Labor & Employment Law Daily Challenge to Papa John’s no-poaching clause for franchisees avoids dismissal
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Friday, October 25, 2019

Challenge to Papa John’s no-poaching clause for franchisees avoids dismissal

By Nicole D. Prysby, J.D.

The employees adequately pleaded the existence of horizontal agreements and antitrust injury in the form of depressed wages and employment opportunities.

Restraint of trade claims brought by employees of Papa John’s International, Inc., and Papa John’s USA, Inc., over the no-hire (or “no-poach”) clause in the chain’s franchise agreements avoided dismissal. In litigation that consolidated three putative antitrust class actions, a federal court in Kentucky found the employees plausibly alleged that the defendants orchestrated an agreement between and among Papa John’s restaurant franchisees not to hire or solicit each other’s employees or Papa John’s employees. The employees also sufficiently demonstrated that the statute of limitations should be tolled due to fraudulent concealment of the no-hire clause. Class claims also advanced based on allegations of a common cause of injury (the existence of the no-hire agreement) and common injury in the form of depressed wages and benefits and lack of employment opportunities (In Re Papa John’s Employee and Franchisee Employee Antitrust Litigation, October 21, 2019, McKinley, J.).

No-hire provision. Papa John’s International, Inc., enters into a standard franchise agreement with each new franchise owner. The plaintiffs claimed that every franchisee executing a franchise agreement from 2010-2017 agreed to a no-hire provision prohibiting it from employing any person employed by Papa John’s or any Papa John franchisee until one year after the franchise agreement is terminated. The plaintiffs claimed that the defendants used the franchise agreements to orchestrate a conspiracy among their franchisees not to compete for labor among themselves or the corporate-owned stores. More specifically, they maintained that the no-poach clause acts as a horizontal restraint of trade among competitors in the labor market and is a per se violation of the Sherman Act.

Sherman Act claims go forward. The court concluded that the employees adequately pleaded restraint of trade claims. They presented sufficient circumstantial evidence of an agreement between economic entities, allegations that the no-hire clause is against the franchisees’ self-interests, and that defendants had numerous opportunities to conspire at annual meetings. The court declined to decide which rule of analysis would apply to the restraint of trade claim, but concluded that it could proceed under a per se analysis because the no-hire provision restrains horizontal competitors for labor. It could also proceed under a quick-look approach or a rule of reason approach.

Although the employees did not define a relevant market, when dealing with a horizontal restraint that has an adverse effect on competition, a plaintiff need not define the relevant market, and here the employees set forth sufficient factual allegations from which the court could plausibly conclude that the agreements at issue are horizontal. They also sufficiently pleaded antitrust injury: depressed wages and diminished employment opportunities.

Statute of limitations tolled. The court also held that the statute of limitations should be tolled because the defendants fraudulently concealed the existence of the no-hire agreement when they publicly represented that each franchisee had complete control over all hiring practices. Those false statements fostered a misimpression by employees that the defendants had no inter-franchise constraints on their hiring and employment practices.

The franchise agreement was only publicly available through third-party websites such as California’s Department of Business Oversight. Based on the obscurity of the publication, the further obscurity of the no-poach provision within the franchise agreements, and the fact that the employees had no reason to look for or read their employer’s franchise agreement, a reasonable person’s interest would not be piqued.

Class claims survive. The court rejected Papa John’s argument that the proposed class lacked commonality or predominance. The plaintiffs demonstrated commonality by alleging that the no-hire clause applies to all Papa John’s employees. Predominance was met because there was a common cause of injury—the no-hire provision, which resulted in similar types of harm: depressed wages and benefits and reduced employment opportunities.

One plaintiff must arbitrate claims. One employee must pursue her claim in arbitration, though, because she signed an agreement during her hiring process to arbitrate all claims arising out of her employment with Papa John’s, including any violation of federal, state, or other law. The court rejected the employee’s argument that her antitrust claim arises not out of her employment but out of the concerted refusal of any Papa John’s franchisee to consider her for a position pursuant to the no-hire agreement.

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