No-Poach Clauses in Franchise Agreements: The Saga Continues in 2022

By on March 2nd, 2022

Posted in New Jersey

 For the past few years, it seems franchisors have been riding a roller coaster when it comes to no-poach clauses in their franchise agreements. While for a time it seemed as though scrutiny for such clauses might be fading, on February 17, 2022, the Department of Justice (“DOJ”) filed a motion requesting permission to file a statement of interest in an ongoing case involving restrictions contained in McDonald’s’ franchise agreements. These restrictions prohibit the solicitation or employment by franchisees of individuals who had worked at another McDonald’s. McDonald’s had been 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 evaluation under the “rule of reason” rather than as a “per-se” violation under the Sherman Act.

Under the “rule of reason,” to succeed, a Plaintiff has to show that the alleged anti-competitive effects of the franchisor’s practices outweighed their pro-competitive benefits and justifications. This approach is more favorable for franchisors since it looks at the franchise relationship more holistically and places a higher bar on a plaintiff. However, this new request by the DOJ signals that the sentiment at the DOJ may no longer support that approach.

The chain of thought advanced by the previous DOJ statement of interest was that franchise arrangements are “vertical” since all parties are associated with the same brand which has some shared and overlapping interests. This is considered different from a “horizontal” arrangement between bona fide competitors. The former is thought to have redeeming qualities that can overcome any potential negative impacts. However, those who feel all franchise relationships should fall into the “horizontal” camp (or be treated the same as those in the “horizontal” camp) claim that no-poach arrangements limit opportunities for mobility and compensation for employees and therefore run afoul of anti-trust laws, regardless of any ancillary benefits or justifications.

The DOJ is seeking to file its statement of interest by March 21, 2022. McDonald’s has filed to block this intervention by the DOJ as untimely, among other things.

As franchisors enter the 2022 annual season for franchise disclosure document updates, now is an excellent time to review their franchise agreements concerning this subject matter and make any needed changes.

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