Antitrust Law Daily Antitrust claim over ‘no-hire’ provision in McDonald’s franchise agreements avoids dismissal
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Tuesday, June 26, 2018

Antitrust claim over ‘no-hire’ provision in McDonald’s franchise agreements avoids dismissal

By Nicole D. Prysby, J.D.

Because a no-hire provision in a McDonald’s franchise agreement was a horizontal restraint on trade, an employee’s federal antitrust claim under quick-look analysis was permitted to go forward by a federal district court in Chicago. Claim under the Illinois Antitrust Act and Illinois Consumer Fraud Act were dismissed (Deslandes v. McDonald's USA, LLC, June 25, 2018, Alonso, J.).

Background. The employee started as an entry-level worker at a McDonald’s franchise and worked her way up to management and completed management training. She was offered a better-paying position at a competing McDonald’s restaurant, but was foiled by McDonald’s franchise agreement, which contained a no-hire provision preventing the restaurant from hiring any current employee of another McDonald’s or anyone who had worked for a competing McDonald’s in the last six months. McDonald’s had a similar restraint in place for the non-franchised restaurants operated by a subsidiary of the McDonald’s corporation. The employee asserted that the no-hire provision promoted collusion among the restaurants, denied each the ability to hire the best employees, and allowed them to pay below-market wages. She brought a Sherman Act claim and claims under the Illinois Antitrust Act and the Illinois Consumer Fraud and Deceptive Trade Practices Act. The defendants moved to dismiss.

Sherman Act claim. The employee alleged that her Sherman Act claim concerned a restraint that was either per se unlawful or unlawful under quick-look analysis. McDonald’s argued that the restraint should be analyzed under the rule of reason and the employee should have included allegations of market power in the relevant market. The court discussed the alleged restraint and concluded that the employee alleged the existence of a horizontal agreement in restraint of trade, under which McDonald’s restaurants all sign agreements promising not to hire employees from other McDonald’s. McDonald’s argued that it was a vertical restraint, because it was imposed by the franchisor. But the court found that it was a horizontal restraint because McDonald’s used the no-hire agreement to protect its own restaurants (the non-franchised stores) from horizontal competition for employees with the franchised stores.

Although a naked no-hire agreement is per se unlawful, if the no-hire agreement is ancillary to a procompetitive agreement or necessary for the product to exist at all, it will be judged under the rule of reason analysis, including by quick-look. The court found that the restraint was ancillary to McDonald’s franchise agreement, and the franchise agreement itself was procompetitive. The court then considered whether the alleged restraint could be found unlawful under quick-look analysis and concluded that it could. If competitors agree not to hire each other’s employees, wages will stagnate. The court rejected McDonald’s argument that the restraint has pro-competitive benefits because it promotes competition between McDonald’s and other fast food brands, instead of intrabrand competition. Because the case concerned competition for employees, not the sale of food to consumers, the procompetitive effects on food sales were irrelevant. In the employment market, the McDonald’s stores are competing brands and dividing the market stifles competition between them. The court also rejected McDonald’s argument that the restriction promotes intrabrand competition by encouraging franchisees to train employees for management positions, because the restriction applied to entry level employees, not just those who had undergone expensive management training. McDonald’s fear of losing employees it had trained did not justify the no-hire agreement. The court also found it appropriate to give the employee leave to amend her complaint to include a claim under the rule of reason, if desired.

State-law claims. The court found that the plain language of the Illinois Antitrust Act excluded the employee’s claims, because the law excludes from the definition of price-fixing any service that is labor performed by employees. The court also found that the Illinois Consumer Fraud Act did not cover the claims, since it is intended to protect consumers from fraud, not as additional enforcement of antitrust laws. Because the plaintiff alleged that she was defrauded as an employee and not a consumer, the claim should be dismissed.

The case is No. 1:17-cv-04857.

Attorneys: Michele Vercoski (McCune Wright Arevalo, LLP) for Leinani Deslandes. David Jarrett Arp (Gibson Dunn & Crutcher LLP) for McDonald's USA, LLC and McDonald's Corp.

Companies: McDonald's USA, LLC; McDonald’s Corp.

MainStory: TopStory Antitrust FranchisingDistribution StateUnfairTradePractices IllinoisNews

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