NEW SEVENTH CIRCUIT DECISION BRINGS INCREASED RISK FOR NO-HIRE AND NON-SOLICITATION CLAUSES

On August 25, 2023, in Deslandes v. McDonald’s, the Seventh Circuit Court of Appeals vacated and remanded a district court’s dismissal of an antitrust case that challenged no-hire and non-solicitation clauses in McDonald’s franchise agreements.^[1] The Court held that the district court had not sufficiently analyzed whether or not the per se rule should apply and that the allegations in this case did not warrant a finding that the clauses at issue were ancillary to a procompetitive arrangement based on the pleadings alone. This decision is the latest in a series of labor-related antitrust cases, including criminal cases, that have addressed contractual labor conditions like no-hire and non-solicitation clauses in recent years. Employers should be aware of the scrutiny on such clauses and take care when such clauses are used that they are ancillary to a procompetitive arrangement and sufficiently crafted to promote procompetitive purposes of the arrangement. As decisions like Deslandes indicate, courts may be wary to dismiss no-hire and non-solicitation cases like this at an early stage.

Antitrust Focus on Labor Cases

In October 2016, the Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) released guidance stating that the agencies view “naked” wage-fixing, no-hire, and non-solicitation agreements as per se illegal under the antitrust laws.^[2] So called “naked” agreements are those that are unjustified standalone agreements that are not part of a broader arrangement. No-hire and non-solicitation, or “no-poach,” agreements generally refer to agreements between individuals at different companies to either not solicit or not hire employees at each other’s companies. Since the DOJ and FTC released this guidance, there have been numerous enforcement actions and private actions brought related to various labor situations, including an attempted criminal prosecution by the DOJ for use of non-solicitation agreements in United States v. DaVita^[3] and criminal charges based on alleged wage-fixing in United States v. Jindal.^[4] Most recently, the FTC has begun to aggressively prosecute employee noncompete agreements through standalone actions under Section 5 of the FTC Act and proposed rulemaking that would ban nearly all employee noncompete agreements in the United States.^[5]

Deslandes v. McDonald’s Opinion

The recent Seventh Circuit decision in Deslandes reflects the high level of scrutiny that has been seen in recent years and provides an additional reason employers should be cautious if they decide to use no-hire or non-solicitation clauses. In Deslandes, plaintiffs worked at McDonald’s franchises and filed suit alleging that a “no-poach” clause in all McDonald’s franchise agreements violated Section 1 of the Sherman Act.^[6] Plaintiffs sought to represent a nationwide class of McDonald’s employees subject to this clause.^[7] The clause at issue precluded a franchise operator of one McDonald’s from hiring any employee of a different McDonald’s while they were employed by the other McDonald’s and for six months after.^[8] The franchise agreement also contained a related provision barring franchise operators from soliciting employees from a different McDonald’s.^[9]

The district court held that the no-hire clause was ancillary to the franchise agreement, that the franchise agreement had procompetitive effects, and that therefore the clause was not “naked” nor “unlawful per se.”^[10] The district court further held that because market power had not been pled as part of a rule of reason analysis, the claim had to be dismissed.^[11] In a separate opinion, the district court also denied class certification.^[12]

On appeal, the Seventh Circuit held that the district court had “jettisoned the per se rule too early.”^[13] Like the district court, the Court found that the agreements at issue were horizontal restraints, but it disagreed that the restraint could be found “naked” or “ancillary” at the pleading stage in this case.^[14] A restraint is not naked, and therefore not subject to the per se rule if it is “ancillary to the success of a cooperative venture.”^[15] While the Court did not rule that the clause was “naked,” it identified several potential flaws in the district court’s reasoning in finding that the clause was ancillary to the procompetitive purposes of the franchise agreement. First, the Court stated that even if the franchise agreement increased output of food to customers, this did not justify detriment to workers.^[16] The Court also noted that increased output of food was not necessarily relevant because the no-hire clause at issue may not have anything to do with that increased output, and a restraint is not ancillary merely because it accompanies a lawful agreement.^[17] In other words, the presence of an otherwise legal contract does not automatically make a no-hire or non-solicitation clause legal, and, if one is included, the no-hire or non-solicitation clause must actually contribute to the claimed benefit of having the clause. Next, the Court questioned whether the no-hire clause did in fact increase output, stating that if the clause prevented employees from “reaping the gains from skills they learned,” and instead merely promoted profits to franchisees capitalizing on employees’ sunk costs, this would not constitute increased output as that term is understood in the antitrust context.^[18] The Court also questioned whether the broadness of the clause—including its national geographic scope and duration for the entire term of employment plus six months—was actually necessary to achieve the claimed objective of protecting franchisees’ investments in training employees.^[19]

Ultimately, the Court found all of the issues it raised were “complex questions” requiring “careful economic analysis,” which “cannot be answered by looking at the language of the complaint.”^[20] Accordingly, the Court vacated the district court’s dismissal and remanded the case for further proceedings, suggesting that the district court may also wish to reconsider plaintiffs’ class certification motion in light of the analysis in the Court’s opinion.^[21]

Takeaways for Employers

The Deslandes opinion serves as a reminder that no-hire and non-solicitation clauses continue to be subject to significant litigation—both civil and criminal. Therefore, employers should think carefully when deciding whether to use such clauses in contracts and consider reviewing existing contracts for them as well to minimize risk. If a no-hire or non-solicitation clause is included in a contract, it should be sufficiently drafted to relate to the procompetitive purpose of the underlying agreement. Finally, if the purpose of a no-hire or non-solicitation clause is not sufficiently documented and is subsequently litigated, the Deslandes opinion underscores that an employer may have substantial hurdles to overcome at the pleading stage, particularly in the Seventh Circuit, as plaintiffs will cite the Deslandes opinion to argue that cases should, at minimum, go into discovery to determine what the appropriate standard of review is. Conversely, defendants can argue that the Deslandes Court’s finding that no-hire clauses raise “complex questions” implies that no-hire and non-solicitation clauses are not sufficiently straightforward to be subject to the per se rule and instead must be evaluated under the rule of reason.