Shearman & Sterling LLP | Antitrust Blog | Illinois District Court Denies Sandwich Franchisor’s Motion To Dismiss Sherman Act Claim Alleging Damages From No-Poach Agreement<br >  
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  • Illinois District Court Denies Sandwich Franchisor’s Motion To Dismiss Sherman Act Claim Alleging Damages From No-Poach Agreement

    On July 31, 2018, Judge Michael J. Reagan of the United States District Court for the Southern District of Illinois granted in part and denied in part defendant-franchisor’s motion to dismiss an antitrust claim filed by a purported class of former employees of defendant’s franchisees.  Butler v. Jimmy John’s Franchise, LLC, No. 18-CV-0133-MJR-RJD, 2018 WL 3631577 (S.D. Ill. July 31, 2018).  Plaintiffs alleged that provisions included in defendant’s franchise agreements with its franchisees in which the franchisees agreed not to hire each other’s employees—commonly known as “no-poach” agreements—violated Section 1 of the Sherman Act and various state antitrust laws by suppressing employee wages and mobility in the labor market.  Defendants moved to dismiss all claims, arguing that plaintiffs failed to allege an injury that would confer Article III standing, and that plaintiffs failed to plausibly allege an antitrust conspiracy under Section 1 of the Sherman Act.
    Judge Reagan quickly rejected defendant’s argument that plaintiffs lacked standing, finding that plaintiffs alleged in “extensive detail” how no-poach agreements restrain competition for employee wages and suppress worker mobility.  Citing Seventh Circuit precedent, Judge Reagan observed that it “is well settled that an agreement among employers to control a material term of employment harms competition in the labor market at issue.”  Judge Reagan also found that the plaintiffs’ alleged injury was of the type that the antitrust laws were designed to prevent, holding that “antitrust laws are meant to protect the labor market … because ‘employer conspiracies controlling employment terms … tamper with the employment market and thereby impair the opportunities of those who sell their services there.’”  Accordingly, Judge Reagan concluded that plaintiffs adequately demonstrated Article III standing by alleging an injury that was likely to be redressed by a favorable judicial decision.

    Judge Reagan then addressed the legal framework for addressing the plausibility of plaintiffs’ Sherman Act claim, specifically whether the alleged conspiracy should be evaluated under the per se, rule of reason, or “quick look” standards.  Judge Reagan held that plaintiffs stated a plausible “hub-and-spoke” conspiracy because, even though the actual contract was between the franchisor and franchisee (i.e., a vertical agreement), each franchisee was an express third-party beneficiary of the no-poach provision and was able to use specific contractual remedies to enforce the no-poach agreement against other franchisees (i.e., an agreement among horizontal competitors).  However, the Court also recognized what it termed the “elephant in the room”—that unlike traditional hub-and-spoke conspiracies where the firms reaching agreements are all individual, distinct entities, here, the alleged parties to the agreement all sell the same products using the same brand and that some level of intrabrand cooperation may be necessary to further interbrand competition.   
    Judge Reagan suggested that because all franchisees deal in the same brand, the applicable standard to analyze the no-poach agreement in this case may not be the per se rule.  The Court posited that the agreement may instead need to be analyzed under the “quick look” standard, which takes into account the procompetitive features of the challenged restraint and applies in scenarios where the per se rule would usually apply, but “a certain degree of cooperation is necessary if the [product at issue] is to be preserved.”  After some discussion, Judge Reagan held that he could not decide whether the claims were subject to the per se rule, quick look analysis, or the rule of reason at this stage of the proceedings because the correct standard to be applied would depend on the facts to be established, noting in particular, the degree of independence exercised by the franchisees as a key fact.  Thus, he found that plaintiffs alleged a plausible claim for relief under Section 1 of the Sherman Act, regardless of the standard under which their claim would ultimately be assessed.  Judge Reagan dismissed plaintiffs’ state law claims without prejudice, finding that plaintiffs failed to adequately plead these claims.

    Judge Reagan’s reasoning in rejecting the motion to dismiss in this case is similar to but not identical to another recent case challenging no-poach agreements with fast food franchisees, Deslandes v. McDonald’s USA, LLC, No. 17 C 4857, 2018 WL 3105955 (N.D. Ill. June 25, 2018).  In McDonald’s, the Northern District of Illinois also denied a defendant’s motion to dismiss, holding that the plaintiffs might be able to prove their claim under a “quick look” approach.  Unlike Judge Reagan, however, the McDonald’s court dismissed the plaintiffs’ per se claim, finding that the no-poach provision of the franchise agreements was an ancillary restriction to a pro-competitive franchise agreement and thus could not be condemned as per se illegal.