Leinani Deslandes v. McDonald's USA LLC
N/A (2023)
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Rule of Law:
An agreement among competitors that constitutes a horizontal restraint may be subject to per se antitrust scrutiny unless it is genuinely ancillary to a legitimate cooperative venture and promotes output, rather than merely appropriating workers' sunk costs. Plaintiffs are not required to plead around such defenses at the complaint stage.
Facts:
- McDonald's franchise agreements historically contained an "anti-poach" or "no-poach" clause.
- These clauses prohibited any McDonald's franchise operator from hiring a person employed by a different franchise or by McDonald's itself until six months after that person's last day of work for McDonald's or another franchise.
- A related clause barred one franchise from soliciting another's employee.
- Leinani Deslandes and Stephanie Turner worked for McDonald's franchises while these no-poach clauses were in effect.
- Deslandes and Turner were unable to accept higher-paying job offers at other McDonald's franchises due to the existence of these clauses.
- McDonald's itself operates many restaurants and enforced the no-poach clause at those corporate outlets, creating a horizontal arrangement with franchised outlets.
- Workers at McDonald's or its franchises acquired business-specific or location-specific skills through their employment.
Procedural Posture:
- Leinani Deslandes and Stephanie Turner filed a lawsuit in the United States District Court for the Northern District of Illinois, Eastern Division, against McDonald's USA, LLC, and McDonald's Corporation, alleging violations of Section 1 of the Sherman Act due to no-poach clauses.
- The district court rejected the plaintiffs' per se theory, stating that the anti-poach clause was ancillary to each franchise agreement and thus not a naked restraint.
- The district court deemed the complaint deficient under the Rule of Reason because it did not allege that McDonald’s and its franchises collectively had power in the market for restaurant workers’ labor.
- The district judge invited plaintiffs to file an amended complaint alleging market power.
- The plaintiffs declined to file an amended complaint.
- The district court dismissed the complaint with prejudice.
- Plaintiffs appealed the dismissal to the United States Court of Appeals for the Seventh Circuit.
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Issue:
Does a complaint alleging a horizontal no-poach agreement among competitors plausibly state a claim under Section 1 of the Sherman Act, such that it should not be dismissed for failing to allege market power or for not pleading around a potential ancillary restraint defense?
Opinions:
Majority - Easterbrook, Circuit Judge
Yes, a complaint alleging a horizontal no-poach agreement among competitors plausibly states a claim under Section 1 of the Sherman Act, and the district court erred by dismissing it for failing to allege market power or prematurely applying the ancillary restraint defense. The court found that the district court jettisoned the per se rule too early because the complaint alleges a horizontal restraint, and market power is not essential to antitrust claims involving naked agreements among competitors, citing Palmer v. BRG of Georgia, Inc. While an agreement is not naked if it is ancillary to a cooperative venture, the mere appearance of a clause in a contract that, on the whole, increases output does not automatically justify it as ancillary. The court questioned whether the no-poach clause truly promotes the production of restaurant food or merely allows franchises to appropriate the value of workers’ own investments (sunk costs in training) without adding to output. The classification of a restraint as ancillary is an affirmative defense, and complaints are not required to anticipate and plead around defenses, as established in Gomez v. Toledo. A complaint only needs to make out a plausible claim under Bell Atlantic Corp. v. Twombly, which this complaint does. The court affirmed the district court's finding that "workers at McDonald’s" does not constitute a relevant economic market, noting the mobility of fast-food workers and the numerous alternative employers, thus dismissing the Rule of Reason claim that required market power allegations.
Concurring - Ripple, Circuit Judge
Yes, a complaint alleging a horizontal no-poach agreement among competitors plausibly states a claim, and the ancillary restraint defense should be further analyzed by the district court, with the burden of proof on the defendants. Judge Ripple concurred to clarify that the court's opinion sends the ancillary restraint defense back to the district court for further analysis, making clear that defendants bear the burden of establishing the defense. He emphasized that the district court should consider the scope and duration of the restriction (e.g., national scope, lasting for employment plus six months) as potentially reducing the need for extended economic analysis if the restraint is not reasonably necessary to achieve procompetitive objectives, citing Blackburn v. Sweeney. He reinforced the established rule that the ancillary restraint defense requires the restriction to be both "subordinate and collateral" to a legitimate business collaboration and "reasonably necessary" to achieve a procompetitive objective of the franchise agreement.
Analysis:
This case clarifies the application of the per se rule to horizontal restraints like no-poach clauses, particularly in franchise systems where a franchisor operates its own outlets alongside franchisees. It establishes that the ancillary restraint defense is an affirmative defense that defendants must prove, and plaintiffs are not required to plead around it at the complaint stage, reinforcing the pleading standards set by Twombly. The decision provides crucial guidance on what constitutes a genuinely "ancillary" restraint, demanding a direct link between the restraint and the promotion of output or efficiency, rather than a mere connection to an output-expanding contract. It also emphasizes the importance of a thorough economic analysis in determining the true nature of such restraints.
