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Creative And Strategic Legal Guidance

Do You Have Anti-Poaching Covenants in Your Franchise Agreement?

On Behalf of | Jan 18, 2019 | Firm News

There has been a fair amount of discussion in the franchising world recently about anti-poaching. Anti-poaching refers to provisions in franchise agreement that prohibit a franchisee from hiring the employees of the franchisor or the employees of other franchisees in the franchise system. A typical in-term covenant might read as follows:

Franchisee covenants that during the term of this Agreement, Franchisee shall not, either directly or indirectly, for itself, or through, on behalf of or in conjunction with any person, persons, or entity employ or seek to employ any person who is at that time employed by Franchisor, or by any other franchisee of Franchisor, or otherwise directly or indirectly induce or seek to induce such person to leave his or her employment thereat.

Such provisions, also referred to as no hire provisions, have been included in franchise agreements for many years without much thought or objection. The intent of such provisions has been to help franchisees protect their significant investment in training employees, thereby strengthening the overall franchise system and preventing intra-brand rivalry.

More recently these anti-poaching provisions have come under fire. The reasoning is that the effect of these provisions is to restrict worker mobility, potentially for better positions and wages, and decrease competition for labor by preventing workers from moving among franchise locations within a franchise system

In early 2018, the Washington Attorney General’s office initiated an investigation to determine whether these anti-poaching or no-hire provisions in franchise agreements restrained competition in the labor market. The Washington Attorney General concluded that no hire agreements restrict worker mobility and decrease competition for labor by preventing workers from moving among locations in a franchise system and artificially reduced employee compensation.

In July 2018, the Washington Attorney General announced that in order to avoid a lawsuit from his office, 7 large, corporate fast-food franchise systems agreed to remove such language from current and future contracts. Those franchise systems included McDonald’s, Auntie Anne’s, Arby’s, Carl’s Jr.’s, Jimmy John’s, Cinnabon and Buffalo Wild Wings. In August 2018, the Washington Attorney General announced that 8 other franchisors would also enter into a consent order to remove these provisions – Applebee’s, Church’s Chicken, Five Guys Burgers and Fries, IHOP, Jamba Juice, Little Caesars, Panera Bread, and Sonic. Other state Attorney Generals are looking into this issue.

This issue was also been seen in the courts in 2018. In June 2018, a former employee of a McDonald’s franchisee filed suit in federal court in the Northern District of Illinois against the franchisor for violation of the Sherman Antitrust Act alleging that McDonald’s and its franchisees engaged in concerted activity to restrict competition among them for employees, thereby lowering their employment costs and limiting employees’ ability to earn higher wages by virtue of the no hire provisions in the franchise agreements between McDonald’s and its franchisees. McDonald’s moved to dismiss the suit, but the court denied the motion to dismiss so the case is proceeding through the court.

Recently two class actions have been filed against two franchise companies. On December 4, 2018, a class action suit was brought in the Southern District of New York against Papa John’s International, Inc. alleging that Papa John’s and its franchisees sought to reduce its labor costs by entering into no hire agreements. The lawsuit further alleges that all employees from 2008 to the present were harmed due to a reduction in wages, a denial of the opportunity to fairly compete for increased compensation and other desirable benefits by applying for a position at another Papa John’s restaurant, and a denial of an increase in compensation and employment benefits from their current employer that would have otherwise been given to the employee to retain them.

On November 29, 2018, a class action suit was filed in the courts of the Eastern District of Pennsylvania against the franchisor of Jiffy Lube franchises. The complaint alleges that Jiffy Lube engaged in anti-competitive behavior by orchestrating an agreement to restrict competition among Jiffy Lube franchisees, which unfairly suppressed employee wages, unreasonably restrained trade, and restrained employees’ ability to secure better compensation, advancement, benefits and working conditions in violation of the Sherman Act. While it will take quite some time for these cases to be decided, defending such an action is costly and distracting to business operations.

To date, we haven’t seen any anti-poaching lawsuits that named a franchisee or franchisees as defendants, but that would be a concern for franchisees.

Now is the time for franchisors who have such provisions in their franchise agreement to consider whether such provisions are needed for the protection of the franchise system, whether the provisions can be more narrowly applied if they are needed, or whether it is best to remove them from the franchise agreement entirely.