The Trend of Increased Antitrust Enforcement in Labor Markets
No-poach and wage-fixing agreements have increasingly become an area of focus for both state and federal enforcers in recent years. A key milestone was in 2016, when the U.S. Department of Justice (DOJ) and Federal Trade Commission jointly issued their Antitrust Guidance for Human Resource Professionals, which warned employers about the anticompetitive risks associated with wage-fixing and no-poach agreements. Recently, President Biden’s July 2021 executive order on competition reinforced that antitrust scrutiny of labor markets will remain a high priority for the federal government going forward. High-profile settlements that resulted from state investigations of no-poach agreements, such as the New York attorney general’s settlement with title insurance underwriters Old Republic and AmTrust in 2021 and 2022 respectively, confirm that no-poach provisions will continue to be an area of focus at the state level as well.
Often, and not surprisingly, government enforcement has led to follow-on class action litigation. For example, a high-profile DOJ investigation of no-poach agreements among the leading competitors in the technology industry back in 2010 led to a large follow-on class action (In re High-Tech Employee Antitrust Litigation), in which a group of defendants settled the claims for $415 million in 2015. Earlier, in 2013, three of the seven defendants had already settled for a total of $20 million. During 2017 and 2018, several state attorneys general began investigating no-poach provisions in franchise agreements in the fast-food industry. Dozens of private class actions followed these investigations. This article discusses two of the most notable of those cases because they contain important lessons for those contemplating or facing class actions involving no-poach provisions.
Deslandes v. McDonald’s and Local Labor Markets
In a private action filed following the Washington State attorney general’s highly public investigation of no-poach provisions in McDonald’s franchise agreements, a former McDonald’s employee alleged that the no-poach provision in the franchise agreement between her employer and McDonald’s prevented her from taking a higher-paying position at a different McDonald’s location. Deslandes v. McDonald’s USA, LLC, 2021 WL 3187668 (N.D. Ill. July 28, 2021). Plaintiff Deslandes and plaintiff Turner (who had filed a related suit) then attempted to certify a nationwide class of all McDonald’s employees who worked for any franchise during a five-year period between 2013 and 2018. The court denied class certification and, in a later opinion, granted McDonald’s motion for judgment on the pleadings. Deslandes v. McDonald’s USA, LLC, 2022 WL 2316187 (N.D. Ill. June 28, 2022) (appeal filed). The two plaintiffs, whose cases were consolidated after class certification was denied, appealed the judgment on the pleadings in favor of McDonald’s to the Seventh Circuit. The appeal is ongoing.
Significant to both the denial of class certification and the granting of McDonald’s motion for judgment on the pleadings was the fact that the proposed class neglected to define a geographic market in the pleadings, insisting that a “quick look” analysis that does not require plaintiffs to define relevant markets should apply to their claims. The court even gave Deslandes leave to amend her complaint to include a claim under the rule of reason because, “[t]hough the court has concluded that plaintiff has stated a claim for a restraint that might be unlawful under quick-look analysis, the evidence at a later stage may not support it.” Deslandes, 2022 WL 2316187, at *2. But Deslandes refused. The court then held, relying on Alston and the court’s lack of experience with antitrust challenges to no-poach provisions in franchise agreements, that the rule of reason analysis, which does require plaintiffs to define the relevant markets, applied to the plaintiffs’ claims. Id. at *4–5. The judge interpreted the plaintiffs’ complaint and proposed class definition as asserting the existence of a national market for their labor, and in denying class certification, the judge focused on the fact that there were “likely hundreds or thousands of relevant markets among the class members,” because “the relevant market for each plaintiff’s labor is a small, geographic area.” Deslandes, 2021 WL 3187668, at *13. The judge concluded that, due to the fragmented geographic market for each class member’s labor, localized issues predominate over common ones, making the case unfit for resolution on a class-wide basis.
Deslandes makes it quite clear that geographic market definition is and will continue to be a significant roadblock to class certification for plaintiffs seeking to certify nationwide classes in no-poach cases because labor markets, especially for relatively low-paying jobs, are often regional or local, limited by commuting distance, moving expenses, and other considerations. In explaining that it is unlikely for there to be a national labor market for the jobs at issue in Deslandes, the court contrasted these positions with the few jobs that are available for highly skilled and highly paid individuals (like chief executive officers), which might actually merit national or perhaps even international market searching. Deslandes, 2021 WL 3187668, at *12. The difficulty of defining a geographic labor market brings up other potential issues related to class certification in the no-poach context: Plaintiffs who are willing to concede that labor markets are local, as described by the judge in Deslandes, may find an unexpected obstacle in the numerosity requirement of Rule 23(a), depending on just how local the relevant markets are.
Conrad v. Jimmy John’s Franchise and Adequate Representation
In Conrad, a former Jimmy John’s employee attempted to certify a class of roughly 615,000 current and former employees across the country who worked at either Jimmy John’s franchises or corporate stores during a four-year period between 2014 and 2018. Conrad v. Jimmy John’s Franchise, LLC, 2021 WL 3268339 (S.D. Ill. July 30, 2021). The prospective class included all Jimmy John’s employees, including managers in charge of enforcing the no-poach provisions, as well as nonsupervisory employees who were the subject of such policies. The Conrad court applied the rule of reason to the antitrust claims and denied class certification. The parties have since settled.
