AAI Says DOJ Too Lenient on Vertical Franchise No-Poaching Agreements

AAI submitted a letter to the Antitrust Division of the Department of Justice (DOJ) explaining its opposition to the DOJ’s approach to analyzing intra-franchise no-poaching agreements covering entry level employees of fast-food chains.  Such agreements were recently the subject of consolidated private antitrust class actions filed in the Eastern District of Washington. The DOJ filed a Statement of Interest in the case asserting its interest in the correct application of the federal antitrust laws.

It its Statement of Interest, the DOJ advocates that the challenged no-poaching agreements between franchisors and franchisees are vertical, that they are likely subject to the ancillary restraints doctrine, and that they therefore should be analyzed by courts under the full-blown rule of reason.

AAI’s letter counters that, regardless of whether the challenged agreements are styled as “vertical,” they have horizontal anticompetitive effects and make no economic sense on their face.  The agreements therefore almost certainly are not ancillary to the main franchise agreements, and it would be wasteful and inappropriate for courts to apply the full-blown rule of reason.  A quick look standard is entirely appropriate, but at a minimum a quicker look is warranted given that the effect of the agreements invariably will be to harm labor-market competition.  AAI’s letter critiques the DOJ’s approach on several grounds:

• The law is clear that an anticompetitive agreement that happens to be appended to a legitimate business integration is not ancillary if it does not serve the lawful, legitimate ends of the integration.  The defendant must establish a plausible connection between the two to even invoke the ancillary restraints test.
• Absent both (1) a plausible basis to believe the challenged no-poaching agreements serve the legitimate interests of the franchise and (2) a determination whether the agreements are necessary to make the broader franchise agreement effective, the application of the ancillary restraints defense cannot possibly be deemed “likely.”  Without more, the likelihood of the defense’s application is unknowable at best.
• The full-blown rule of reason is inappropriate for vertical restraints that have horizontal anticompetitive effects and no known, cognizable efficiencies.  Where restraints appear on their face to make “no economic sense,” at a minimum a truncated effects analysis is warranted.
• No-poaching agreements that have no plausible, legitimate justification, no cognizable efficiencies, and make no economic sense on their face are exceedingly unlikely to be ancillary and need not be reviewed under the full-blown rule of reason on that basis.
• The Statement of Interest does not properly instruct the district court on the applicable legal standards governing the challenged agreements. Even if the DOJ believed the quick look or per se standard does not apply, it should have recognized that the rule of reason nonetheless can be abbreviated to avoid unnecessarily elaborate effects analysis.