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'Anti-Poaching' Agreements Can Be Legally Questionable. As McDonald's Recently Found Out.

By Vaidehi Mehta, Esq. | Last updated on

Franchise owners might want to think twice about their employment practices after a recent lawsuit against McDonald’s and their “no-poach” agreements. Even as the lawsuit is still being litigated in the federal court system, what we’ve learned so far as that these kinds of contract agreements have the potential to violate antitrust laws. Let’s take a look at how franchises and no-poach clauses work, and why McDonald’s is having a hard time in court right now.

Franchises 101

The vast majority (over 80%) of McDonald’s restaurants are franchised. A franchise restaurant is a restaurant business that operates under a brand name and model established by another company, the franchisor. The franchisor grants the franchisee (the owner of the individual restaurant) the right to use their brand name, logo, recipes, operational manuals, and marketing strategies. In return, the franchisee pays the franchisor an initial fee and ongoing royalties, typically a percentage of their sales. In theory, a franchise benefits both the franchisee and the franchisor. Starting a franchise comes with a lower risk compared to opening an entirely new restaurant concept.

If you are considering getting into the franchise business, you can read more about buying a franchise, examples of franchises, and other legal resources for starting your own business at FindLaw’s Learn About the Law free legal resource pages.

However, not all franchise agreements are the same. Until it went to court over the matter only recently, each of McDonald’s franchise agreements contained an anti-poach clause. In other words, each franchisee signed up to avoid hiring anyone employed by either a different franchise or even by a McDonald’s restaurant until six months after the last date that person had worked for the other restaurant. In addition, the agreement prohibited one franchise from soliciting another franchise’s employees.

Employees Sue McDonald's

The anti-poach clause became a big enough issue for a couple of McDonald’s employees that they eventually took the hamburger chain to court. Leilani Deslandes and Stephanie Turner worked at McDonald’s stores at the time the anti-poach clauses were in effect. As a result, when they were offered higher-paying jobs at other franchises, they were legally unable to accept them. Deslandes, for example, was hired in an entry-level position at a Florida McDondalds in 2009. In 2015, she was looking for a position that paid more at a different franchise. But when she got the higher-paying job, she was told by the manager of that franchise that the no-poaching policy did not allow them to hire Deslandes.

Deslandes and Turner brought suit against McDonald’s, contending that such a clause violates antitrust laws, as a clause that reduces competition for fast-food workers deflates the price of labor (benefitting business owners and consumers alike). The lawsuits accused the company of colluding with franchise owners to restrict competition for employees. This was in violation of not just the federal Sherman Antitrust Act, but also states’ equivalent antitrust laws, as well as state laws that ban deceptive trade practices.  

Why Anti-Poaching is Usually Illegal

The Sherman Act prohibits an agreement that “unreasonably restrains trade,” and they can be “unreasonable” in two different ways. Some agreements are considered automatically unreasonable (“per se” unreasonable) because they are inherently anticompetitive in nature, and are thus considered invalid. Restraints that are not “unreasonable per se” are judged under the “rule of reason,” which looks at the facts of the case and the restraint’s actual effect on competition.

One type of agreement that is “per se” unreasonable is a “horizontal agreement.” A horizontal agreement is an agreement between two or more businesses operating at the same level of the supply chain. In other words, the businesses are competitors in the market. This is contrasted with vertical agreements, which are agreements between businesses at different levels of the supply chain (for example, a manufacturer and a retailer). These agreements are generally less concerning from a competition standpoint.

Horizonal agreements can involve things like price-fixing (agreeing on a certain price for a product or service), dividing up the market (each business sells in a specific territory), or limiting production (to keep prices high). Horizontal agreements are monitored by antitrust laws to ensure fair competition in the market. Regulatory bodies like the Federal Trade Commission (FTC) in the U.S. are responsible for investigating and potentially prosecuting businesses that engage in illegal horizontal agreements. Many horizontal agreements are illegal because they harm consumers by reducing competition and potentially leading to higher prices and lower quality products or services.

The federal trial court ruled that anti-poach clauses like those found in McDondald’s contracts may be considered “horizontal” under certain conditions. Specifically, if the franchisor (McDonald’s Corporate) and franchisee (owner of the individual McDondald’s store) actually or even just potentially compete for employees, the type of agreement like the anti-poach clause would be considered horizontal. The same is true for an anti-poach agreement between two different franchisees, whether or not McDondald’s Corporate had a hand in setting it up.

"Ancillary Restraints" Defense

Once it’s established that the agreement is horizontal, the defendants in the lawsuit have a defense to allow the agreement if they can establish what’s called the “ancillary restraints doctrine.” This doctrine allows a business to argue that certain restraints included in a legitimate agreement are necessary and incidental to achieving the agreement's primary purpose.

In other words, the restraints, while potentially limiting competition, are justified by the overall benefits of the agreement. Courts will weigh the pro-competitive benefits of the agreement against the anti-competitive effects of the restraints. If the benefits outweigh the harms, the doctrine may apply, and the restraints might be considered legal. This helps achieve a balance between promoting competition and allowing businesses to form agreements that can improve efficiency and innovation.

Can Mickey D's Defend Itself?

The ancillary restraints doctrine allows businesses to enter into certain agreements that might have some limitations on competition, as long as those limitations are outweighed by the overall benefits to the market. Importantly, it’s up to the defendants to show this.

But instead of making the defendants show that the benefits outweighed the negatives of the restraints, the trial court just assumed that the requirements of the ancillary restraints doctrine were met. The 7th Circuit Court of Appeals said “not so fast” — and sent the case back down to the trial court to redo correctly. The Supreme Court has opted not to take the case up.

What will happen if McDonalds is able to defend their agreement? The anti-poaching clause stays in place. The upshot for current and future McDonald's employees is that their work contract will continue to limit their job opportunities and career advancement in a few ways. Limited competition among employers for your skills can mean less leverage to negotiate a higher salary or benefits package. If you're unhappy at your current job, an anti-poaching agreement could make it harder to find a new position within your industry.

But it won't just be fast-food workers who will be adversely affected. Owners of McDonald's franchises, as well as owners of competitor fast-food franchises, will have fewer human resources. With fewer companies actively recruiting, you as a franchise owner might have a smaller pool of potential employers to consider.

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