AAI Offers Guidance to 11th Circuit on Franchise Employee No-Poaching Agreements (Arrington v. Burger King Worldwide)

AAI filed an amicus brief asking the Eleventh Circuit Court of Appeals to tread carefully in determining the standard of review applicable to intrafranchise employee no-poaching agreements and to hold defendants to their proper burden in an ancillary restraints analysis.

Agreements between employers not to solicit or hire one another’s employees have garnered considerable attention in recent years, with courts, state attorneys general, and the federal antitrust agencies rightly recognizing that these agreements are tantamount to price fixing and cause considerable harm to labor markets and to workers.  Despite the widespread consensus that no-poach and no-hire agreements between unrelated competitors are categorically illegal, less certainty surrounds the standards applicable to no-poach and no-hire agreements between franchisors and their franchisees.  Recent empirical work has revealed that such agreements are endemic in the fast food restaurant industry.  The Washington State Attorney General has convinced more than 150 chains to drop no-poaching provisions from their franchise agreements and has sued those who have refused to do so.  At the same time, the Department of Justice (DOJ) has intervened in private civil cases against franchisors and offered controversial guidance, which AAI has disputed, that seems to suggest intra-franchise no-hire agreements are ancillary restraints subject to the full-blown rule of reason.

Arrington v. Burger King Worldwide is a private class action case against Burger King, alleging that the no-poaching provision that used to be standard in Burger King’s franchise agreements unreasonably restrained competition for labor between and among Burger King and its franchisees, suppressing wages.  The district court dismissed the case, finding that Burger King and its franchisees represent a unitary economic interest and that they are, accordingly incapable of conspiring under Copperweld.  Plaintiffs and the DOJ, who wrote separately as an amicus, argued forcefully against the district court’s Copperweld analysis.  AAI noted its agreement with Plaintiffs on the Copperweld issue, but wrote separately to address the proper framework for addressing intrafranchise no-poaching agreements, should the Eleventh Circuit contemplate affirming on alternate grounds.

AAI’s brief emphasized the importance of the per se and quick-look rules to effective antitrust analysis and enforcement, and argued that the effects of any agreement, and not the relationship between the franchisor and the franchisees, should drive the analysis of the applicable standard for proving liability.  Moreover, although Burger King and its franchisees have a vertical relationship in the restaurant-format and burger markets, it is their relationship in the separate market for labor, where they lack such a relationship, that is relevant to the antitrust analysis.

The brief also argued that the court should treat skeptically any claim that no-poaching agreements are necessarily ancillary to fast-food franchise agreements.  The fundamental connection between the labor restraint and the franchise agreement, which is required before the ancillary restraints test may even be invoked, is far from clear.  But even if the court applied the ancillary restraints test, the brief argues, the no-poaching agreements are neither reasonably necessary nor the least restrictive means available for achieving any efficiencies.  That more than 150 chains, including Burger King, have voluntarily dropped the provisions rather than defend them in court more than establishes that these burdens on worker freedom are unnecessary.  And, even if these provisions had some procompetitive effect, the franchisor could achieve the same effect by paying for worker training.  In any event, AAI cautioned the court to weigh only cognizable efficiencies in the relevant labor market against the obvious anticompetitive effect of the restraints on the market for low-wage workers.