No-Poach Clause in Franchise Agreement in 2022

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According to the latest data, it appears that franchisors have been on a roller coaster ride for the past few years due to No-Poach Clause in Franchise Agreement. While it appeared for a time that the Department of Justice (“DOJ”) would be able to file a statement of interest for restrictions contained in McDonald’s franchise agreements, the DOJ filed a motion on February 17, 2022, that requested permission to file a statement of interest involving restrictions contained in McDonald’s franchise agreements.

To comply with these regulations, franchise owners cannot pursue or hire anyone who previously worked for another McDonald’s restaurant. McD’s relied on an existing statement of interest submitted by the Department of Justice in a separate case during the previous administration’s tenure, which called for a review under the “rule of reason” rather than finding a “per se” violation of the Sherman Act.

To prevail under the “rule of reason,” a Plaintiff must demonstrate that the alleged anticompetitive impacts of the franchisor’s actions outweighed the benefits and justifications that the franchisor provided for those benefits and justifications. This method is more advantageous to franchisors since it considers the franchise relationship as a whole and places a greater bar on a plaintiff’s ability to prove their case. However, this recent request by the Department of Justice indicates that the sentiment within the DOJ may no longer favor that strategy.

The line of reasoning advanced by the prior DOJ statement of interest was those franchise arrangements are “vertical” in nature because all parties are affiliated with the same brand and have mutually beneficial and overlapping interests in common. This is believed to be distinct from a “horizontal” agreement between legitimate competitors. The former possesses redeeming characteristics that can outweigh any potential bad consequences.

Those who believe that all franchise relationships should fall into the “horizontal” camp (or be treated the same as those who believe that all franchise relationships should fall into the “horizontal” camp) argue that no-poach arrangements limit opportunities for mobility and compensation for employees and, as a result, violate anti-trust laws, regardless of any ancillary benefits or justifications.

The Department of Justice aims to submit its statement of interest for No-Poach Clause in Franchise Agreement by March 21, 2022. McDonald’s has filed a lawsuit against the Department of Justice, claiming that the intervention is untimely, among other things. In preparation for the 2022 annual season for updating franchise disclosure documents, franchisors should review their franchise agreements pertaining to this subject matter and make any necessary modifications.