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The Franchise Memorandum

Court Rejects Per Se Theory but Allows Anti-Poaching Class Action to Proceed Based on Quick-Look Doctrine
Posted in Antitrust

A federal district court in the Western District of Washington denied a motion to dismiss a putative class action lawsuit alleging that anti‐poaching clauses in Cinnabon franchise agreements violated the Sherman Act and Washington’s Unfair Business Practices Act. Yi v. SK Bakeries, LLC, No. 3:18‐cv‐05627 (W.D. Wash. Nov. 13, 2018). The lead plaintiff, Kyla Yi, was a former employee at a Cinnabon franchised bakery in Washington. Franchise agreements for Cinnabon bakeries prohibited franchisees from hiring or soliciting Cinnabon’s and other franchisees’ employees without prior written consent. Yi alleged that these anti‐poaching clauses, which were removed from Cinnabon’s franchise agreements in July 2018, had artificially suppressed employees’ wages by restricting franchisees’ competition for labor.

In support of its motion to dismiss, Cinnabon argued that a franchisor and its franchisees are a single entity incapable of conspiring in violation of the Sherman Act. The court rejected that argument as premature because discovery had not begun. Cinnabon also argued that the complaint failed to state a claim that the anti‐poaching clauses constituted an unreasonable restraint on trade. The court held that Yi failed to allege sufficient facts to support a per se violation of the Sherman Act because it was not clear that the anti‐poaching clauses lacked any redeeming virtue. Relying on a similar class action lawsuit against McDonald’s, however, the court found Yi’s allegations sufficient under a “quick‐look” rule‐of‐reason analysis at the motion to dismiss stage. Taking Yi’s allegations as true, the court found that an observer with even a rudimentary understanding of economics could conclude that the anti‐poaching clauses stifled competition for labor. But the court warned Yi that, having failed to allege facts sufficient to support a full rule‐of‐reason analysis, her case could ultimately fail if the evidence failed to support use of the truncated quick‐look analysis.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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