Seventh Circuit Rejects Dismissal of Franchisee No-Poach Clause Challenge
In Deslandes v. McDonald’s USA LLC,1 issued August 25, 2023, the U.S. Court of Appeals for the Seventh Circuit overturned the dismissal of antitrust claims that challenged no-poach clauses in franchise agreements.
Plaintiffs were employees of McDonald’s franchises and challenged the no-poach or anti-poach clauses in the applicable agreements under Section 1 of the Sherman Act (15 U.S.C. § 1) as antitrust violations.
Laws reviewed under this section “fall into two principal categories”:2 (1) “naked restraints,” which “are unlawful per se”3 and (2) “other restraints,” which “are evaluated under the Rule of Reason.”4 The Rule of Reason, the U.S. Supreme Court has explained, is “‘a fact-specific assessment of market power and market structure’ aimed at assessing the challenged restraint’s ‘actual effect on competition’—especially its capacity to reduce output and increase price.”5 To succeed on a claim based on the Rule of Reason, establishing “[m]arket power is essential.”6
In Deslandes, the trial court dismissed plaintiffs’ claims, finding that the complaint was insufficient on both rationales. First, the trial court determined that clauses at issue were not per se unlawful as “naked restraints” because they are “ancillary to each franchise agreement.”7 Second, it determined Plaintiffs’ complaint was deficient under the rule of reason because it failed to “allege that McDonald’s and its franchises collectively have power in the market for restaurant workers’ labor.”8
On appeal, the Seventh Circuit reversed and remanded the case for further proceedings.9 Regarding the rule of reason, the Court held that there is not an economic market for McDonald’s employees10 because McDonald’s employees can easily choose to work at other fast-food restaurants “[i]f wages are too low” and, therefore, “[t]he mobility of workers—both from one employer to another and from one neighborhood to another—precludes the Court from “treat[ing] employees at a single chain as a market.”11 Thus, if rule of reason applied, then plaintiffs would lose because they cannot establish a relevant market comprised solely of McDonald’s franchise workers across the country. However, the Seventh Circuit held that the district court “jettisoned the per se rule too early.”
The Court also ruled that the trial court improperly rejected the unlawful per se basis for plaintiffs’ challenge at the motion to dismiss stage12 and a plaintiff does not have to anticipate affirmative defenses when drafting a complaint.13
As to whether the clauses at issue are, in fact, ancillary, the Court said that determination would require discovery, a review of the facts, and “careful economic analysis”—which is not appropriate at the dismissal stage.14 As the Court noted, the determination is not as straightforward as the district court thought, and “[a] ‘restraint does not qualify as “ancillary” merely because it accompanies some other agreement that is itself lawful.’”15
Judge Ripple’s concurring opinion explained that defendants seeking to establish this defense must prove two elements: (1) “that the restriction in question [is] ‘subordinate and collateral,’ to a ‘legitimate business collaboration’ among the defendants,”16 and (2) that the restriction is “reasonably necessary to achieve a procompetitive objective of the franchise agreement.”17
The Court’s discussion suggested that the no-poach clauses at issue stifle employees’ ability to take advantage of a competitive employment market among franchises after self-investing in their training.18 Its analysis appears to turn on certain specific facts, including that the employees paid for their own training, the national scope of the no-poach clauses, and the Court’s determination that the clauses did “not promote output” for the franchises.19 That being said, Judge Ripple’s concurrence clarified that the decision did not take any position on the merits.20
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1 Deslandes v. McDonald’s USA, LLC, Nos. 22-2333 & 22-2334, 2023 WL 5496957 (7th Cir. Aug. 25, 2023) (citation omitted).
5 Nat’l Collegiate Athletic Ass’n v. Alston, 141 S. Ct. 2141, 2155 (2021).
6 Deslandes, 2023 WL 5496957, at *1.
9 Id. at *4.
10 Id. at *2.
11 Id. at *1.
13 Id. at *3.
15 Id. at *2 (citation omitted).
16 Id. at *4 (Ripple, J., concurring).
18 Id. at *3 (panel).
20 Id. at *4 (Ripple, J., concurring).