The Franchise Memorandum

Three parallel anti-poaching cases brought by private parties in the U.S. District Court for the Eastern District of Washington have settled following the filing of statements of interest by the U.S. Department of Justice and amicus briefs by the Washington State Attorney General’s Office. As reported in Issue 238 of The GPMemorandum, the DOJ had announced its intent to file a statement of interest in each of the three putative class action lawsuits. All three cases involved challenges to no-poaching provisions included in franchise agreements, provisions which restricted the ability of franchisees to hire employees away from other franchisees in the system and/or the franchisor. The cases are: Stigar v. Dough Dough, Inc., No. 2:18-cv-00244 [Auntie Anne’s]; Richmond v. Bergey Pullman, Inc., No. 2:18-cv-246 [Arby’s]; and Harris v. CJ Star LLC, No. 2:18-cv-00247 [Carl’s Jr.].

The DOJ filed its statement of interest, which addressed federal antitrust law, on March 7, 2019, arguing that franchise agreements are “usually vertical” agreements and thus “assessed under the rule of reason.” A franchise agreement is vertical because franchisor and franchisee “normally conduct business at different levels of the market structure.” Because of the vertical nature of the agreement, a “typical no-hire or no-solicitation agreement between a franchisor and a franchisee” is to be assessed under the rule of reason. The question under such analysis would be whether the interbrand procompetitive effects of such agreements outweigh the intrabrand limitation on competition. On March 11, the Washington AG filed its amicus brief arguing that, under Washington antitrust law, a franchise no-poaching agreement would be subject to per se analysis, unless the parties could show that it was “reasonably necessary” to a separate, legitimate business transaction or collaboration. The Washington AG argued that franchisors cannot satisfy that standard because many franchisors do not use such provisions, and others have removed them in response to the Washington AG’s investigations. Because federal antitrust law guides, but does not bind, the interpretation of Washington antitrust law, the two can be subject to different standards.

Days after these statements were filed, the parties requested that the court cancel a scheduled hearing on the defendants’ motions to dismiss. By March 18, the parties informed the court that they had reached a settlement. A stipulation of dismissal was entered in each case in mid-April.