Anti-Poaching Provisions Under Fire in Franchise Agreements

Anti-Poaching Provisions Under Fire in Franchise Agreements

Anti-Poaching Provisions Under Fire in Franchise Agreements

Franchise agreements often contain provisions prohibiting the franchisee from soliciting or hiring workers employed by the franchisor or other franchisees. For years such "anti-poaching" provisions have been fairly common, often passing from year to year without comment, question, or scrutiny. No more.

Over the past few weeks, 15 large franchisors have agreed to drop anti-poaching provisions from their franchise agreements in order to avoid antitrust lawsuits by Washington State's Office of the Attorney General. Eleven other state attorneys general are investigating the use of such provisions by various QSR franchisors. Private plaintiffs have sued franchisors in at least four class actions, contending that anti-poaching provisions in franchise agreements violate federal and state antitrust laws. Meanwhile, pending federal legislation would outlaw anti-poaching provisions in franchise agreements altogether.

What are anti-poaching agreements?

Broadly speaking, "anti-poaching" agreements are contracts between employers not to hire and/or solicit for employment each other's employees. A recent survey by Princeton economists found that 58 percent of the largest franchise systems -- those with more than 500 franchise outlets in the U.S. -- have anti-poaching provisions in their franchise agreements that restrict the recruitment or hiring of workers currently (and sometimes formerly) employed at another outlet in the franchise system.

When used in franchise agreements, anti-poaching provisions prevent intra-brand freeriding; that is, they bar franchisees from raiding each other's employees after another franchisee has already incurred substantial time and expense to train the employee regarding the specialized skills and methods necessary to deliver the franchise system's products or services to customers. This is particularly important regarding management-level employees, who necessarily require a greater level of investment by the franchisee. By helping franchisees protect their significant investment in training, anti-poaching provisions strengthen the overall franchise system, prevent intra-brand rivalry, and foster inter-brand competition. Despite such rationales, regulators, legislators, and class action plaintiffs contend that such provisions hamper worker mobility and suppress wages.

Governmental scrutiny

In October 2016, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) jointly issued "Antitrust Guidance for Human Resource Professionals" to alert companies that federal antitrust laws apply to competition among companies to hire and retain employees, regardless of whether those companies compete in the same product or service market. Critically, the Guidance asserts that "naked" anti-poaching agreements (that is, agreements that are separate from or not reasonably necessary to a larger legitimate collaboration between the employers) are per se antitrust violations under the Sherman Act that could result in criminal prosecution. The Guidance further warned that anti-poaching agreements that do not result in criminal sanctions may still lead to civil liability under federal antitrust law. In a January 2018 speech, the DOJ's top antitrust official announced that the department expects to initiate multiple criminal proceedings targeting naked anti-poaching agreements in the coming months.

Anti-poaching attention has focused on franchising in recent months. In February 2018, Washington State's Attorney General's office issued civil investigative demands to multiple franchisors, requesting information about franchise agreements signed in the past five years that contain anti-poaching provisions and the franchisors' reasons for having, changing, or eliminating those provisions.

On July 12, 2018, Washington Attorney General Bob Ferguson announced that seven franchisors -- Arby's, Auntie Anne's, Buffalo Wild Wings, Carl's Jr., Cinnabon, Jimmy John's, and McDonald's -- agreed to remove anti-poaching provisions from their franchise agreements. On August 20, 2018, his office announced that eight other franchisors would do so as well: Applebee's, Church's Chicken, Five Guys Burgers and Fries, IHOP, Jamba Juice, Little Caesars, Panera Bread, and Sonic.

Pursuant to Assurances of Discontinuance filed in King County (Washington) Superior Court, the franchisors agreed to no longer enforce anti-poaching provisions in their existing franchise agreements and to remove the language from current and future contracts nationwide. Violations could result in civil penalties. The Assurances resolve the Washington Attorney General's investigation into whether these franchisors' anti-poaching provisions violate state antitrust law and allow the franchisors to avoid lawsuits without admitting any wrongdoing.

The Washington Attorney General's investigation of other franchisors that use anti-poaching agreements is ongoing, with a press release warning that the office will file lawsuits if other franchisors do not remove anti-poaching provisions from their agreements.

Other states are following Washington's lead. On July 9, 2018, the attorneys general of California, the District of Columbia, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, and Rhode Island sent letters to eight QSR franchisors -- Arby's, Burger King, Dunkin' Donuts, Five Guys Burgers and Fries, Little Caesars, Panera Bread, Popeyes Louisiana Kitchen, and Wendy's -- demanding information and documents regarding the use of anti-poaching provisions in their franchise agreements.

Meanwhile, on March 1, 2018, Senators Elizabeth Warren and Cory Booker introduced the End Employer Collusion Act (S.2480), which, if passed, would expressly prohibit anti-poaching provisions in franchise agreements. Specifically, the bill would prohibit any entity from entering into, enforcing, or threatening to enforce a restrictive employment agreement. Under the proposed bill, a "restrictive employment agreement" is an agreement, expressly including a franchise agreement, that "prohibits or restricts one employer from soliciting or hiring another employer's employees or former employees." A violator would be liable for the actual damages sustained by an injured worker, punitive damages, and attorneys' fees and costs. A companion bill (H.R.5632) was introduced in the House of Representatives on April 26, 2018.

Class actions

In the past year, four class actions have been filed against franchisors (Carl's Jr., McDonald's, Pizza Hut, and Jimmy John's) based on anti-poaching provisions in their franchise agreements. The class action plaintiffs contend that anti-poaching agreements between the franchisor and its franchisees constitute per se violations of federal and state antitrust laws. Such antitrust class actions carry the risk of huge potential class sizes, treble damages, and attorneys' fees. A federal court in Illinois recently rejected McDonald's motion to dismiss, and the federal antitrust claim is moving forward against McDonald's in the case of Deslandes v. McDonald's USA, LLC. Motions to dismiss currently are pending in the other three cases.

Joint employment concerns

Aside from potential antitrust implications, anti-poaching provisions may open a franchisor to arguments that it is a "joint employer" with its franchisees, and therefore liable for its franchisees' labor and employment law violations. In the past few years, many franchisors have taken great pains to disclaim any involvement in franchisees' hiring decisions in light of joint-employment concerns. By prohibiting franchisees from soliciting or hiring qualified workers who work (or worked) at another franchisee's outlet, anti-poaching provisions undermine such disclaimers and increase the risk of joint-employer exposure.

What's next?

In light of the increased scrutiny and potential legal exposure noted above, all franchisors should carefully review with qualified franchise counsel any anti-poaching provision in their franchise agreements. What is the provision's purpose? Why is it in the franchise agreement in the first place? Are there less restrictive ways to achieve the same goals? How broad is the provision's scope as to covered employees, geography, and timing? Does it apply regarding the franchisor's employees, either at headquarters or at company-owned outlets?

Given recent developments, the safest course of action is for franchisors to remove anti-poaching provisions from their franchise agreements altogether and to decline to enforce such provisions in existing agreements. To the extent a franchisor believes it has a specific, compelling need for a narrow anti-poaching provision, the franchisor should work with experienced counsel to analyze the potential antitrust and joint-employment implications of the provision and, at a minimum, ensure that it is as narrowly tailored and least restrictive as possible.

 Jess Dance is a shareholder in Polsinelli PC's Denver office where he is a member of its Global Franchise and Supply Network practice group. Email him at jdance@polsinelli.com.

Published: September 3rd, 2018

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