Bolstered by recent actions by federal and state regulators, plaintiffs lawyers have filed a raft of class actions alleging agreements not to poach employees violate federal antitrust laws. Now, the U.S. Justice Department is weighing in on their cases.
Most of the lawsuits, filed within the past year, challenge so-called “no poach” agreements that companies have with their franchises over employees, particularly in the services and fast-food restaurant industries. They follow 2016 guidance from the U.S. Department of Justice and investigations of many of the same companies by nearly a dozen state attorneys general.
So far, judges have refused to dismiss cases against McDonald’s, Cinnabon and two sandwich shop chains, Jersey Mike’s and Jimmy John’s. And lawyers are looking at more franchise cases in the pipeline, including six class actions on behalf of H&R Block employees.
“Normally, you can’t have an antitrust price fixing damages claim against a single entity for price fixing, so the theory on these cases is the franchises of H&R Block compete with the corporate stores of H&R Block,” said Jason Hartley, of San Diego’s Hartley, who has filed one of the H&R Block class actions. “It’s a provocative new theory on the franchisee and corporate store cases. That’s why I’m pursuing those.”
But the cases are far from slam dunks: This month, the DOJ asked courts for permission to file statements of interest that appear to support the arguments of the defendants, not the employees.
DOJ spokesman Jeremy Edwards declined to comment.
No-poach class actions aren’t new. Five years ago, several high-tech companies like Google Inc. and Apple Inc. settled a nationwide no-poach class action for more than $400 million. Several entertainment studios, such as The Walt Disney Co. and DreamWorks Animation LLC, also settled no-poach cases by animation workers.
“They gained a lot of legitimacy with what happened in the high-tech employee case,” Hartley said. “At the outset, they are risky cases. But the evidence, as these cases developed, like in high-tech and to a somewhat less degree the animation case, is compelling factual backgrounds that drive the cases.”
As in the high-tech cases, many of the new class actions parallel allegations by government regulators—in particular, guidance that the Justice Department “intends to proceed criminally against naked wage-fixing or no-poaching agreements,” which it deemed “per se illegal under the antitrust laws.”
On April 3 of last year, the Justice Department settled a civil case against two railroad equipment suppliers over agreements not to poach each other’s employees. The case was “part of a broader investigation by the Antitrust Division into naked agreements not to compete for employees—generally referred to as no-poach agreements,” said Assistant Attorney General Makan Delrahim of the Justice Department’s Antitrust Division, in a statement at the time.
More than two dozen lawsuits now are pending against both companies, Knorr-Bremse AG and Westinghouse Air Brake Technologies Corp., and have been coordinated into a multidistrict litigation proceeding in U.S. District Court for the Western District of Pennsylvania. A hearing on a motion to dismiss a consolidated class action, brought on behalf of thousands of employees, is set for Feb. 25.
But the newest cases involve franchise agreements. Plaintiffs lawyers argued at a hearing Thursday before the U.S. Judicial Panel on Multidistrict Litigation to create multidistrict litigation for the H&R Block cases, in either Illinois or Missouri.
Fast food restaurants are big targets. On July 9 of last year, attorneys general from 10 states and Washington, D.C., including California, New Jersey, New York and Pennsylvania, wrote a letter to eight restaurants asking about their no-poach agreements. Washington Attorney General Bob Ferguson, in particular, has reached agreements with 39 restaurants, many of which are the same chains now facing class actions. Some states have filed lawsuits. On Jan. 25, King County Superior Court Judge Melinda Young refused to dismiss Ferguson’s case against Jersey Mike’s.
Other class actions target Arby’s, Papa John’s Pizza, Little Caesars, Carl’s Jr. and Auntie Anne’s.
The ‘Meat’ of the Argument
The cases, citing the DOJ’s guidance, allege that the no-poach agreements are unreasonable restraints on the labor trade. Such agreements, the complaints say, reduce employee salaries and opportunities for advancement and, as horizontal restraints, are per se violations of the federal Sherman Act.
Many of the defendants, in moving to dismiss, argue the employees failed to demonstrate that they attempted to work at another franchise or were unable to get a similar job at a different restaurant. Franchises, they argued, were not in competition with each other and were vertical agreements.
They also argued that judges should evaluate the no-poach agreements not as a per se restraint on trade, as the plaintiffs contended, but under the “rule of reason,” which requires employees to establish a relevant market—something the complaints haven’t done.
Some plaintiffs have cited a June 25 decision by U.S. District Judge Jorge Alonso in the Northern District of Illinois, who found he had “no trouble concluding” that a no-poach agreement between McDonald’s and its franchises could be a per se unlawful horizontal restraint. But he found that some type of analysis, which he called a “quick look” test, was required given that the no-poach provisions were part of franchise agreements.
“Because the restraint alleged in plaintiff’s complaint is ancillary to an agreement with a procompetitive effect, the restraint alleged in plaintiff’s complaint cannot be deemed unlawful per se,” he wrote.
Plaintiffs also have used a Nov. 13 ruling in the Cinnabon class action, in which U.S. District Judge Robert Bryan of the Western District of Washington, citing the McDonald’s case, came to a similar conclusion.
In a July 31 decision, U.S. District Judge Michael Reagan of the Southern District of Illinois also made similar findings in a class action involving Jimmy John’s, but he put off the analysis question until later in the case.
Rachel Brass, a San Francisco partner at Gibson, Dunn & Crutcher who represents Jimmy John’s and McDonald’s, and a plaintiffs attorney in both cases, Richard McCune of McCune Wright Arevalo in Ontario, California, did not respond to requests for comment.
The DOJ’s notices, filed Jan. 25, come in cases that have dismissal hearings scheduled next month.
In its notice in the railroad equipment case, the DOJ sought to clarify that no-poach agreements are per se unlawful “unless the facts show that they are reasonably necessary to a separate legitimate business transaction or collaboration between employers.”
Neither Dean Harvey, a partner at San Francisco’s Lieff Cabraser Heimann & Bernstein, who is co-lead counsel in those cases, nor defense attorneys Mark Hamer, chairman of Baker McKenzie’s North America antitrust practice, and Thomas Birsic, co-practice area leader of the global litigation group at K&L Gates, responded to requests for comment.
The DOJ also filed notices in class actions against Carl’s Jr., Auntie Anne’s and Arby’s. Those notices sought to clarify that a no-poach agreement between a franchisor and franchisee “merits rule of reason analysis at the proper procedural stage” and that a “quick look” assessment “is unlikely to apply for the typical vertical franchisor-franchisee agreements.”
In those cases, defense attorney Bob Atkins, co-chairman of the litigation department at New York’s Paul, Weiss, Rifkind, Wharton & Garrison, declined to comment. Plaintiffs’ attorney Craig Ackermann, of Ackermann & Tilajef in Tacoma, Washington, who brought all three cases, did not respond to a request for comment.