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U.S.A.: Franchise Anti-poaching Agreements Under Attack in U.S.

For more than 40 years, many franchisors have used provisions in their franchise agreements that prohibit franchisees from recruiting or hiring employees of other franchisees of the franchisor or of the franchisor itself.

Carl ZWISLER - 17.09.18
Country expert

According to a 2017 study, cited by two Princeton economists, 58% of franchisors with 500 or more outlets (90 franchisors) used some form of “anti-poaching” language in their franchise agreements.  Some anti-poaching provisions apply only to managers or to skilled employees; others apply to all employees. Precise terms of the restrictions vary.

In September 2017, the New York Times published an article describing a study by two Princeton University economists, “Why Aren’t Paychecks Growing? A Burger-Joint Clause Offers a Clue.”  In the article, the economists claimed that anti-poaching provisions are designed by franchisors to keep down wages for franchisees’ employees and to limit their mobility.

Between June 2017 and January 2018, class action lawsuits were filed against McDonald’s, CKE (Hardee’s and Carl’s Jr.), Pizza Hut and Jimmy John’s alleging that their so-called “anti-poaching agreements” violated federal and state antitrust laws and other state laws.

In February 2018, the Washington State Attorney General issued “civil investigative demands” to quick-service restaurant franchisors doing business in Washington, demanding that they provide copies of all franchise agreements with anti-poaching language, and that they explain why they use anti-poaching language, whether they have modified it or discontinued using it, and why.

Two weeks later, U.S. Senators Booker and Warren introduced S. 2480, which would outlaw anti-poaching agreements.  Within a month, a companion bill was introduced in the U.S. House of Representatives, along with a bill that would make non-compete agreements unlawful.  A Senate version of the anti-non-compete bill was introduced around the same time.

In June 2018, the judge hearing the McDonald’s anti-poaching case refused to dismiss the plaintiffs’ claims, explaining that they had sufficiently plead a case under the Sherman Antitrust Act. Similarly, last month the Sherman Act clam survived the motion to dismiss in the lawsuit against Jimmy John’s.

On July 9, 2018, eleven more state attorneys’ general issued a press release stating that they were conducting a coordinated investigation of anti-poaching practices of eight prominent quick service franchisors.  The same day, a staff representative of Senator Booker told the International Franchise Association that he planned to issue requests for information about anti-poaching practices to all 90 large franchisors who were identified in the Princeton study.

Curiously, anti-poaching language has been in use for at least 40 years, and no court has ever concluded that it is unlawful.  Franchise anti-poaching agreements only apply to franchised businesses (and sometimes to franchisor-owned businesses) of the same brand, so they are less restrictive than non-compete agreements that typically prohibit employees or franchise owners from being involved in any competing business.

Although the U.S. Department of Justice and Federal Trade Commission issued “Antitrust Guidance for Human Resource Professionals” in October, 2016 in which they argued that “naked” anti-poaching agreements are unlawful and will be prosecuted, the Guidance did not conclude that all anti-poaching agreements are unlawful.  Notably, the U.S. Department of Justice is rumored to be currently investigating whether anti-poaching provisions are unlawful and whether franchisors have coordinated their efforts to impose these restrictions on franchisees’ employees.

Franchisors that have adopted them have typically done so to protect the investment franchisees make in recruiting and training employees.  Sometimes manager training can last as long as six weeks and can cost $40,000-$60,000.  Franchisors and franchisees do not want franchisees of the same brand to recruit managers after having made that investment by offering them a pay increase over what their current franchisee employer is paying them.  However, many anti-poaching clauses govern all or nearly all employees.

In their July 9, 2018 press releases announcing their investigations, the eleven state attorneys general expressed disdain for the fact that franchisees’ employees don’t even know about these restrictions when they become employed by a franchisee.  Moreover, they claim, in the words of Illinois Attorney General Lisa Madigan, “It unfairly stops low-income workers from advancing and depresses their wages.”

U.S. franchisors are re-evaluating their policies relating to poaching and preparing for possible litigation by state attorneys general. On July 12, 2018, the Washington State Attorney General announced via press release that the state entered into agreements with seven of the large quick service chain franchisors to immediately discontinue enforcing the anti-poaching provisions, and to ultimately remove them from their U.S. franchise agreements.  Pursuant to these “assurances of discontinuance,” six of the franchisors have agreed to amend their Washington franchise agreements accordingly within 120 days and their other U.S. franchise agreements when those agreements are up for renewal.  The Washington State Attorney General expects that more franchisors will agree to remove these anti-poaching provisions from their U.S. franchise agreements to avoid litigation with the state.   On the legislative front, while the sponsors of the legislation in Congress are all Democrats, and will not likely be able to enact anti-poaching legislation during this Congressional term, many observers think that control of one or both Houses of Congress will change following the November 2018 elections, and that anti-poaching and non-compete legislation could become a high priority in the next Congress.

Anti-poaching developments are moving quickly on the legal and legislative fronts. We expect to provide additional updates in a future edition of this newsletter. 

Carl Zwisler and Diana Vilmenay practice U.S. and International Franchise Law in the Washington, D.C. office of Gray Plant Mooty. The firm is representing several franchisors in state anti-poaching investigations.

 

Carl E. Zwisler, IDI franchising country expert for U.S.A. and Diana V. Vilmenay, lawyer at Gray Plant Mooty, Washington, D.C.

 

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