judge gavel, law books and scales of justice

In June 2021, the Supreme Court reaffirmed in NCAA v. Alston that antitrust claims under Section 1 of the Sherman Act “presumptively” call for rule-of-reason analysis and that only the rare case merits “quick look” or per se treatment. __ U.S. __, 141 S.Ct. 2141, 2151 (2021). Recently, in Deslandes v. McDonald’s USA, LLC, Judge Jorge Alonso of the U.S. District Court for the Northern District of Illinois applied that guidance in dismissing claims that no-poach agreements between McDonald’s franchises and corporate-owned locations violated Section 1, holding that, under the rule-of-reason analysis, the plaintiffs’ failure to allege a relevant market doomed those claims. No. 17 C 4857, 2022 WL 2316187, at *2 (N.D. Ill. June 28, 2022). Judge Alonso also determined that the plaintiffs were not entitled to rely on a “quick look” approach to escape the required analysis of markets and competitive effects under the rule of reason. Judge Alonso’s reliance on Alston to reject the quick-look approach illustrates the difficulty of prosecuting no-poach cases in the context of a franchise or other legitimate business arrangement. Even in a time of increased Federal Trade Commission (FTC) scrutiny of no-poach agreements, plaintiffs must still plead and prove a relevant geographic market when seeking to invalidate no-poach agreements under Section 1 of the Sherman Act and thus face significant burdens in bringing such claims.

The consolidated case before Judge Alonso began as a putative class action wherein the plaintiffs sought to invalidate the no-poach restriction contained in McDonald’s franchise agreements as unlawful restraints of trade under the Sherman Act. The challenged restriction provided:

Franchisee shall not employ or seek to employ any person who is at the time employed by McDonald’s, any of its subsidiaries, or by any person who is at the time operating a McDonald’s restaurant or otherwise induce, directly or indirectly, such person to leave such employment. This paragraph shall not be violated if such person has left the employ of any of the foregoing parties for a period in excess of six (6) months.

Judge Alonso denied class certification in July 2021. Deslandes v. McDonald’s USA, LLC, Case No. 17 C 4857, 2021 WL 3187668 (N.D. Ill. July 28, 2021). His opinion concluded that individual issues predominated because, under the Alston-mandated rule-of-reason analysis, the claims required a showing that the defendants had power in the relevant market applicable to each individual’s claim.

The defendants thereafter filed a motion for judgment on the pleadings, arguing that the Sherman Act claims could not survive due to the plaintiffs’ failure to allege a relevant market in their respective complaints. After briefing was closed, the U.S. Department of Justice (DOJ) unsuccessfully sought permission to file a Statement of Interest – likely in an attempt to finesse (or perhaps to disavow) the position it expressed in its Statement of Interest filed in another franchise no-poach case, Stigar v. Dough Dough Inc., No. 18 C 00244 (E.D. Wash. Mar. 7, 2019), that the rule of reason was broadly applicable to franchise no-poach agreements.

Judge Alonso granted the defendants’ motion for judgment on the pleadings, dismissing the Sherman Act claims “for failure to include allegations of market power in a relevant market, because those are the facts necessary to render plausible a claim that a restraint is unlawful under rule-of-reason analysis.” In granting the motion, Judge Alonso rejected the plaintiffs’ argument that McDonald’s restaurants together constitute the relevant market. Instead, he referenced the class certification ruling in the case that “the relevant geographic market for the type of labor [plaintiffs] were selling is a small, local area,” noting that “within three miles of [one plaintiff’s] home were two McDonald’s restaurants and between 42 and 50 other quick-serve restaurants. Within 10 miles of [that plaintiff’s] home were 517 quick-serve restaurants.”

The plaintiffs’ decision not to define narrower relevant markets and instead proceed through certification, as plaintiffs often do, clearly backfired. As Judge Alonso himself commented in an earlier motion to dismiss, noting that the plaintiffs chose not to allege a rule-of-reason claim or define a relevant market:

[P]laintiff has not attempted to plead a claim under the rule of reason. This is perhaps unsurprising. To state a claim under the rule of reason, a plaintiff must allege market power in a relevant market. The relevant market for employees to do the type of work alleged in this case is likely to cover a relatively small geographic area. Most employees who hold low-skill retail or restaurant jobs are looking for a position in the geographic area in which they already live and work, not a position requiring a long commute or a move. That is not to say that people do not move for other reasons and then attempt to find a low-skill job; the point is merely that most people do not search long distances for a low-skill job with the idea of then moving closer to the job. Plaintiff, though, seeks to represent a nationwide class, and allegations of a large number of geographically small relevant markets might cut against class certification.

The Biden administration and DOJ have made clear their intent to scrutinize the use of no-poach agreements, most notably in the criminal cases brought by DOJ as per secases. Defendants in those and future cases can be expected to cite Deslandes in an attempt to defeat DOJ’s per se characterization. And as the FTC considers whether to exercise its rulemaking authority with regard to no-poach agreements, Deslandes shows that Alston presents a formidable hurdle for private class-action challenges to no-poach agreements in the franchise context.

Given the rule of reason’s broad applicability to such agreements, Alston and now Deslandes raise the bar for plaintiffs seeking to invalidate no-poach agreements by requiring plaintiffs to bring complaints that pass rule-of-reason muster. Perhaps the FTC will view Deslandes as confirmation that regulatory intervention is a more productive way to police franchise no-poach agreements. Indeed, McDonald’s itself reached an agreement with the Washington state attorney general in 2018 to drop no-poach clauses from its franchise agreements. Many other franchises have followed suit.