The Franchise Memorandum

A federal district court in Illinois recently denied McDonald’s motion to dismiss a claim that the anti-raiding provision in its franchise agreement violated Section 1 of the Sherman Act. Deslandes v. McDonald’s USA, LLC, 2018 WL 3105955 (N.D. Ill. June 25, 2018). Until 2017, McDonald’s included a provision in its franchise agreement that prohibited franchisees from hiring workers who were at the time, or had been within the past six months, employed at another McDonald’s restaurant. McDonald’s also applied the policy to its own restaurants. The plaintiff was denied employment under the policy at one of McDonald’s own restaurants because the McDonald’s franchisee for whom she was working refused to release her. She then sued McDonald’s for violation of the Sherman Act claiming that its “no hire” provision allowed it to lower its employment costs by restricting competition in the market for labor.

Although the court conceded that the arrangement had “vertical elements,” i.e., it was imposed on franchisees by their franchisor and affected only intrabrand employment, the court said it viewed the provision as a horizontal restraint because it affected employment prospects not only at restaurants run by McDonald’s franchisees but at those run by McDonald’s itself as well. The court then assessed the provision under a “quick look” approach, which it described, quoting Seventh Circuit precedent in another context, as being used when “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anti-competitive effect on customers and markets, but there are nonetheless reasons to examine the potential procompetitive justifications.” The court then found that “[e]ven a person with a rudimentary understanding of economics would understand that if competitors agree not to hire each other’s employees, wages for employees will stagnate.”

Although the court seemed to accept that a “no-hire” clause could address a franchisor’s concerns about its and its franchisees training and then losing employees, it gave little weight to that concern because the restraint was not limited to employees who had been trained at McDonald’s Hamburger University, and the same end, in the court’s view, could be accomplished by paying higher wages or entering into fixed-term employment contracts with all workers.

The court therefore found that the plaintiff had stated a claim for violation of Section 1 of the Sherman Act. However, the court did not explain how the wage stagnation for low-skilled employees about which it was concerned was likely to affect any relevant market of employees given that any person wishing to leave employment at a McDonald’s restaurant could apply for a job at the myriad of quick service restaurants that are likely to be operating under other brands in the immediate area.