AAI Calls for Per Se Treatment of Naked, Horizontal No-Poach Agreement in Seventh Circuit (Deslandes v. McDonald’s)

AAI has filed an amicus brief in the Seventh Circuit seeking reversal of a district court opinion rejecting a class-action challenge to a horizontal no-poach agreement in the franchise setting.

For decades, McDonald’s USA, LLC, and McDonald’s Corp., which own the ubiquitous McDonald’s franchise as well as 5-10% of McDonald’s restaurants (“McOpCos”), imposed a nationwide “no-poach” agreement limiting the hiring of restaurant employees, which it implemented principally through a provision in its franchise contracts with independently-owned McDonald’s restaurants (“Independents”). After a putative nationwide class of McDonald’s workers alleged that the agreement was a per se violation of Section 1, or, in the alternative, a violation under the rule of reason, the district court dismissed the proposed class representatives’ individual claims on the pleadings. The court held that the agreement was an ancillary restraint subject to neither the per se rule nor the “quick look” rule of reason. It applied the full blown rule of reason and concluded that market power is implausible in labor markets limited to the sale of labor to McDonald’s outlets.

The AAI brief argues that the district court committed numerous errors. First, the district court failed to properly apply the ancillary restraints doctrine. It did not conduct the required analysis to determine that the challenged agreement was reasonably related to the main transaction and reasonably necessary to generate its efficiencies. Neither is true here. The court should have found that the restraint is naked, not ancillary, and it should have cut off further inquiry and applied the per se rule.

Second, even if the court applied the rule of reason, it erred by proceeding straight to the “full blown” rule of reason, which requires a showing of market power. In rare cases when horizontal market allocation is reviewed under the rule of reason rather than the per se rule, the Supreme Court has made clear that it remains inherently suspect under NCAA v. Board of Regents. A showing of market power therefore is unnecessary to make out a prima facie case that horizontal market allocation is unreasonable. Even if the restraint were not inherently suspect, a showing of market power still should not have been required under the Supreme Court’s holding in California Dental v. FTC 

Third, the district court erred in its application of the full-blown rule of reason. It declared that market power is implausible based on bald speculation about likely market share, but the plaintiffs offered direct evidence of market power, which is sufficient to create a reasonable inference on a motion for judgment on the pleadings. 

The brief was written by AAI Vice President of Legal Advocacy Randy Stutz, with assistance from AAI Extern Mathew Simkovits, who is a student at Stanford Law School.  Several AAI Advisory Board members also provided valuable guidance.