Dane Morris Takeaways: On August 25, 2023, Judge Frank Easterbrook of the U.S. Court of Appeals for the Seventh Circuit published an opinion in which a three-judge panel held that Plaintiffs — former McDonald’s workers — alleged a plausible violation of Section 1 of the Sherman Act, 15 U.S.C. § 1 in Deslandes v. McDonald’s USA, LLC, Nos. 22-2333 & 22-2334 (7th Cir. Aug. 28, 2023). The Seventh Circuit rejected the district court’s conclusion that plaintiffs failed to allege a per se violation of Section 1 because the horizontal no-poach restraint alleged by plaintiffs could be a naked restraint between competitors rather than a restraint ancillary to the success of cooperative venture. Instead, the Seventh Circuit concluded that additional discovery, economic analysis, and potentially a trial could be required to resolve the issue.
The ruling in Deslandes v. McDonalds is required reading for any corporate counsel handling antitrust class action litigation involving no-poach or non-solicitation issues.
Plaintiffs, a group of former McDonald’s workers, brought a class action over alleged antitrust violations in the U.S. District Court for the Northern District of Illinois. Defendants McDonalds USA, LLC and McDonald’s Corporation (collectively, McDonald’s) operate fast-food restaurants or do so through a subsidiary, and until recently, every McDonald’s franchise agreement contained a provision prohibiting any franchise operator from hiring any person employed by a different franchise or by McDonald’s itself until six months after the last date that person had worked for McDonald’s or another franchise. Plaintiffs allege that they were unable to earn higher wages at other franchises while these provisions were in effect. The district court dismissed the complaint, and Plaintiffs appealed.
Case Remanded for Further Proceedings
A horizontal agreement between competitors could be considered a per se violation of Section 1 of the Sherman Act or it could be considered a violation under the Rule of Reason. Per se violations are reserved for certain agreements, like price-fixing or market allocation. All other arrangements by competitors are considered under the Rule of Reason, which includes an assessment of the relevant product or service market and a defendant’s (or defendants’) power in such market. The assessment of market power typically includes an analysis of market share and barriers to entry and expansion, among other factors.
Here, Plaintiffs did not allege that McDonald’s had market power in the market for labor at its restaurants, and the Seventh Circuit agreed with the district court that there was so much competition for fast-food restaurant workers that McDonald’s could not have had market power. Nonetheless, the Seventh Circuit disagreed with the district court’s determination that Plaintiffs had not alleged a per se violation.
A no-poach clause (or any other clause) is considered ancillary, rather than naked, if it is ancillary to the success of a cooperative venture. The district court concluded that Plaintiffs had not alleged a per se violation because the no-poach clause was ancillary to the franchise agreement in that it expanded the output of burgers and fries and led to the success of the cooperative venture between franchises. The Seventh Circuit disagreed with this analysis because “it treats benefits to consumers (increased output) as justifying detriments to workers (monopsony pricing).” Id. at 3. While the Seventh Circuit recognized the possibility that the no-poach clause could have been protecting franchises’ investment in training, it found that selling more burgers and fries to consumers is immaterial to justifying any detriment to workers from the provision and remanded the case for further proceedings on the question.
Implications For Employers
Deslandes v. McDonald’s is notable in that it opens the door to significant discovery, economic analysis, and potentially even trial proceedings to determine whether a no-poach (or similar employment provision) is ancillary to an agreement or a naked restraint that can be adjudicated only on the pleadings. The Seventh Circuit also signaled that the fact that the no-poach provision was nationwide in scope (rather than limited to a particular labor submarket) and that fact that the restriction lasted for the duration of employment and an additional six months (rather than limited to the time to recoup training investment) could tend to show that the no-poach clause was an illegal means for suppressing wages rather than a reasonable restraint to further the success of the overall franchise. Employers utilizing no poach agreements are well-served to consider the Deslandes ruling in detail.