A recent Seventh Circuit opinion by Judge Easterbrook held that no-poach agreements, absent valid ancillary restraints, can be per se illegal. Per se violations of the antitrust laws are inherently illegal—meaning no defenses or justifications are available. They have traditionally included conduct like horizontal price fixing, bid rigging, and market allocation.
This is the first appellate opinion to reach the conclusion that no-poach agreements can be per se violations. As the Department of Justice Antitrust Division (DOJ) has spent the past seven years arguing that no-poach agreements are criminal violations of the antitrust laws, the opinion could empower the DOJ to bring more no-poach cases, given that it must establish an antitrust violation is a per se violation for criminal cases. This opinion also fires a warning shot at companies that use no-poach clauses in franchise agreements. Under the principles described in the opinion, many no-poach clauses in that type of agreement may be per se illegal.
The case arose from a no-poach policy in McDonald’s’ franchise agreement that prohibited franchise owners from (1) hiring a person employed by a different franchise or McDonald’s itself and (2) soliciting employees from another franchise. For both restrictions, the prohibition lasted until six months after the last date that the person had worked for McDonald’s or another franchise. The plaintiffs were employees who were unable to take higher-paying offers at other franchises. They brought a Section 1 claim alleging that the policy violated the antitrust laws.
The district court rejected the plaintiffs’ contention that the policy was a per se violation. That court viewed the restraint as ancillary to each franchise agreement, distinguishing it from per se illegal naked restraints on trade. Because it viewed new franchises as expanding fast food output, it saw the restraint as justified.
But the Seventh Circuit panel reversed the lower court’s ancillary restraint analysis, stating that it “jettisoned the per se rule too early.” Slip op. at 4. The district court had reasoned that the policy was an ancillary restraint because a new franchise would expand the output of food. Yet, in doing so, the district court failed to treat the workers as a market, leading it to downplay harms to workers caused by the policy such as reduced wages and lack of mobility. Relatedly, the district court also erred by crediting the alleged benefits of the restraint in the downstream fast food sales market, namely higher output, against the harms to workers in the upstream labor input market. Out-of-market offsets are disfavored under the antitrust laws.
The panel also disagreed that the policy was inherently related to food output. For example, it noted that an employee may accept a lower wage to receive training and, upon finishing the training, seek employment at another McDonald’s with a higher wage. The no-poach policy prohibits this, thereby allowing franchise owners to keep paying workers at lower wages longer than they would otherwise, but it does not guarantee that the franchise owner will use the resulting profits to increase food output, as opposed to pocketing the extra profits. And the panel questioned why the policy was national in scope, as the relevant market was local, and why its time limit was not linked to a reasonable recovery of the franchise’s investment in training, if the purpose of the no-poach policy was to recoup training investments (an in-market effect). The nature of these questions led the panel to conclude that the district court had applied the wrong analysis to evaluating the complaint and motion to dismiss.
Additionally, the panel held that because the ancillary restraint argument is an affirmative defense, and a plaintiff’s duty in a complaint is to state the facts relevant to its claim but not state facts relevant to any affirmative defense a defendant may raise, the complaint’s failure to address the ancillary restraints argument is not relevant to a motion to dismiss for failure to state a claim. The panel remanded to the district court and also instructed the court to reconsider its decision to deny class certification given the analysis in the panel’s opinion.
Judge Ripple wrote a concurrence to emphasize that the panel’s opinion should not be read by the district court as a directive to find that the no-poach policy is per se illegal, but rather to treat the opinion as a discussion of various factors the district court should consider on remand.
This decision is notable because it is the first appellate decision to strongly suggest that no-poach agreements can be per se illegal. The decision also seemed to clarify which no-poach agreements can be deemed ancillary under the antitrust laws—those that are tied to recouping the costs of training employees. For the DOJ, the case provides useful precedent in its amplified efforts to combat no-poach agreements, which it has recently fought through criminal trials.