What is a Franchise “No Poach Agreement,” and Why is Biden Looking to Ban Them?

When a franchise contract prohibits one franchisee from hiring employees of another franchisee without their consent, it is called a “no-poach agreement.” This rule is designed to ensure one franchisee doesn’t save the time, expense and effort of training by hiring the employees of other franchisees who have already made the required investment outlined in the agreement. Over the past few years, the U.S. Department of Justice (DOJ) has gone back and forth over the legality of no-poach agreements. Now, Biden has announced his plans to ban the provision for franchise brands.

In October 2016, the DOJ issued guidance to human resource professionals stating that no-poach agreements between employers were per se illegal and subject to criminal prosecution under Section 1 of the Sherman Antitrust Act, which prohibits agreements that unreasonably restrain trade. If a provision is considered a per se restraint — or a horizontal restraint — it is considered harmful to competition, and a plaintiff is not required to prove that the challenged agreement in fact hinders competition in their market.

This 2016 directive resulted in employees of franchisees filing numerous civil damage suits, including class actions, against both franchisors and franchisees. So far, many of those cases are still pending, and the initial rulings for those that have gone through have been varied.

In 2019, under the Trump administration, the DOJ backpedaled on the 2016 directive and declared that no-poach agreements between franchisors and franchisees should be judged by the rule of reason, because they are “vertical restraints” that could theoretically benefit overall industry competition. 

For example, the practice of franchisees being able to avoid training fees and costs by poaching employees of fellow franchisees could damage a franchise brand’s systemwide growth, thus hindering overall advancement of the industry. The rule of reason argument also suggests employees of franchisees can benefit from no-poach agreements because those agreements give the franchisees the incentive to invest in the training and development of their employees, who are free to use those skills at a competing brand.

This 2019 declaration also noted that no-poach agreements between a franchisor and franchisees that both operate stores in competition with each other, as well as between competing franchisees, should still be judged under the per se rule.

Now, Biden has promised to ban all no-poach agreements, which means the DOJ will likely begin criminal prosecutions of franchise no-poach agreements once again. If the franchise industry as a whole hopes to maintain the legal practice of no-poach agreements, they will need to prove their positive effect on competition as well as their ability to create upward mobility for employees and increased compensation.