Distribution, Competition, and Antitrust / IP Law

Are Franchise No-Hire Provisions Unlawful?

Two recent suits against McDonald’s and Carl’s Jr. are challenging franchise provisions that limit or prohibit the ability of one franchisee to hire away employees from another franchisee.  These provisions are fairly common, although after the suit McDonald’s decided to repeal its version.

One issue that may be decided is whether these restraints are horizontal or vertical.  From an antitrust perspective, it seems more plausible that they are vertical.

If vertical, then there is likely going to be a balance of anti-competitive effects and pro-competitive efficiencies.  As to the latter, as the linked New York Times article notes, “[t]urnover rates are high in the industry, and maintaining a talented work force requires investing in training and recruitment. Prohibiting franchisees from hiring one another’s workers protects that investment.”  Again, that seems a plausible explanation, though of course it is subject to testing.

Additionally, we might ask whether there is really any anti-competitive harm, given that there isn’t much (if any) real price flexibility between and among franchisees in the same geographic area.  Without meaningful flexibility on downstream prices, franchises may not be able to bid up labor costs, in which case the no-hire restrictions may not have much if any effect on wages.

Given the enforcement agencies’ recent interest in and guidance concerning labor markets, we may see additional challenges to these franchise restrictions.

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About Howard Ullman

Antitrust, competition, and IP law enthusiast.

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