Increasing Scrutiny on Franchise “No Poach” Clauses 

Intellectual Property Alert

August 22, 2018

Companies who enter into agreements between two or more employers not to hire the other’s employees or to limit competitiveness in the hiring process may face potential criminal and civil liability. There is renewed interest in such clauses spurred, in part, by the belief that such agreements contribute to the failure of lower-income employees’ wages to keep up with those in higher management positions. In 2018, there is increasing momentum in the ranks of legislators, the U.S. Department of Justice, and state attorneys generals to investigate and take action. This year, U.S. Senator Cory Booker introduced Senate Bill S. 2480 titled “End Employer Collusion Act” to create a private right of action against employers using such agreements. Ongoing private litigation includes claims that these agreements and related activities violate the Sherman Antitrust Act, 15 USC Sections 1-7.  

Among the antitrust scrutiny of the no-poach policies is a concern with franchise agreements that bar franchisees from hiring the employees of other franchisees. At least 11 state attorneys general are investigating the use of such provisions in franchise agreements. In July 2018, Senator Booker and Senator Elizabeth Warren sent a letter to the CEO’s of 89 large franchisors encouraging them to abandon such clauses and citing an October 2016 DOJ Guideline report suggesting that “agreements between employers not to hire each other’s workers are likely illegal under antitrust law, and that ‘violations of the antitrust laws can have severe consequences’...”.

Senator Booker’s letter cited a recent study by Princeton economists that found “58 percent of major franchisor’s franchise agreements include a no-poach provision …”. The letter also included a list of questions that the senators requested be answered by August 10, 2018. If employers are faced with a suit for unlawful anti-competitive activities for no-poach agreements they should review their employment practices liability (EPLI) policies as the most likely source of coverage. Otherwise directors and officers (D&O) liability policies should be reviewed for possible coverage, however, D&O policies often contain antitrust and employment-related exclusions.

A no-poach agreement is not automatically invalid or illegal. The U.S. Third Circuit Court of Appeals found that the no-poach agreement for a period limited to eight months after the sale of a company to another entity was not a violation of the Sherman Act. See, Eichorn v. AT&T Corp., 248 F.3d 131 (3d. Cir. 2001). The court held that such agreements were legal if 1) they are ancillary to a larger non-monopolistic business arrangement; 2) reasonable in scope and duration; and 3) reasonably necessary to protect a legitimate business interest. In order to minimize potential exposure, companies should review any agreements containing no-poach provisions to ensure they meet the Eichorn standards.

Each state has its own public policy, statutes, and regulations with regard to restraints of trade, particularly regarding employment. The law of the state where an individual is employed should also be reviewed in light of any restraints on an employee’s mobility.

Related Practices

To discuss any questions you may have regarding the issues discussed in this Alert please contact Thomas A. Dye at (305) 397-0806 or