The Franchise Memorandum

A federal court in Illinois has allowed a former Jimmy John’s employee to proceed with antitrust claims targeted at an anti‐poaching requirement in Jimmy John’s franchise agreements. Butler v. Jimmy John’s Franchise, LLC, 2018 WL 3631577 (S.D. Ill. July 31, 2018). Jimmy John’s had included in its franchise agreements a prohibition on franchisees recruiting or hiring any employee that has worked at another Jimmy John’s in the prior year. According to the plaintiff, this requirement was enforced by franchisees through noncompete provisions in their employment agreements, and could also be enforced by one franchisee against another for a known breach. The plaintiff filed suit against Jimmy John’s under the Sherman Act, arguing that Jimmy John’s was per se liable under federal antitrust laws for facilitating a horizontal agreement in restraint of trade between its competing franchisees that unfairly precluded him from supplementing his work at other Jimmy John’s shops.

Jimmy John’s moved to dismiss, arguing that its agreements with franchisees are vertical in nature—not agreements between competitors—and therefore subject to a “rule of reason” analysis that requires detailed allegations about market power. Although Jimmy John’s relationship with its franchisees is vertical, the court concluded that the plaintiff had sufficiently pled details that could support a “hub‐and‐spoke” conspiracy by which Jimmy John’s individual agreements with franchisees were used to orchestrate a “horizontal wheel” connecting each franchisee, even without individual horizontal agreements among the franchisees themselves.

The plaintiff also sufficiently pled an alternative theory that required a “quick look” analysis—a standard more rigorous than the “rule of reason”—that is applied when the agreements in question may be vertical, but still require a certain degree of cooperation between competitors. In particular, the court noted that the plaintiff alleged that all franchisees were designated as third‐party beneficiaries to the anti‐poaching provision and were expressly able to enforce the requirement against other franchisees who violated it.