The Franchise Memorandum

Refusing to rubber-stamp a proposed $5 million anti-poaching class action settlement, a federal court in Kentucky has directed the plaintiff to provide additional information to allow proper consideration of the factors specified in Fed. R. Civ. P. 23. In re Papa John’s Employee and Franchisee Employment Antitrust Litig., 2023 WL 5227294 (D. Ky. Sep. 15, 2023). According to the parties, the settlement would provide approximately $33 to each class member, although less would be due to class members who had entered into arbitration agreements in connection with their employment. While the court did not appear to take issue with the overall amount of the settlement, given the extensive discovery that had taken place and the risks of litigation to both sides, it raised fundamental questions about the nature of the claim and its fit within established antitrust and economic principles. The court’s expressed concerns are equally applicable to other anti-poaching class actions now pending against franchisors, including the claims against McDonald’s and Burger King that were recently revived by the Seventh and Eleventh Circuits, respectively.

With respect to antitrust doctrine, the court questioned whether a franchise anti-poaching claim should be analyzed as a per se illegal horizontal restraint or as a vertical restraint subject to the rule of reason. While the plaintiffs in all of the civil class actions have claimed that franchise anti-poaching provisions should be per se illegal, the court found that proposition “not entirely obvious” because the restraint operated within a single brand in a highly competitive market where employees enjoyed high levels of mobility. Generally, condemnation of a restraint as per se illegal is appropriate only where the courts have experience with that restraint and the outcome of a rule of reason analysis would be clear. Here, in contrast, no full rule of reason analysis has ever been conducted on an anti-poaching claim, and the effects of the purported restraint are not self-evident. As the court noted, “why would anyone work at Papa John’s if no-poach provisions systematically suppress wages within that company relative to other restaurants?” In other words, if the provision suppressed wages as postulated, employees would naturally migrate to other systems and employers. The court also raised questions regarding the plaintiff’s proposed product and geographic markets, which typically are required in antitrust cases. The plaintiff proposed a single-brand, national class of Papa John’s employees. Given the mobility of employees between brands and the fact that fast-food workers generally would only look for jobs near their homes, the court questioned whether a market of all fast-food workers in a smaller geographic market would be better aligned with economic reality, if less advantageous to the plaintiff. In view of these and other concerns, the court granted the plaintiff 30 days to supplement the record in order to continue to pursue potential certification of a settlement class.