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No-Poach Franchise Case Dismissed Under Single-Entity Rule

Client Alert

Authors: A. Christopher Young, Jan P. Levine and Robyn R. English-Mezzino

4/27/2020
No-Poach Franchise Case Dismissed Under Single-Entity Rule

Are franchisees dependent offshoots of their franchisors, or are they standalone businesses capable of independent decision-making? This was the issue before a Florida federal judge recently tasked with deciding, as a threshold matter, whether a franchisor, Burger King, could enter into an agreement with its franchisees that violated Section 1 of the Sherman Antitrust Act. The judge found that Burger King franchisees were dependent on their franchisor to such an extent that they constituted a single entity akin to a parent-subsidiary corporate relationship and were incapable of conspiring to violate the antitrust laws.

Because Burger King’s relationship with its franchisees is typical of other franchise systems, especially those in the fast food industry, more franchisors will likely consider this defense, especially against employees claiming that franchise agreement no-poach provisions are illegal. But could taking such a position be a double-edged sword? The franchise industry recently has been fighting against an expanding joint-employer rule that could make franchisors liable for their franchisees’ labor and employment practices. Franchisors may find it difficult to maintain, for antitrust purposes, that they and their franchisees are single entities dependent on the franchisor’s decision-making while also maintaining, for labor and employment purposes, that they are sufficiently independent such that franchisees should be responsible for their own employment decisions.

Arrington v. Burger King Worldwide, Inc.

On March 24, Judge Martinez of the U.S. District Court for the Southern District of Florida dismissed the class action claims against the Burger King defendants that challenged the legality of no-hire provisions in their franchise agreements. The plaintiffs claimed that the no-hire provisions were “per se” unlawful. The defendants insisted that, under a “quick look analysis,” no one with a rudimentary understanding of economics could find that the no-hire provisions had anticompetitive effects on employees or labor. The defendants also argued that Burger King and its franchisees were a single enterprise incapable of conspiring under Section 1 of the antitrust laws. In support, the defendants relied on an unpublished 1993 Ninth Circuit opinion, Williams v. I.B. Fischer Nevada, 999 F.2d 445, 447-48 (9th Cir. 1993), and dicta from a Florida district court decision, Hall v. Burger King, 912 F. Supp. 1509, 1548 (S.D. Fla. 1995).

Judge Martinez set aside the issue of what standard applied and whether the no-hire restraint was unreasonable and honed in on the single-entity issue expressed by the Supreme Court in Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), and American Needle, Inc. v. National Football League, 130 S. Ct. 2201 (2010). Under the single-entity rule, legal entities that have a common unity of interest are found to be incapable of conspiring in violation of the antitrust laws. In Copperweld, the Supreme Court found that a wholly owned subsidiary and its parent could not conspire under Section 1 because the parent company’s control over its subsidiary created a common unity of interest. By contrast, in American Needle, 32 NFL teams that made up National Football League Properties (NFLP) to develop and market intellectual property were found to be separate entities capable of conspiring under the antitrust laws. In Arrington, the court ultimately concluded that Burger King was not capable of concerted action with its franchisees because “Burger King’s relationship with its franchisees more closely resembles a corporation organized into divisions or de facto branches, or that of a parent-subsidiary [i.e., Copperweld], than the relationship between similarly-situated NFL teams [i.e., American Needle].”

Judge Martinez relied on all of the requirements that Burger King imposed on its franchisees, including brand standards, to support the court’s conclusion that there was common interest between Burger King, the franchisor, and its franchisees. For example, Burger King imposed on its franchisees payment of royalties, payment toward a joint advertising budget, use of a uniform operations manual, uniform appearance and image, uniform menu, uniform service and manner of food preparation, standardized equipment, uniform training standards, and uniform hours of operation. Moreover, the court found that the “Amended Complaint and standard franchise agreement reveal, Burger King’s products, and all of the operational parameters necessary to bring them to the marketplace, are fully realized long before a franchisee joins the Burger King System and subject to close supervision by [Burger King Corporation].”

The fact that a franchisee might have some autonomy with respect to employment decisions was not enough in the court’s opinion to convert the franchisee into a separate economic actor. The court found that introducing liability based on the franchisor/franchisee organizational structure would elevate form over substance and encourage corporations to alter their structures to avoid liability, which might, in turn, deprive consumers of the conveniences that flow from the franchised restaurant system.

Additionally, the court found the situation involving Burger King to be closely aligned with Williams and Hall. In Williams, the plaintiffs brought suit against a franchisor (Jack-in-the-Box), alleging that its compulsory “no switching” agreement violated Section 1 of the Sherman Antitrust Act. The agreement provided that the franchisees would not offer employment to any manager of another Jack-in-the-Box within six months of the manager’s termination from employment from another franchisee unless that franchisee provided a release. As in Williams, Judge Martinez found that the franchisor was incapable of conspiring with the franchisees, and, therefore, Burger King did not violate Section 1 of the Sherman Antitrust Act. In support of its decision, the court also cited to Hall, which found that Burger King and its franchisees were a single entity that could not conspire in violation of the antitrust laws.

