Deslandes v. McDonald’s: Understanding Easterbrook’s Impact on No-Poach Law

Posted on Oct 26, 2023

Daniel M. Sweat

 

Judge Easterbrook’s 2023 opinion in Deslandes v. McDonald’s[1]has sparked a conversation among antitrust practitioners about how no-poach agreements should be evaluated under §1 of the Sherman Act. Easterbrook signaled that plaintiffs in the 7th Circuit can enjoy the per se standard even when defendants assert an ancillarity defense. Whether more courts choose to adopt a per se approach will have far-reaching consequences for antitrust plaintiffs and defendants alike.

A violation of U.S. antitrust law is typically evaluated under either the per se or the rule of reason standard. Price-fixing schemes,[2] bid rigging agreements,[3] and geographical market allocation[4] are classic examples of per se violations because they restrict competition without any procompetitive benefit. Other restraints of trade that are not plainly anticompetitive are evaluated using the rule of reason’s three-step, burden-shifting framework.[5] Under this framework, 1) the plaintiff has the initial burden to prove the challenged restraint has an anticompetitive effect, 2) the defendant then has the burden to show a procompetitive rationale for the restraint, and 3) the burden then shifts back to the plaintiff “to demonstrate that the procompetitive efficiencies could be reasonably achieved through less anticompetitive means.”[6]

The per se standard typically disadvantages the defendant because it allows them fewer opportunities to argue that the restraint had a procompetitive rationale. Moreover, a per se standard does not require a plaintiff to identify the relevant market or prove the defendant had market power.[7] Thus, defendants want their cases to be evaluated under the rule of reason rather than the per se standard. Which standard a court adopts has a tremendous impact on the plaintiff’s likelihood of success at trial and, therefore, the defendant’s incentive to settle.

Courts have determined that no-poach agreements may be per se illegal if they are akin to market allocation schemes.[8] Just as dividing a geographical area between horizontal competitors in a product market is illegal, so too are restrictions in the labor market that amount to market allocation. However, not all no-poach agreements are alike. Some no-poach agreements are naked restraints of trade, meaning they have “no purpose except stifling competition.”[9] Other no-poach agreements are “ancillary to a legitimate procompetitive business purpose” and do not run afoul of antitrust law.[10] Importantly, when a plaintiff alleges a violation of antitrust law, defendants have the opportunity to assert an ancillarity defense, meaning they can argue the restraint was reasonably necessary to achieve a legitimate procompetitive business purpose.[11]

In 1985, Judge Easterbrook held that ancillary restraints must be evaluated under the rule of reason in Polk Bros. Inc. v. Forest City Enterprises, Inc..[12] Thus, even if a plaintiff alleges a per se violation of antitrust law, if a defendant then argues that the agreement was ancillary to a larger endeavor, the agreement would be evaluated according to the rule of reason’s three-step, burden-shifting framework.

Deslandes’ holding in 2023, however, contradicts the rule announced in Polk Bros. In Deslandes, Easterbrook held that certain labor mobility restrictions should be evaluated under a per se standard even when a defendant asserts an ancillarity defense.[13] In doing so, Easterbrook opined that courts should pay close attention to whom (i.e. to the labor market or the product market) the procompetitive benefits of the supposed legitimate business purpose accrue.[14]

In Polk Bros. Easterbrook simply wrote that “[a] restraint is ancillary when it may contribute to the success of a cooperative venture that promises greater productivity and output.”[15] But in Deslandes Easterbrook looks at no-poach agreements with more granularity, writing that a no-poach clause that appears in an otherwise output-enhancing contract might actually have nothing to do with the output.[16]

McDonald’s argued that the no-poach agreement produced procompetitive effects for both the consumer and the employee. The Northern District of Illinois noted that consumers benefit in the form of increased output.[17] However, the employees also benefit in that they get access to training, which would be difficult to provide without the no-poach clause. Thus, the no-poach clauses were arguably necessary to prevent employees from undergoing training at McDonald’s (while accepting a reduced wage) before jumping ship to a competitor that did not offer training but offered a higher wage.[18] McDonald’s needed to mitigate free-riding in order to offer training, but Easterbrook was largely unconvinced by this argument.

Before Easterbrook’s opinion in Deslandes, it was well-established that no-poach agreements should be afforded the rule of reason under Polk Bros.[19] Now, the operative standard is less clear. Perhaps this lack of clarity reflects the idiosyncratic nature of labor markets generally.[20] Regardless, what remains clear is that antitrust practitioners should be prepared for no-poach agreements to attract increased judicial scrutiny. Further, when drafting no-poach agreements, attorneys should be aware that judges may consider whether and how “terms of the no-poach clause reflect [the purportedly procompetitive] objective.”[21]

 

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[1] Deslandes v. McDonald's USA, LLC, 81 F.4th 699 (7th Cir. 2023).

[2] See U.S. v. Trenton Potteries Co., 273 U.S. 392 (1927). See also U.S. v. Socony-Vacuum Oil Co., 310 U.S. 150 (1940).

[3] See National Soc. of Professional Engineers v. U.S., 435 U.S. 679 (1978).

[4] See U.S. v. Topco Associates, Inc., 405 U.S. 596 (1972). See also Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990).

[5] Ohio v. American Express Co., 138 S.Ct. 2274, 2284 (2018).

[6] Id.

[7] Deslandes (2023) at 4.

[8] See generally United States v. DaVita Inc., 2022 WL 266759 (D.Colo. 2022) (denying a motion to dismiss by evaluating a no-solicitation agreement under the per se standard).

[9] Topco, 405 U.S. at 608.

[10] United States v. eBay, Inc., 968 F.Supp.2d 1030, 1039 (N.D.Cal. 2013) (quoting Nat'l Collegiate Athletic Ass'n v. Bd. of Regents of Univ. of Oklahoma, 468 U.S. 85, 100 (1984)).

[11] See United States v. Addyston Pipe & Steel Co., 85 F. 271, 280–83 (6th Cir. 1898) (Taft, J.), aff'd, 172 U.S. 211 (1899) (defining the limits of the ancillary restraint doctrine in light of the Sherman Act).

[12] Polk Bros., Inc. v. Forest City Enterprises, Inc., 776 F.2d 185, 189 (7th Cir. 1985).

[13] Deslandes (2023) at 4.

[14] Id. at 5. “One problem with [classifying this no-poach agreement as ancillary] is that it treats benefits to consumers (increased output) as justifying detriments to workers (monopsony pricing). That’s not right; it is equivalent to saying that antitrust law is unconcerned with competition in the markets for inputs, and Alston establishes otherwise.”

[15] Polk Bros., Inc. at 189.

[16] Deslandes (2023) at 5.

[17] Deslandes v. McDonald's USA, LLC, 2021 WL 3187668, at *6 (N.D.Ill. 2021) (“Each time McDonald's entered a franchise agreement, it increased output of burgers and fries, which is to say the agreement was output enhancing and thus procompetitive.”).

[18] Deslandes (2023) at 6.

[19] See Rothery Storage & Van Co., et al., Appellants v. Atlas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986) (“The challenged restraint is ancillary to the economic integration of Atlas and its agents so that the rule of per se illegality does not apply.”).

[20] See Justin McCrary & Bryan Richetti, Accounting for the Employer-Employee Relationship in Antitrust Analysis, Antitrust Magazine Online, June 2023. See also Eric A. Posner, The New Labor Antitrust, Posner, University of Chicago Coase-Sandor Institute for Law & Economics Research Paper, 2023 at 38.

[21] Deslandes (2023) at 7.