Eleventh Circuit Holds That a Franchisor and Its Franchisees May Violate Sherman Act by Entering Into No-Hire Agreements

On August 31, 2022, the US Court of Appeals for the Eleventh Circuit held that a franchisor and its franchisees engage in concerted action for purposes of Section 1 of the Sherman Act when they enter into “no-hire” agreements. In Arrington v. Burger King Worldwide, Inc., the Eleventh Circuit reversed a district court’s dismissal of antitrust claims asserted by current and former employees of Burger King franchises, holding that plaintiffs had plausibly alleged that Burger King Corporation’s franchise agreements violate Section 1. The Eleventh Circuit’s decision in Arrington may be a bellwether of courts’ willingness to scrutinize alleged restraints on labor markets. There has been an uptick in recent years in challenges to no-poach agreements by the enforcement agencies and class-action plaintiffs, and the Eleventh Circuit’s decision will no doubt encourage further cases.

Claims Presented to the District Court

According to the plaintiffs, between 2010 and 2018, Burger King allegedly incorporated a “No Hire Agreement” into its standard franchise agreement, which prohibited Burger King and its franchisees from hiring away any employee of Burger King or of another Burger King franchisee for six months after the employee leaves the first Burger King restaurant, unless the first Burger King employer gives the latter Burger King employer prior written consent. Plaintiffs alleged that this No-Hire Agreement artificially depressed wages, reduced employee benefits, and deprived employees of job mobility. The plaintiffs asserted that the No-Hire Agreement violated Section 1 of the Sherman Act because it prohibit >Burger King franchisees from competing with each other and with the Corporation in attracting and retaining labor. Id. at *3; see, e.g., Am. Compl. ¶ 7 (alleging that through the No-Hire Agreement, the “franchisees, at the direction and control of and with the assistance of Burger King itself, have together colluded to depress wages and employment opportunities of employees who work in Burger King branded restaurants throughout the United States”).

Under well-established precedent in Copperweld Corp. v. Independence Tube Corp. and American Needle, Inc. v. National Football League, only independent entities can engage in “concerted action” for purposes of Section 1 of the Sherman Act—Section 1 does not reach unilateral conduct. As the Supreme Court explained in American Needle, to fall within the ambit of Section 1, an arrangement between two or more entities must “‘deprive the marketplace of independent centers of decisionmaking’… and thus of actual or potential competition.” If the entities, in fact, constitute a “single economic unit,” any agreement between them does not satisfy Section 1’s multiplicity-of-actors requirement. In Copperweld, for example, the Supreme Court held that a parent corporation and a wholly owned subsidiary “must be viewed as… a single enterprise for purposes of § 1 of the Sherman Act.” In contrast, the Court in American Needle held that NFL teams are independent actors, meaning that an agreement among them to jointly license their intellectual property was actionable under Section 1.

The central question presented in Arrington v. Burger King was whether Burger King and its franchisees should be treated as independent economic actors (as in American Needle) or as a single economic unity (as in Copperweld). The district court concluded that Burger King and its franchisees were a single economic entity—and as such, were not capable of concerted action—and dismissed the complaint on that basis. The district court concluded that under Copperweld and American Needle, “Burger King’s No-Hire Agreement constitutes an internal agreement to implement a single, unitary firm’s policies… and does not implicate antitrust principles” (quotation omitted).

The Eleventh Circuit’s Legal Reasoning

The Eleventh Circuit disagreed with the district court, ruling that the complaint plausibly alleged concreted action because Burger King and each of its franchisees are distinct economic entities. The Eleventh Circuit relied extensively on Burger King’s standard franchise agreement, which states that “no fiduciary relationship between the parties exists”; that Burger King restaurants “may” face competition from each other; and that each franchisee is solely responsible for its own hiring decisions. Accordingly, the court reasoned that “each franchisee is an independent center of decisionmaking as to hiring or employment agreements.”

In concluding that Burger King and its franchisees are each independent actors, the Eleventh Circuit’s decision largely focused on the existence of competition between the franchisees themselves. That begs the question of whether Burger King Corporation and a franchisee should be considered a single economic entity. Some courts have held that a franchisor and franchisee could be eligible for protection under Copperweld as a single entity. For example, in Williams v. I.B. Fischer Nevada, the Ninth Circuit found that Foodmaker, the franchisor of Jack-in-the-Box restaurants, was incapable of conspiring with a Jack-in-the-Box franchisee. In 2011, the Western District of Washington followed this reasoning in Danforth & Associates, Inc. v. Caldwell Banker Real Estate, LLC, finding that Caldwell Banker and the Bain entity were “in a franchisor-franchisee relationship” and, therefore, could not conspire within the meaning of the Sherman Act. The district court in Arrington relied upon that line of cases in dismissing the complaint, emphasizing that “Burger King’s No-Hire Agreement constitutes an internal agreement to implement a single, unitary firm’s policies, and does not implicate antitrust principles.”

Burger King argued that the Eleventh Circuit could affirm dismissal on the alternative ground that the agreement was not unreasonable under the rule of reason. The Eleventh Circuit declined to take this approach, stating that it would not decide in the first instance whether the rule of reason or the per se rule should apply. This raises the question of what level of antitrust scrutiny should apply in the franchise context. The plaintiffs alleged an unlawful agreement that is partly vertical (the franchise agreements between Burger King and its franchisees) and partly horizontal (an agreement among the franchisees). At least one court, the Southern District of Illinois in Butler v. Jimmy John’s Franchise, LLC, has suggested that the per se rule might apply to agreements among franchisees. Other courts (notably the Eastern District of Michigan in Ogden v. Little Caesar Enterprises, Inc., and the Northern District of Illinois in DeSlandes v. McDonald’s USA, LLC), have held that the rule of reason or a “quick look” analysis should apply in the franchise context.

Key Takeaways

The Eleventh Circuit’s decision in Arrington may signal that courts are becoming increasingly willing to scrutinize alleged restraints on labor markets. There has been an uptick in recent years in challenges to no-poach agreements by the enforcement agencies and class-action plaintiffs. For example, in Yi v. SK Bakeries, LLC, the Western District of Washington, in 2018, denied a motion to dismiss a Section 1 claim against Cinnabon franchisor and franchisees for no hire agreement because they were “capable of conspiring” under Section 1. The Eleventh Circuit’s decision in Arrington will no doubt encourage plaintiffs to bring further cases.

Employers should continue to be mindful of the potential antitrust risk involved in no-poach agreements, communications with competitors about wages or terms of compensation, and non-compete agreements. If you are unsure about navigating the evolving legal landscape related to antitrust risk in employment agreements, O’Melveny’s closely aligned teams within our Antitrust & Competition and Labor & Employment practices can help. We will continue to monitor these legal developments and are here to answer any questions you may have.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Anna Pletcher, an O’Melveny partner licensed to practice law in California, Stephen McIntyre, an O’Melveny partner licensed to practice law in California, and Laura K. Kauffmann, an O’Melveny associate licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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