-poach restrictions ancillary to vertical franchise agreements” and could not “predict with confidence that an ancillary no-poach restriction in the franchise context ‘would be invalidated in all or almost all instances.’” If, even in a case like Alston, where an undisputed “monopsonist admittedly suppressed wages in a well-defined market through undisputed horizontal wage-fixing,” the Supreme Court thought it was appropriate to apply the rule of reason, the same standard should be applied to franchise no-poach cases such as this one.
Plaintiffs asserted that Alston stands for the principle that the rule of reason is flexible and must be fashioned to the facts of the case. Calling the “quick look” test an abbreviated version of the rule of reason, the workers said that whether that test is appropriate depends on the nature of the relationship between the restraint and the product in question. When legitimate cooperation (between McDonald’s and its franchisees, for example) provides no justification to restrain competition for each other’s workers, a quick look review would be sufficient.
These arguments are playing out at a time of heightened scrutiny of labor market restrictions. President Biden’s July 9, 2021 Executive Order specifically suggested that the Federal Trade Commission ban or limit non-compete agreements between employers and employees. Agency attention to the availability of wage data shared between employers is also addressed. In light of this, and the Department of Justice’s increased enforcement activity in this area, judicial clarification of the appropriate standard of review under antitrust law for labor market restrictions will be important.