The Seventh Circuit recently revived an antitrust challenge to a clause in McDonald’s franchise agreements barring franchises from poaching other franchises’ employees. (See our previous coverage of antitrust challenges to no-poach agreements, reported on: Feb. 9th, 2022; May 2nd, 2022; Sept. 22nd, 2022; Nov. 29th, 2022; Feb. 14th, 2023; and May 15th, 2023.) In a unanimous opinion by Judge Frank Easterbrook, the Seventh Circuit held that the district court erred by rejecting the plaintiffs’ theory that the no-poach clause was per se unlawful at the motion-to-dismiss stage.
The Plaintiffs’ Sherman Act Claims
The plaintiffs worked for McDonald’s franchises. They brought this suit under section 1 of the Sherman Act, alleging that every McDonald’s franchise agreement contained a “no-poach clause.” This no-poach clause allegedly forbade franchise operators from hiring any person employed by any other McDonald’s franchise in the country (or McDonald’s itself) until six months after that person’s employment ended. The plaintiffs claimed that this agreement was a naked, horizontal restraint of trade that is unlawful per se. A “naked” restraint is one that “is unaccompanied by new production or products.” Polk Bros., Inc. v. Forest City Enterprises, Inc., 776 F.2d 185, 188–89 (7th Cir. 1985). Alternatively, the plaintiffs alleged that the no-poach clause was illegal under the rule of reason.
The District Court’s Dismissal of the Complaint
Judge Jorge L. Alonso in the Northern District of Illinois granted McDonald’s motion to dismiss the complaint in its entirety. According to Judge Alonso, Plaintiffs’ per se theory failed because the no-poach clause was not a naked restraint. Rather, because it was included as a clause within McDonald’s franchise agreements, it was ancillary to those agreements. In antitrust law, an agreement is exempt from per se treatment if it is ancillary to a procompetitive venture, such as one that enhances output (i.e., producing a greater quantity of goods or a new good that would not otherwise exist). In Judge Alonso’s view, McDonald's franchise agreements were procompetitive because each new franchise “increased output of burgers and fries.”
Judge Alonso also held that the complaint failed under a rule of reason analysis because it did not allege that McDonald’s and its franchises collectively have power in the market for restaurant workers’ labor. In support of this conclusion, Judge Alonso found that there were 517 quick-service restaurants within ten miles of the lead plaintiff’s home.
The Seventh Circuit’s Analysis
The Seventh Circuit began by agreeing with the district judge’s holding that the complaint failed under a rule of reason standard. Rejecting the plaintiff’s argument that “the existence of market power is too obvious to need allegations and proof,” Judge Easterbrook explained that “workers at McDonald’s” does not constitute a labor market because “[p]eople entering the labor market can choose where to go—and fast-food restaurants are only one of many options.” Op. at 3. Therefore, the plaintiffs had failed to plausibly allege that McDonald’s and its franchises had power in any labor market, which the panel viewed as a necessary element of a claim under the rule of reason standard.
But the panel unanimously held that “the district judge jettisoned the per se rule too early.” Id. at 4. The no-poach clause is a horizontal restraint because McDonald’s allegedly operates many of its restaurants itself (or through a subsidiary) and enforces the no-poach clause at those restaurants, such that workers at franchised outlets cannot move to corporate outlets or vice versa. In the panel’s view, although a horizontal restraint is not per se unlawful if it is ancillary to the success of a cooperative venture, the complaint’s allegations did not support the district court’s holding that McDonald’s no-poach clause was ancillary as a matter of law.
The panel found several problems with the district court’s analysis. First, the panel wrote, the district court “treat[ed] benefits to consumers (increased output) as justifying detriments to workers (monopsony pricing).” Id. at 5. That reasoning, the panel held, is foreclosed by the Supreme Court’s decision in NCAA v. Alston, 141 S. Ct. 2141 (2021), which the court interpreted as establishing that restraints on the “markets for inputs”—like the labor market—can violate the antitrust laws even when they arguably benefit consumers through increased output.
Another problem, according to the panel, is that the no-poach clause’s appearance in the franchise agreement did not necessarily mean that it contributed to the increased economic output generated by the franchise agreement. To be truly ancillary, the no-poach clause must bear some relationship to the enhanced output that results from the franchise agreements. But, taking the plaintiff’s allegations to be true at the pleading stage, the panel found any such link to be missing: “Is there some reason to think that a no-poach clause promotes the production of restaurant food? … Maybe it just takes advantage of workers’ sunk costs and helps each business’s bottom line, without adding to output.” Op. at 5.
Expanding on this, Judge Easterbrook noted that if McDonald’s no-poach clause “prevents workers from reaping the gains from skills they learned by agreeing to work at lower wages at the outset of their employment,” then “it does not promote output”—i.e., the production of burgers and fries—and “cannot be called ‘ancillary.’” Id.at 6. He acknowledged that franchises’ need to protect their investment in training employees “could in principle justify restraints on poaching.” Id. But, in his view, the question of whether McDonald’s no-poach clause was “protecting franchises’ investments in training” or instead enabling McDonald’s “to appropriate the value of workers’ own investments” in their training at low wages could not be answered based on the allegations in plaintiffs’ complaint. Id. at 7. Rather, resolving the issue of whether the restraint was truly “ancillary” requires “careful economic analysis” and, in any event, “the classification of a restraint as ancillary is a defense, and complaints need not anticipate and plead around defenses.” Id. That last statement may call into question whether, in Judge Easterbrook’s view, a per se antitrust challenge may be dismissed at the pleading stage on the basis that the challenged agreement is ancillary to a legitimate venture.
For all of these reasons, the panel vacated the district court’s dismissal of the plaintiffs’ complaint and remanded for further consideration. The panel also encouraged the district court to reconsider its denial of class certification.
Judge Ripple’s Concurrence
Judge Kenneth Ripple, who joined the panel opinion, published a short concurrence to clarify his understanding of what the panel decided. In his view, the panel made clear that defendants bear the burden of establishing that no-poach clauses are ancillary restraints and provided helpful guidance to the district court on how to analyze McDonald’s no-poach clause. But, Judge Ripple cautioned, the panel opinion did not definitively assess the merits of its suggested avenues of economic analysis or preclude the district court from considering other approaches. For instance, the extensive scope and duration of the no-poach clause by itself might preclude it from being “reasonably necessary to the achievement of the procompetitive objectives of the franchise agreement,” without the need for further economic analysis. Id. at 9–10.
In closing, Judge Ripple highlighted the “rule” that, in his view, the panel opinion left intact—namely, “that the ancillary restraint defense requires that the defendants establish both that the restriction in question be ‘subordinate and collateral’ to a ‘legitimate business collaboration’ among the defendants and be reasonably necessary to achieve a procompetitive objective of the franchise agreement.” Id. at 10 (emphasis in original) (citations omitted).
We’ll keep an eye on this case as it goes forward.
