No-Poach Agreements Revisited: Jimmy John’s Antitrust Class Action Case Proceeds

In late July 2018, a US federal judge in Illinois refused to dismiss a class action antitrust lawsuit against sandwich maker Jimmy John’s. See Butler v. Jimmy John’s Franchise LLC, Case No. 18-cv-0133-MJR-RJD (US Dist. Court, SD Illinois 2018).

As many know, Jimmy John’s is a fast-food restaurant that sells and delivers deli-style sandwiches. The chain has over 2,700 locations in more than 40 states plus the District of Columbia; many are company-owned, but a vast number of the locations are franchise locations. As we discussed in an earlier article — see here — it was common in the fast-food franchising industry for the franchise agreement to prohibit individual franchise locations from soliciting or recruiting any employee currently working for another franchise. These are generally called “no-poach” or “no-switch” agreements. According to the news reports — see here — Jimmy John’s franchise agreement went even further and prohibited franchisees from recruiting employees who had worked for another franchise location in the prior 12 months. According to the agreements, “poaching” employees in this manner was defined as a “default” under the franchise agreement and grounds for termination of the franchise. In states other than California, Jimmy John’s also required employees to sign non-compete agreements agreeing not to work for other franchisees and agreeing not to work for any “deli-style restaurant” located near any Jimmy John’s store for at least two years after their work ended.

As noted in our earlier article, such “no-poach” agreements are a form of non-compete agreement. In California, such agreements are unenforceable from the standpoint of the employee. In general, California favors the ability of workers to be gainfully employed in their trade and any sort of restraint on trade will be struck down by California courts.

In addition, from the vantage of the employer, these no-poach agreements are potential restraints on trade that violate federal antitrust laws. This is the gist of the claims being made in the Illinois federal class action lawsuit. Illinois allows non-compete agreements generally and, therefore, the no-poach agreements are not void on those grounds. However, the plaintiff employees have argued that Jimmy John’s franchise agreement harms competition in violation of the antitrust laws by inhibiting the free flow of labor thereby negatively affecting wages, work hours, employment benefits, career advancement, and growth.

In response to the antitrust allegations, Jimmy John’s argued that the no-poach provisions (and the other non-compete agreements) were allowable because the franchise arrangement created a vertical integration between Jimmy John’s as the franchisor and its various franchisees. According to Jimmy John’s, “vertical” restraints on trade are lawful under current interpretations of the antitrust laws. However, the court rejected this argument. First, the court questioned the “vertical” nature of the Jimmy John’s franchise relationship since the franchise agreements disclaim that Jimmy John’s and the franchisees are agents, joint venture partners, or employees of the other “for any purpose.” Second, the court emphasized that the no-poach agreements and other restraints are not just vertical, but also horizontal since the franchisees could enforce the provisions against each other with Jimmy John’s being the principal enforcer through the termination provisions.

The Jimmy John’s antitrust case is a cautionary tale. No San Diego business wants to face a lawsuit alleging antitrust violations. Aside from the expense of litigation, potential judgments include recovery of treble damages and attorneys’ fees. A good San Diego corporate attorney should review your company policies, procedures, and agreements to ensure they are free from no-poach provisions.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq. of San Diego Corporate Law by email or by calling (858) 483-9200. Mr. Leonard has the experience to review your franchise agreements, help with the purchase (or sale) of a San Diego franchise, and/or assist with any other business-related matter.

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