No-Poach Clauses in QSR Litigation

Class certification was denied in two seminal franchise no-poach litigation matters involving McDonald’s and Jimmy John’s.

Retained by Gibson, Dunn & Crutcher

Defense counsel retained Cornerstone Research to support Justin McCrary of Columbia University on two seminal quick-serve restaurant (QSR) franchise no-poach cases involving the McDonald’s and Jimmy John’s franchises.

Class certification was denied in both cases, with both U.S. district court judges relying on Professor McCrary’s analysis in their opinions.

The no-poach clauses at issue place limits on the ability of franchisees to solicit, recruit, or hire employees from other franchisees within the same branded franchise. Plaintiffs allege that such clauses suppress both their wages and employment opportunities within the franchise system.

In both matters, Professor McCrary analyzed the potential procompetitive benefits of the challenged clauses and opined on issues of class certification. Class certification was denied in both cases, with both U.S. district court judges relying on Professor McCrary’s analysis in their opinions.

Deslandes et al. v. McDonald’s USA LLC et al.

Judge Alonso of the U.S. District Court for the Northern District of Illinois cited Professor McCrary’s analysis throughout his opinion. He concluded that rule of reason analysis, rather than per se treatment or quick-look analysis, was appropriate.

The judge cited Professor McCrary’s explanation of how the plaintiffs’ conspiracy allegation does not make economic sense.

One key factor supporting this decision was ample evidence of potential procompetitive benefits of the challenged clauses provided by Professor McCrary. Judge Alonso discussed Professor McCrary’s opinion that such clauses are a way to solve the “free rider” problem that franchise systems face, whereby franchise owners would otherwise “free ride” off the value of the brand and underinvest in training or other aspects of their business. These procompetitive benefits must be balanced against any anticompetitive effects, and thus rule of reason analysis is required.

Judge Alonso also cited to Professor McCrary’s explanation of how the plaintiffs’ conspiracy allegation does not make economic sense, because such a conspiracy would reduce McDonald’s total profits. As Professor McCrary explained, the central effect of the alleged conspiracy would reduce labor demand for McDonald’s locations, which would in turn reduce McDonald’s overall output and revenues. Because McDonald’s profits are primarily determined as a percentage of franchisee revenues, McDonald’s would not benefit from the alleged conspiracy.

Conrad et al. v. Jimmy John’s Franchise LLC et al.

Judge Rosenstengel of the U.S. District Court for the Southern District of Illinois reached similar conclusions in the matter brought against Jimmy John’s. Relying on Professor McCrary’s testimony regarding the procompetitive benefits of the challenged clauses, she concluded that rule of reason analysis was required and that individualized issues would outweigh common issues.

Relying on Professor McCrary’s testimony regarding the procompetitive benefits of the challenged clauses, the judge concluded that rule of reason analysis was required.

Professor McCrary explained that the challenged clauses could benefit employees through increased training and advancement opportunities. He also demonstrated empirically that stores with more highly trained employees perform better and that protecting training investments has the potential to increase demand for the brand overall.

Relying on Professor McCrary’s testimony, Judge Rosenstengel also discussed how the relevant market was not nationwide, and comprised more than just Jimmy John’s employees. She concluded that this presented even more individualized issues since the relevant market would differ across individuals. Professor McCrary explained that in order to determine whether a worker was harmed by the challenged clause, it would be necessary to determine the relevant competitors for the employee’s labor, and to what extent a worker had acquired skills specific to Jimmy John’s.

Lastly, Judge Rosenstengel concluded that plaintiffs failed to meet the predominance requirement because they failed to demonstrate that the Jimmy John’s franchisees had a conscious commitment to suppress labor mobility. In doing so, she noted Professor McCrary’s analysis of employee release requests (requests between Jimmy John’s stores to hire one another’s workers). In almost all cases, the employee releases were granted without any conditions, and the release process as practiced was consistent with store owners trying to protect their investments in training.