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THE LATEST: DOJ Distinguishes ‘No-Poach’ Agreements

WHAT HAPPENED:
  • The Department of Justice filed a Statement of Interest in three related cases in the Eastern District of Washington yesterday dealing with alleged “no-poach” (or non-solicitation) agreements between franchisors like Carl’s Jr, Auntie Anne’s and Arby’s and their franchisees.
  • In the statement, the DOJ distinguished between “naked” no-poach agreements between competitors and the kinds of no-poach agreements in the franchise context that are typically vertical restraints between the parent company and the individual franchisee.
  • According to the DOJ, naked no-poach agreements should be analyzed as per se, or presumptively anticompetitive and illegal under Section 1 of the Sherman Act, while most vertical restraints should be analyzed under the rule of reason which requires some balancing of potential harms and benefits.
  • The statement did, however, distinguish two scenarios where franchise agreements could still merit per se
  • In a situation where the “franchisees operating under the same brand name agreed amongst themselves (and wholly independent from the franchisor), for example, not to hire any person ever previously employed by another franchisee that is a party to the agreement.” Stigar v. Dough Dough, Inc. et al., No. 2:18-cv-00244-SAB, Statement of Interest of the United States of America at 11 (Mar. 7, 2019).
  • In an agreement between a franchisor and franchisee relating to competition in a market where they actually compete. “If operating in the same geographic market, they both could look to the same labor pool to hire, for example, janitorial workers, accountants or human resource professionals. In such circumstances, the franchisor is competing with its franchisee.” If such agreement is not ancillary to any legitimate and procompetitive joint venture, it would warrant per se Id. at 13.
WHAT THIS MEANS:
  • For many franchises, the DOJ’s distinction between “naked” and vertical no-poach agreements will represent welcome respite from the onslaught of class actions that have been filed recently.
  • Franchisors and franchisees, however, will still need to demonstrate any past or future no poach agreements are not (1) between franchisees and independent of the franchisor, or (2) operating in the same geographic market where both entities actually compete.
  • It also remains to be seen whether the court will adopt the DOJ’s view on the topic, and how State Attorneys General will react.



THE LATEST: Employee “No-Poaching” Agreements Remain in the Antitrust Crosshairs

There have been a series of investigations, class action suits and high value settlements involving agreements not to solicit employees. In addition, the Department of Justice (DOJ) Antitrust Division made a splash a few months ago when it announced that it would criminally investigate and prosecute employers that engage in certain “naked” no-poach or wage-fixing agreements.

WHAT HAPPENED:
  • Employees filed a civil class action against the Carl’s Jr. hamburger chain because of a no-hire provision in its franchisee agreements.
  • The plaintiffs allege that Carl Karcher Enterprises (CKE), the franchisor, includes the no-hire provisions in its standard agreement to prevent its restaurants from hiring each other’s shift leaders. According to the complaint, the clause appears in the same part of the agreement that also prevents franchisees from competing for each other’s customers.
WHAT THIS MEANS:
  • The plaintiffs’ bar continues to view employee no-hire/non-solicitation agreements as a profitable area to bring class actions.
  • The DOJ’s policy guidance states that only “naked” agreements among employers will justify criminal enforcement. This means agreements that are not ancillary to some other joint competitive activity. Here, the restraint is arguably ancillary to operating a franchise chain.
  • Plaintiffs’ success likely will hinge on whether they can show that the agreement between the franchisor and its franchisees is really among separate entities rather than a single economic unit under the Copperweld
  • The Franchisor’s business justifications also are likely to be important as this litigation progresses.
  • Companies need to be sensitive to employment restrictions involving other employees such as non-solicitation or no-hire agreements.



How to (Legally) Keep Competitors from Poaching Your Key Employees: Antitrust Law and Non-Poaching/Non-Solicitation Agreements

by Nick Grimmer

How can a company legally protect its valuable interests in key employees, when a competitor can just swoop in with a more attractive employment offer?  A non-poaching agreement or clause (also called a no- or non-poach, -hire, -interference, -switching or -solicitation agreement or clause, depending on the circumstances) can offer protection.  In these agreements, competitors or potential competitors for skilled labor might agree not to cold call, solicit, recruit or even hire each other’s employees.  The agreements usually cover specified employees or categories of employees (e.g., by title, skill area or salary level) and usually last for a set period of time. 

The ancillary restraints doctrine generally governs non-poaching agreements.  Under that doctrine, a restraint of trade (here, the non-poaching agreement) is permissible if it is one in which there is also a legitimate/procompetitive main agreement, and the covenant in restraint of trade is necessary and merely ancillary (i.e., collateral or subordinate) to that agreement.  If it is not, then it is a “naked restraint of trade” and will be per se illegal under federal antitrust law (and the plaintiff—typically, the affected employee(s)­—will need only to prove the existence of the restraint, as opposed to having to show its anticompetitive effects, which are presumed).  Conversely, if a non-poaching agreement is ancillary to a legitimate/procompetitive agreement, it is judged under the rule of reason, which involves a balancing of procompetitive benefits and anticompetitive effects. 

Agreements that keep employees out of competitors’ camps come in several flavors.  The basic types—and their general antitrust treatment—include:

“Naked” agreements between competitors:  Like an (illegal) agreement among competitors to divide sales territories, a naked agreement among competitors for labor simply to not hire each other’s employees is likely per se illegal (in essence, they both entail “you keep what’s yours, I keep what’s mine”).  To avoid per se illegality, keep these points in mind:

  • The purpose of the main agreement must be legitimate; a non-poaching agreement aimed only at “protecting” employees from poaching or improving relations with a competitor for labor is a non-starter.  We address examples of legitimate purposes below.
  • The more related and tailored the non-poaching agreement is to a legitimate purpose, the more likely it is necessary and ancillary to a legitimate main agreement (such that the rule of reason will apply); conversely, a broad, vague or general non-poaching agreement might be subject to per se treatment.  So, a non-poaching agreement should:
    • be in writing
    • set a specific end point with a clear relationship to the main agreement (e.g., a reasonable period following a sale); and
    • specifically define the scope of covered employees (by class, position, section of the company, geography or even name) in a manner clearly related to the main agreement; it should cover only the employees that are or might be directly involved or at issue in the main agreement.  So, for example, if two companies enter a joint venture that relates to only one of their numerous product lines, the joint venture agreement’s [...]

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