The Franchise Memorandum

As reported in the last issue of The GPMemorandum, the Department of Justice Antitrust Division filed statements of interest in three franchise anti-poaching class actions pending in federal court in Washington. The statements urged application of the rule of reason to the Sherman Act claims asserted by the putative class members and explained why per se and quick-look analyses were improper. The cases in which the DOJ filed its statements of interest were settled and dismissed shortly thereafter, but similar class actions remain pending against many other franchisors.

In a speech delivered March 1, 2019 at the Santa Clara University School of Law, Deputy Assistant Attorney General for Antitrust Michael Murray discussed the DOJ’s recent filings and expounded upon the reasons why anti-poaching agreements in the franchise context should be assessed under the rule of reason. See https://www.justice.gov/opa/speech/deputy-assistantattorney-general-michael-murray-delivers-remarks-santa-clara-university. Murray explained that “[f]ranchisors and franchisees . . . are primarily in a vertical relationship in their industry and generally not competitors with respect to the labor market. Consequently, agreements among them likely are subject to the rule of reason.” To the extent that franchisees themselves are deemed to be horizontal competitors, they “must actually have entered into an agreement, as opposed to merely engaged in parallel conduct,” such as entering into similar vertical agreements with the franchisor. Even a horizontal anti-poaching agreement should be assessed under the rule of reason so long as it is ancillary to a separate and legitimate transaction and not a “naked” anti-poaching agreement. Thus, according to Murray, “there are two ways for a no-poach agreement to be subject to the rule of reason and not the per se rule: verticality and ancillarity.” Murray further suggested that recent franchise anti-poaching cases in which the quick-look doctrine was deemed a potential alternative “deserve further scrutiny” and that the doctrine should not be applied merely because a particular restraint is difficult to classify.