Western District Of Kentucky Upholds Complaint Challenging Franchise No-Poach Agreements As Horizontal Restraints Of Trade
On October 21, 2019, Judge Joseph H. McKinley Jr. of the United State District Court for the Western District of Kentucky issued a mixed order and opinion that denied Defendants Papa John’s International, Inc. and Papa John’s USA’s (“Papa John’s” or “Defendants”) motion to dismiss Plaintiffs’ class claims, but granted Defendants’ motion to compel one of the named plaintiffs to arbitrate. In Re Papa John’s Employee and Franchisee Employee Antitrust Litigation, NO: 3:18-CV-00825-JHM (W.D. Ky. 2019). The case involves three consolidated putative class actions filed by current and former employees against defendants, alleging no-poach, or no-hire, clauses in the company’s franchise agreements are a horizontal restraint on trade and a per se violation of Section 1 of the Sherman Act. The Court ruled that plaintiffs adequately alleged a per se violation, but that discovery would be necessary to determine what standard of review would apply moving forward.
Plaintiffs alleged defendants’ no-poach provision was a per se violation of the Sherman Act because it operated as a market allocation agreement, a category of restraint long held to be per se unlawful under the antitrust laws. In the alternative, plaintiffs also alleged that the no-poach provision was illegal under both the quick-look approach and the rule of reason due to its anticompetitive effects. The Court determined that it would be inappropriate on a motion to dismiss to definitively resolve what standard of review should ultimately apply without the benefit of greater factual development through discovery. The Court then found that plaintiffs adequately pled a Section 1 claim by showing a horizontal restraint of trade based on allegations that the no-poach provision restricted competition among the franchisees competing for workers and alleged direct evidence of anticompetitive effects–the suppression of wages and decreased job mobility of plaintiffs.
Defendants argued that plaintiffs’ rule of reason argument failed because they had not expressly defined the appropriate product and geographic market affected by the no-poach agreement, as required under the rule of reason. But the Court rejected this argument, finding that the Supreme Court’s decision in Ohio v. Am. Express Co. “indirectly stated” that direct evidence of the anticompetitive effect of a horizontal restraint can obviate the need to define the affected relevant market. The Court also distinguished Ogden v. Little Caesars Enters., Inc., a recent Eastern District of Michigan decision that dismissed a Sherman Act complaint based on franchise no-poach provisions, on the grounds that the Ogden plaintiffs pled only a per se or “quick look” violation, and had “pointedly resisted” pleading a rule of reason claim.
The Court also denied defendants’ motion to restrict the class period to the Sherman Act’s four-year limitation period, finding that plaintiffs adequately alleged defendants’ fraudulent concealment of their alleged scheme. Defendants pointed out that the franchise at issue agreements was available in various state agencies’ public databases, arguing that they were not concealed and that plaintiffs could have identified the alleged scheme with due diligence. Plaintiffs, however, pointed to defendants’ affirmative representations during the early class period that franchisees were free to make their own employment decisions including “hiring, termination, pay practices and any other employment practices.” The Court reasoned that those statements, combined with the obscurity of the state databases where the contracts could be found, meant plaintiffs lacked a reason to know of the no-poach agreements’ existence, defeating defendants’ due diligence argument.
The Court granted defendants’ motion to compel one of the named plaintiffs to arbitrate her claim. Unlike the other named plaintiffs, Jamiah Greer signed an employment agreement that required her to arbitrate all claims that arose out of her employment with Papa John’s. The Court rejected Greer’s argument that her antitrust claims did not arise out of, or relate to, her employment since the claims related to the collusion among the defendants rather than her employment relationship with Papa John’s. The Court acknowledged ambiguity in the agreement but cited precedent requiring a liberal construction of arbitration agreements and the agreement’s broad language that covered claims of “any violation of any federal, state, or other governmental law, statute, regulation, or ordinance.”
The decision is the most recent in a series of district court opinions addressing Sherman Act challenges to franchise no-poach agreements at the pleading stage. The U.S. Department of Justice has advocated that the rule-of-reason standard should apply, several state Attorneys General have disagreed, and many of the district courts, like the Court here, have not definitively resolved what standard–per se, quick look, or rule of reason–they will ultimately apply at trial. In light of the number of franchise no-poach cases currently underway, the issue is likely to be a source of controversy for some time to come.