Judge Martinez did acknowledge that whether the franchisor-franchisee relationship is a single entity is a fact-specific issue requiring analysis of the decision-making abilities of the alleged actors. Nonetheless, he concluded on a motion to dismiss that Burger King was incapable of concerted action with its franchisees and that the no-hire agreement was an internal agreement to implement a single set of policies.

On April 20, the plaintiffs filed a motion for leave to file an amended complaint to allege facts showing that Burger King and its franchisees do not have a “complete unity of interest” and, therefore, can conspire under the antitrust laws. In support of this conclusion, the plaintiffs propose amendments to the complaint that allegedly show, among other things, (1) Burger King and its franchisees make independent employment decisions; (2) Burger King has argued in other cases that it maintains no control over its franchisees’ employment decisions and therefore cannot be liable for them; (3) Burger King and its franchisees have consistently argued that they are not joint employers under federal labor and employment regulations; (4) Burger King and its franchisees have different, and often competing, economic interests; and (5) Burger King admits that its relationship with franchisees is subject to the antitrust laws. As to the last point, the plaintiffs cite Burger King’s SEC statements that say “[c]ompany restaurant operations and our relationship with franchisees are subject to the federal and state antitrust laws.” While the proposed amended complaint makes more detailed factual assertions to overcome the single-entity doctrine, the motion for leave reads like a notice of appeal of Judge Martinez’s decision. The plaintiffs even argue that “[a]fter American Needle, the weight of authority holds franchisors are capable of conspiring with their franchisees.”

Takeaways

The Arrington decision is a surprising departure from other recent decisions in cases challenging franchise no-poach provisions under the Sherman Act, which have either explicitly rejected the single-entity rule at the motion-to-dismiss stage or implicitly rejected the rule because the franchisors did not assert the defense.

In a case involving Cinnabon — Yi v. SK Bakeries, LLC, No. 18-5627 (W.D. Wash. Nov. 13, 2018) — Cinnabon and its franchisees argued that they were a single entity incapable of conspiring under Section 1 of the Sherman Act. Cinnabon, like Burger King, also supported its argument with references to Williams. Still, the court rejected the single-entity rule argument, finding that, at the motion-to-dismiss stage, there were sufficient facts presented that the agreement joined together independent decision-makers. The court also found that, because the issue is fact-intensive, it would be premature to dismiss under Williams without discovery.

Similarly, a New Jersey federal judge rejected tax preparation franchisor Jackson-Hewitt’s attempt to dismiss antitrust claims lodged against it because it and its franchisees were a single entity incapable of conspiring. Robinson v. Jackson-Hewitt, Inc., No. 19-9066, 2019 U.S. Dist. LEXIS 188962 (D. N.J. Oct. 31, 2019). The court referenced largely the same criteria as Arrington but concluded it was sufficient to plead that franchisees in the employment context are “‘separate economic actors pursuing separate economic interests.’” Id. at *14.

Arrington also departs from a recent decision outside the no-poach agreement context. In Kissing Camels Surgery Center, LLC v. Centura Health Corp., No. 12-cv-3012, 2016 U.S. Dist. LEXIS 185150 (D. Colo. July 13, 2016), four ambulatory surgery centers and their developer and part owner attempted to dismiss antitrust conspiracy claims against them by arguing that they should be treated as a single entity incapable of conspiring with itself. The court was unable to resolve the “fact-specific inquiry” at the motion-to-dismiss stage and denied the motion.

Additionally, the Arrington decision relied on dicta. The court in Hall denied the antitrust claim because of an absence of evidence of a conspiracy before it turned to the single-entity rule. Therefore, its conclusory remark that the Burger King franchise is a single entity was merely dicta. Hall, unlike Arrington, was also decided on a motion for summary judgment after discovery and findings of fact and conclusions of law were made by the court.

The Arrington decision could be a shield that can be raised by franchisor defendants not only in cases challenging no-poach agreements but also in any case alleging a conspiracy between a franchisor and its franchisees. But raising that shield may have consequences. While it is too early to know the persuasive weight of Arrington, the decision could complicate franchisors’ arguments in labor and employment cases that they should not be held liable for the employment decisions of their franchisees, such as refusing to collectively bargain, failures to pay overtime, etc., because those decisions were made by an independent entity. Before affirmatively asserting the single-entity rule, companies should consider downstream consequences and proceed cautiously with a holistic approach that makes sense across all areas of the law impacting their business.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

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