Over the past few years, it seems like franchisors have been on a rollercoaster ride when it comes to non-poaching clauses in their franchise agreements. While for a time it seemed that review of these clauses might fade, on February 17, 2022, the Department of Justice (“DOJ”) filed a motion seeking permission to file a statement of claim. interest in a pending matter involving restrictions contained in McDonald’s Franchise Agreements. These restrictions prohibit the solicitation or employment by franchisees of persons who have worked at another McDonald’s. McDonald’s was relying on an existing statement of interest filed in a separate case by the DOJ during the previous administration’s tenure that called for an assessment under the “rule of reason” rather than as a violation “in self” under the Sherman Act.
Under the “rule of reason,” to succeed, a plaintiff must demonstrate that the alleged anti-competitive effects of the franchisor’s practices outweigh their pro-competitive benefits and justifications. This approach is more favorable for franchisors because it views the franchise relationship more holistically and raises the bar for the applicant. However, this new request from the DOJ signals that sentiment in the DOJ may no longer support this approach.
The chain of thought advanced by the DOJ’s previous Statement of Interest was that franchise agreements are “vertical” since all parties are associated with the same brand that has common and overlapping interests. This is considered different from a “horizontal” arrangement between bona fide competitors. The former is believed to have redeeming qualities that can overcome any potential negative impact. However, those who believe that all franchise relationships should fall into the “horizontal” camp (or be treated the same as those in the “horizontal” camp) argue that non-poaching agreements limit opportunities for mobility and compensation for employees and therefore violate antitrust laws, regardless of any incidental benefit or justification.
The DOJ is seeking to file its Expression of Interest by March 21, 2022. McDonald’s has requested, among other things, to block this DOJ intervention as inappropriate.
As franchisors enter the 2022 annual season for updates to franchise disclosure documents, now is a great time to review their franchise agreements regarding this topic and make any necessary changes.
COPYRIGHT © 2022, STARK & STARKNational Law Review, Volume XII, Number 61