Ruling Redefines “Rule of Reason” in McDonald’s Antitrust Case

No-poach agreements are a hot topic in antitrust. Both government agencies and private plaintiffs have challenged such agreements.

Recently the Seventh Circuit weighed in on McDonald’s no-poach agreements. In an opinion by Judge Frank Easterbrook, the court addressed issues regarding the per se rule and the ancillary restraints doctrine that are worth examining.

Under the McDonald’s agreements, each franchisee promised not to hire any person employed by another franchisee, or by McDonald’s itself, until six months after the last employment date. Another clause barred any franchisee from soliciting another franchisee’s employees. Two former McDonald’s employees sued, alleging that the provisions violated Section 1 of the Sherman Act.

The district court entered judgment of the pleadings, dismissing the complaints. The court rejected the per se approach. It concluded that the agreements were not naked restraints but ancillary to an effort to expand the output of burgers and fries.

The district court also rejected the Rule of Reason. The complaints had not alleged market power in the labor market, and it held that market power was an essential element of any claim under the Rule of Reason. Absence of such an allegation rendered the complaints implausible.

The Seventh Circuit affirmed the district court’s rejection of the Rule of Reason. It noted that a relevant market of “workers at McDonald’s” was not sound. People who work at a McDonald’s one week could work at a Wendy’s the next. The court stated that “[t]he mobility of workers . . . makes it impossible to treat employees at a single chain as a market.”

The Court of Appeals, however, held that the district court was too hasty in rejecting the per se rule. The court noted that the agreements were horizontal restraints to restrict the cost of an input — labor. In other words, a conspiracy to achieve a labor market monoposony.

What is the ancillary restraints doctrine? It was first established by Judge William Howard Taft in 1898 in the seminal Addyston Pipe decision. It is a form of the Rule of Reason. If a restraint is ancillary and necessary to an otherwise procompetitive endeavor, it may be lawful. In addition, the doctrine requires that the restraint be reasonably necessary to achieve the procompetitive purpose of the collaboration and is not more restrictive than necessary.

The Court of Appeals held that the ancillary restraints doctrine is a defense that need not be anticipated in a complaint. Furthermore, the court questioned whether the no-poach clauses were ancillary to an effort to increase labor output, and whether they were more restrictive than necessary. The court held that these questions could not be answered on a motion for judgment on the pleadings.

Judge Easterbrook’s opinion seems to clash with settled principles regarding the Rule of Reason and the per se rule. It is well-established that the Rule of Reason is the presumptive standard. The per se rule is applied only where the restraint is a naked restraint in that there are no plausible procompetitive justifications. In other words, a court can say with confidence that the restraint will always or almost always tend to restrict competition and decrease output. Conversely, if the restraint is designed to increase economic efficiency and render markets more, rather than less competitive, the fuller analysis of the Rule of Reason must apply.

It is also well-established that a trial court must engage in some analysis whether there are plausible procompetitive benefits to determine whether to apply the Rule of Reason or the per se rule. The Supreme Court has rejected a “literal” or “structural analysis” where the per se rule applies merely if the restraint fits into one of the traditional per se categories and it is horizontal.

Significantly, Judge Easterbrook’s opinion sets forth procompetitive benefits of such clauses.

Why therefore did the court reverse the district court’s determination that the per se rule doesn’t apply. Judge Easterbrook’s opinion appears to be holding that there are limits to the analysis that a trial court can engage in to determine whether to apply the per se rule or the Rule of Reason on a motion for judgment of the pleadings. Judge Easterbrook concluded that whether the franchises increased labor output, and whether the no-poach agreements were ancillary and necessary to that procompetitive effort, were too complicated on such a motion.

But there could be unintended consequences of this decision. Under the per se rule, procompetitive justifications are usually not considered.

Judge Ripple’s concurring opinion offers some help. Judge Ripple makes clear that the ancillary restraints doctrine, as well as other procompetitive justifications, may be considered on remand. It is almost a Rule of Reason case in disguise.