In the midst of a federal effort to ramp up antitrust prosecutions of companies agreeing not to recruit or hire each other’s employees (see previous articles dated November 9, 2016, January 25, 2018, April 25, 2018 and July 17, 2018), special scrutiny – and criticism – has been directed toward the use of no-poach agreements in the franchise industry.  State Attorneys General now lead the fight to limit the practice, and early indications suggest that their efforts are already producing results.

On July 9, 2018, Attorneys General from 10 states^[1] and the District of Columbia launched a joint investigation into the hiring practices of certain national fast-food companies.  In a letter sent to the companies, the Attorneys General requested information regarding restrictive covenant language included in the companies’ franchise agreements which would inhibit the ability of employees to move from one franchisee to another.  According to the Attorneys General, such “no poach” agreements negatively restrict employees’ earning potential, and implicate state-based employee protection laws, as well as consumer protection and antitrust laws.  Responses to the letter were due on August 6, 2018.  As of the date of this post, there has been no official update on the status or content of any responses.

Since the joint investigation was announced, another state that did not join the initial letter revealed in two separate press releases that a number of franchises are already taking steps to curb the use of no-poach clauses in franchisee agreements. First, on July 12, 2018, the Attorney General for the State of Washington, Bob Ferguson, announced that following an investigation by its Antitrust Division, seven national fast-food companies agreed to no longer enforce such “no poach” agreements in their current franchise agreements, and to remove such language from future contracts.  More recently, on August 20, 2018, AG Ferguson announced that eight more fast-food chains entered into similar agreements.  According to both announcements, the concessions were made in order to avoid antitrust lawsuits by the State of Washington.  Significantly, the announcements emphasized that the concessions would take effect not just in Washington but on a nation-wide basis.

In the franchise industry, the use of “no poach” agreements typically provide that the franchisee will not recruit or hire employees (often management employees exclusively) from other franchise locations of the same franchisor. The rationale for such language is to protect franchisees from having their management employees recruited away to other franchise locations after the franchisee expended time and money training such employees.

The state-level probes come on the heels of increased criticism of no-poach agreements by the Department of Justice’s Antitrust Division. While no court to date has found such agreements to violate federal antitrust laws, the DOJ has repeatedly warned that it will treat these types of agreements as illegal restraints of trade, in violation of the Sherman Act, if they are not reasonably tailored to support a broader, legitimate business collaboration.

In this vein, the DOJ has acted aggressively to rein in “no poach” agreements by obtaining civil consent agreements and threatening criminal prosecution against companies who enter into such agreements. There also has been a spike in private class action lawsuits, which are particularly enticing to the class action bar given the potential for a large number of class members, as well as the ability to recoup treble damages, attorneys’ fees, and joint and several liability under the antitrust laws.  In fact, less than one month after the Washington Attorney General announced its first wave of settlements, a new class action lawsuit was filed in Washington State against Auntie Anne’s – one of the seven franchises listed in the initial announcement.

_{[1] Those states include California, Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania, and Rhode Island.}