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Franchisors Face Growing Scrutiny Over ‘No Poaching’ Provisions

September 18, 2018Alerts Franchising Alert

Franchisors need to review their franchise agreements and take immediate action in response to the recent onslaught of legal action over “no poaching” provisions in franchise agreements.

In a typical franchise agreement, a franchisor will prohibit a franchisee from poaching its or its other franchisees’ employees during the term of the franchise agreement and for a period of time after the franchise agreement ends.

Until now, these provisions were fairly commonplace. Franchisors argue that these provisions protect each franchisee’s investment of time and money in its employees, including general managers who sometimes participate in extensive training programs.

Critics of such provisions argue that the practice keeps wages for these employees low and that this is a manipulation of the market. Worker advocacy groups have long pushed for an end to this alleged “anti-competitive” practice. Economists generally agree that this has a negative impact on low-level employee wages.

Major Brands Settle After Attorney General Files Suit

In July, seven international brands agreed to no longer enforce the no poaching provisions in response to a lawsuit being led by the State of Washington Attorney General’s Office.

In August, eight more large brands followed this trend. Additionally, several state attorneys general, led by the Massachusetts Attorney General Martha Healy, have sent investigation letters to several large international franchisors regarding each of their no poaching agreements.

This is only the beginning of the attack on these no poaching provisions. In the past year, civil antitrust actions have been filed by employees of franchisees of several large international franchisors.

The potential liability under these actions could be substantial because the class sizes could be immense with treble damages and attorneys’ fees potentially being awarded in any franchisee employee victory.

McDonald's Loses Bid to Dismiss

McDonald’s’ recent motion to dismiss was denied so the case against that company will proceed. The outcome of this case will be closely watched as a test case for this issue overall. The need to act is further supported by the fact that Senator Elizabeth Warren (MA) and Senator Cory Booker (NJ) are strong advocates of removing the “no poaching” provisions and have introduced legislation to make these acts illegal.

The U.S. Department of Justice is bringing criminal antitrust complaint against franchisors for what they call vertically assisted, horizontal conspiracies to fix labor rates.

The time to address this is now and franchisors should not wait until the update of your franchise disclosure document in 2019. If you need any assistance navigating through this process, the franchise team at Fox Rothschild is more than happy to assist.