Eleventh Circuit Serves a Whopper of a Ruling on Franchisor’s ‘No-Poach’/‘No-Hire’ Agreement With Franchisees

Over the last several years, business-to-business “no-hire” and “no-poach” agreements have come under legal attack, including through enforcement actions by the Federal Trade Commission and criminal prosecutions by the U.S. Department of Justice. Even President Biden jumped into the fray on July 9, 2021, when he issued his “Executive Order on Promoting Competition in the American Economy.”

On August 31, 2022, the U.S. Court of Appeals for the Eleventh Circuit issued a notable and concerning decision involving a “no-hire agreement” between franchisees and their franchisor. In Arrington v. Burger King Worldwide, Inc., the Eleventh Circuit reversed a Florida district court’s decision to dismiss a lawsuit filed by former employees of several Burger King franchises who had challenged the no-hire agreement contained within Burger King’s franchise agreements as an unlawful restraint of trade under the Sherman Act. Although Burger King purportedly removed the no-hire language from new franchise agreements beginning in September 2018, that language existed in the older franchise agreements governing the franchised restaurants where the plaintiffs were employed.

District Court Dismisses Workers’ Lawsuit Over No-Hire Agreement

In their lawsuit against Burger King, the plaintiffs argued that the agreements, in which Burger King franchisees agreed not to hire employees of Burger King or any of its franchisees for six months post-employment, were an unlawful restraint of trade because they prevented employees from working at other Burger King restaurants and, thus, resulted in depressed wages, decreased benefits, and reduced upward job mobility for the employees. The district court dismissed the action, concluding that the Burger King franchisor and each of its franchisees were a “single economic enterprise” and, as such, were incapable of engaging in conspiratorial “concerted activity”—an essential element of liability under the Sherman Act. Because the plaintiffs could not establish this element, the district court also denied as futile their request to amend their complaint. The plaintiffs appealed the decision.

Eleventh Circuit Focuses on “Independent” Nature of Franchise Relationship

The Eleventh Circuit disagreed with the district court and held that the workers’ complaint against Burger King “plausibly alleged” that the no-hire agreement qualified as “concerted activity” under the Sherman Act, particularly because “each franchisee [was] an independent center of decisionmaking as to hiring or employment agreements.” Accordingly, the Eleventh Circuit reversed the district court’s dismissal of the workers’ complaint and remanded the case to the district court for further proceedings.

In reaching this decision, the Eleventh Circuit analyzed several aspects of the franchise relationship between Burger King and its franchisees and focused on the franchisees’ independence. For example, the standard franchise agreement expressly emphasized the “independent” nature of each franchisee’s relationship with Burger King and that “no fiduciary relationship exist[ed] between the franchisee and Burger King.” Consistent with that independence, each franchisee also agreed to be “solely responsible for all aspects of the employment relationship with its employees,” including hiring, compensation, and other employment terms and conditions. Burger King reinforced that independence by declaring on its hiring webpage that all employment decisions for positions at independent franchised restaurants “are determined solely by the Franchisee.” In addition, Burger King’s franchise disclosure document explicitly forecasted competition from other franchised and corporate-owned Burger King restaurants. The Eleventh Circuit also noted that the plaintiffs “alleged (or would have alleged in their proposed amended complaint) that the three franchisees [for which they worked] had differing approaches to recruitment on their websites.”

According to the circuit court, in the absence of the no-hire agreement, “each independent Burger King restaurant would pursue its own economic interests and therefore potentially and fully make its own hiring decisions, including about wages, hours, and positions.” Because the no-hire agreement removed that ability, it “‘deprive[d] the marketplace of independent centers of decisionmaking [about hiring], and therefore of actual or potential competition.’” For this reason, the court held that the plaintiffs had sufficiently alleged a Sherman Act violation, but the court declined to decide whether the no-hire agreement was an illegal restraint of trade.

Key Takeaways

Although the Eleventh Circuit did not address the ultimate issue of whether the no-hire agreement in the franchising context is an illegal restraint of trade, the decision continues the recent trend of “no-poach” or “no-hire” agreements drawing increased scrutiny.

This ruling highlights a challenge that some franchisors—and even some gig economy companies and other businesses with independent-contractor arrangements—may face in litigation involving certain employment practices at the independent operator level. While the independence of the franchise or business relationship is a key factor in limiting joint-employer liability, that same independence might be leveraged by workers of a franchisee or independent contractor alleging antitrust violations against entities that do not employ them.

Given this situation, and the increasing scrutiny and potential exposure in this area, companies may want to take the time to analyze whether they have entered into any “no-poach” or “no-hire” agreements that warrant a closer analysis. The scope and effect of the agreement, the parties involved, and the nature of the parties’ relationship may merit careful examination.

Businesses should conduct a careful analysis before entering into agreements with their competitors that restrict job mobility. Caution may be particularly warranted for franchisors, as well as gig economy companies and other independent contractors, given the significance of the independent nature of those relationships and the conflicting legal landscape.

Ogletree Deakins’ Unfair Competition and Trade Secrets Practice Group will continue to monitor and report on developments with respect to restrictive covenants litigation and enforcement and will post updates to the firm’s Unfair Competition and Trade Secrets blog as additional information becomes available. Important information for employers is also available via the firm’s webinar and podcast programs.