District court erred in Arrington: implications of anti-poaching class action for franchising
On August 31, 2022, the Eleventh Circuit reversed a district court’s decision to dismiss an anti-poaching class action against Burger King Corporation, Burger King Worldwide, Inc. and their ultimate parent company, Restaurant Brands International, Inc. (collectively, Burger King), remanding the matter to the district court for further proceedings.
District court proceedings
In October 2018, plaintiff Jarvis Arrington, a former line cook for a Burger King franchisee in Illinois, filed a class-action complaint against Burger King in federal court in Florida, alleging that the company violated Section 1 of the Sherman Act by including a “no-hire” provision in its franchise agreements.
From approximately 2010 until September 2018, Burger King’s franchise agreements contained a “no-hire” provision, which prohibited franchisees from employing or seeking to employ any individual who worked for another franchised or company-owned Burger King restaurant for at least six months after the individual left employment at another Burger King restaurant (unless the first employer gave the second employer prior written consent to hire the individual).
The plaintiffs alleged that the restrictions limited the employment opportunities available to Burger King employees, which resulted in artificially depressed wages and benefits, in violation of Section 1 of the Sherman Act. To establish such a claim, a plaintiff must allege facts that plausibly show: “(1) a contract, combination, or conspiracy that (2) unreasonably (3) restraints interstate or foreign trade.”
In March 2020, the Florida district court granted Burger King’s motion to dismiss. The district court held that the plaintiffs failed to adequately allege facts that showed a concerted action between Burger King and its franchisees that resulted in an unreasonable restraint on trade. The district court analyzed the relationship between Burger King and its franchisees and concluded that Burger King and each of its independent franchisees together constituted a “single economic enterprise,” such that they were incapable of conspiring under the Sherman Act. The plaintiffs appealed the dismissal to the Eleventh Circuit Court of Appeals.
Appellate court proceedings
In Arrington, et al. v Burger King Worldwide Inc., et al., --- F.4th ----, 2022 WL 3931471 (11th Cir. Aug. 31, 2022), the Eleventh Circuit reversed and remanded the district court’s judgment. Relying heavily on Am. Needle, Inc. v Nat’l Football League, 560 U.S. 183 (2010), which held that the NFL’s 32 teams competed with one another to sell their own separate brands and were “independent centers of decisionmaking” that could engage in unlawful concerted action with respect to the licensing of their intellectual property, the Eleventh Circuit concluded that the plaintiffs adequately alleged that the inclusion of the no-hire provisions in the franchise agreements constituted concerted action under Section 1 of the Sherman Act.
In reaching its conclusion, the Eleventh Circuit stated that, although Burger King and its franchisees have certain economic interests in common, each separately pursues its own economic interests when hiring employees. The court noted that the franchise agreements emphasize the independent nature of each franchisee’s relationship with Burger King, expressly stating that “no fiduciary relationship between the parties exists.”
In addition, the court relied on language in Item 12 of Burger King’s franchise disclosure document, which states that each franchisee “may face competition from other franchisees, from outlets that [Burger King] own[s], or from other channels of distribution or competitive brands that [Burger King] control[s].” The court found this language to be persuasive evidence that Burger King and its franchisees compete against each other and have “separate and different economic interests.”
Further, the court noted that the franchisees’ independence expressly extends to hiring decisions, as each franchise agreement states that the franchisee is “solely responsible for all aspects of the employment relationship with its employees,” and that it enjoys “the sole right to hire…and establish wages, hours, benefits, employment policies, and other terms and conditions of employment for its employees without consultation with or approval by [Burger King].”
Thus, the court found each franchisee to be an “independent center of decisionmaking as to hiring or employment agreements.” As a result, the court held that the no-hire provisions “deprive the marketplace of independent centers of decisionmaking [about hiring], and therefore of actual or potential competition.” For this reason, the court found that the plaintiffs plausibly alleged that the no-hire provision qualified under Section 1 of the Sherman Act as “concerted activity” and that the district court erred in dismissing the plaintiffs’ complaint on that basis.
The court concluded its opinion by denying Burger King’s invitation to determine the level of scrutiny that should be applied to the restraint on trade, instead remanding that issue to the district court.
Implications for franchising
Although the Eleventh Circuit found in favor of the franchisees’ employees, the court’s findings support the arguments that franchisors often assert in the defense of both joint employer and misclassification claims. The decision reaffirmed that franchisors and franchisees are independent decision makers, particularly when it comes to employment decisions, which will likely bode well for any franchisor advancing an argument that (1) it does not control its franchisees’ employment practices and (2) it is not the employer of its franchisees.
It should also be noted that, while the franchisees’ employees won the appeal on this narrow issue, the Eleventh Circuit left the district court open to address Burger King’s other arguments, including that the rule of reason should apply to the plaintiffs’ claims and that the plaintiffs failed to adequately plead a claim under the rule of reason standard of review.
The plaintiffs in Arrington, like the plaintiffs in a recent franchise anti-poaching case involving McDonald’s, only alleged that the no-hire restraints were per se illegal or, in the alternative, illegal under quick-look analysis. The failure to plead that the no-poach restraints were unlawful under rule of reason analysis led the Illinois district court to deny the plaintiffs’ motion for class certification in Deslandes. The district court granted McDonald’s judgment on the pleadings on the basis that, after the Supreme Court’s recent decision in NCAA v Alston, 141 S. Ct. 2141 (2021), the rule of reason must apply.
In order to pass the rule of reason standard, the plaintiffs must plead and prove that the franchisor had sufficient market power in the relevant market. The court in Deslandes held that the plaintiffs were not able to do so – and the district court could, on remand, reach the same conclusion here.
If you have any questions or would like to discuss how this decision may relate to your franchise system, please contact the author.