Like the court in Deslandes, the court in Conrad held that the named plaintiff’s “failure to offer classwide evidence of a relevant labor market is case-ending.” However, failure to define properly a geographic market was not the only roadblock to certification in Conrad. In finding that the predominance requirement of Rule 23(b)(3) was not satisfied, the Conrad court took note of the fact that the putative class “failed to establish that common evidence will show that the Jimmy John’s franchisees had a conscious commitment to suppress labor mobility.” Conrad, 2021 WL 3268339, at *9. Furthermore, the putative class failed to satisfy predominance because individualized inquiries would be required to assess the impact of the no-poach provisions on each class member—each class member was subject to different versions of the no-poach provision contained in different franchise agreements that were in effect at different times, and were affected differently by the relevant provision based on their position at Jimmy John’s. Id. Finally, that there were unharmed class members, and plausible arguments that class members may have even benefited from the no-poach provisions at issue, made it impossible for common issues to predominate over individual ones in the damages analysis in the case. In fact, the defendants argued that “most putative class members likely benefited from the No-Poach Provision because it gave franchisees an added incentive to provide more training, thus promoting employee advancement.” Id. at *10. It is important to note that assessing the procompetitive benefits of a restraint, such as the benefit to employee advancement of the no-poach provision at issue in Conrad, is an exercise that is unique to the rule of reason analysis, which the court found applied in this case.
The Conrad court not only found that the predominance requirement of Rule 23(b)(3) was not satisfied by the putative class but also found that the putative class failed to satisfy the requirements of Rule 23(a), including typicality and adequacy of representation. Conrad alleged that the typicality requirement was satisfied simply because he worked at Jimmy John’s. However, his core allegation of harm to class members, i.e., that the no-poach provision prevented them from moving between franchises for better wages, did not apply to him at all because “[h]e did not leave his job at Jimmy John’s in search of higher wages, and he was never denied the opportunity to change locations because of the [no-poach p]rovision.” Id. at *5. Indeed, Conrad admitted that the no-poach provision was “irrelevant” and “just didn’t really have anything to” do with him because he never sought employment at another Jimmy John’s location. Id.
Finally, in addition to failing to satisfy the typicality requirement of Rule 23(a), the putative class in Conrad also failed to satisfy the adequacy of representation requirement because, among other reasons, the class representative’s interests as a manager were in clear conflict with the interests of class members who held nonsupervisory positions. Id. at *7. At Jimmy John’s, managers like Conrad were tasked with enforcing the no-poach provisions at issue in the case against employees such as in-shop employees and drivers whom the managers supervised. Jimmy John’s even claimed that “[a]t any trial of this case, certain managers would be called as defense witnesses, testifying about the very decisions at issue here.” Id. at *6. The court decided that this intra-class conflict of interest, whereby some putative class members were in charge of enforcing the challenged conduct, prevented the class representative from providing adequate representation to all class members. Furthermore, there was a profit-sharing program at Jimmy John’s that included managers but not nonsupervisory employees, further misaligning the class representative’s incentives with those of other class members. Id. at *7. It is not difficult to imagine that such intra-class conflicts of interest precluding certification would be common in putative classes in no-poach cases that encompass employees of different ranks and positions, whose injury or lack thereof is linked to their individual roles and responsibilities.
A Changing Standard of Antitrust Analysis
Recent cases illustrate that the standard of antitrust analysis that applies to no-poach cases going forward will be highly determinative of the success of class certification attempts because, as the court in Conrad said, “the rule of reason raises more individualized issues precluding class certification.” Conrad, 2021 WL 3268339, at *10. In the wake of Alston, federal courts have either applied the rule of reason to no-poach cases up front—an approach that was bolstered by the DOJ’s statement of interest in a former no-poach case explaining that “most franchisor-franchisee restraints are subject to the rule of reason” (Statement of Interest of the United States of American at 11, Stigar v. Dough Dough, Inc., No. 2:18-CV-00244 (E.D. Wash. Mar. 8, 2019))—or punted the decision of which standard to apply until after the motion to dismiss stage. State courts, in contrast, have been more amenable to applying the per se standard in line with the 2016 guidelines and the Washington State attorney general’s approach in the fast-food franchise cases.
The DOJ, however, has changed course since Stigar to advocate for a more enforcement-friendly standard. Although McDonald’s, in its motion for summary judgment in Deslandes, cited the DOJ’s Stigar statement of interest in favor of applying the rule of reason to franchise-related, no-poach cases, the DOJ itself pushed back. In a last-minute motion for leave to file a statement of interest in Deslandes, the DOJ claimed that the “Statement of Interest in Stigar . . . does not fully and accurately reflect the United States’ current views.” The DOJ’s motion in Deslandes was denied, but the judge said that he would “note that there’s a change in [the DOJ’s] position.” Transcript of Proceedings, Deslandes v. McDonald’s USA LLC, No. 1:17-cv-04857 (N.D. Ill. Mar. 2, 2022), ECF No. 452. The DOJ and Federal Trade Commission then jointly filed an amicus brief in the appeal of Deslandes to the Seventh Circuit, clarifying their position that “agreements among competing employers not to hire or solicit each other’s employees are per se unlawful unless defendants establish ancillarity.” Oral argument in the case was held on March 31.
With the government changing its stance on the correct mode of antitrust analysis to apply in antitrust cases involving no-poach provisions in the franchise context—potentially shifting from the rule of reason to a per se approach and urging courts to follow—plaintiffs may find some support in their class certification ambitions. However, if the rule of reason approach remains the norm, employers that are able to convince courts that labor markets are local and individual employees are affected in different ways by no-poach provisions may be able to avoid costly follow-on class litigation, even if governmental investigations into their labor practices lead to public settlements with enforcement agencies. It remains to be seen whether the tide will truly turn, but one thing is certain: The outcome of class certification attempts in no-poach cases will continue to depend on the applicable mode of antitrust analysis.