Each franchise system is unique. Training managers and other employees to do things the “system-way” takes time, money and other resources. The more that a franchisee invests in a worker, the more valuable that worker becomes for the franchisee. Unfortunately, that same value makes that worker a potential target for poaching by other system-franchisees; franchisees who want the benefit of investment, without the cost.

Those familiar with the franchising industry understand that talent-poaching is disruptive and leads to contention within the system. It’s similar to a franchisee free riding on the cooperative marketing efforts of other local franchisees, while declining to contribute to the cooperative.

Some franchisors, in the interest of system harmony, and protecting their franchisees’ talent investments, have included so-called “no-poaching” or “no-switching” obligations in their franchise agreements. In general, these provisions contractually limit a franchisee from hiring another system-franchisee’s employees. In a court case considering a “no-switching” provision which prohibited a franchisee from hiring another franchisee’s manager, the judge explained:

The purpose of this agreement is to prevent the franchises from “raiding” one another’s management employees after time and expense have been incurred in training them. 1

Clearly these provisions “restrain trade” in the sense that they have the effect of preventing certain limited employment relationships. But in general, these provisions have not been viewed as unlawful. Unfortunately, that may be changing – at least if a number of attorneys general and politicians get their way. Massachusetts Attorney General Maura Healey has taken the lead on a multi-state effort to curtail no-poaching provisions used by major fast-food franchisors; the July 9, 2018 press release issued by AG Healey’s office explains:

“No-poach agreements unfairly limit the freedom of fast-food and other low-wage workers to seek promotions and earn a better living,” said AG Healey. “Our goal through this action is to reduce barriers and empower workers to secure better-paying and higher-skill jobs.” 2

Drumm Law understands that other similar efforts are underway, including legislation initiatives intended to curtail no-poaching provisions. At this point franchisors who contractually prohibit talent-poaching may be at risk of legal action alleging that their no-poaching provisions unlawfully restrains trade. There is even a potential for class action plaintiff lawyers to jump on the band wagon, taking the position that these provisions oppress a class of similarly-situated workers.

Even though these provisions serve a legitimate purpose and may ultimately be found by courts to be lawful under appropriate conditions, they tend to benefit franchisees more than franchisors. As such the risks likely outweigh any corresponding benefit to retaining these provisions – at least until this legal issue is no longer unsettled. Therefore, Drumm Law is encouraging its franchisor clients to consider removing these provisions from their agreements now, or at the time of their next FDD renewal. Additionally, Drumm Law is able to advise concerned clients on how to reduce risks associated with the no-poaching provisions in existing franchise agreements.

If you are concerned, reach out to us; we are here to help.

1 Williams v. I.B. Fischer Nevada, 794 F.Supp. 1026, 1029 (D.Nev.1992), aff’d 999 F.2d 445 (9th. Cir. 1993).

2 https://www.mass.gov/news/ag-healey-leads-multistate-investigation-of-worker-no-poach-agreements-at-national-fast-food (last viewed July 27, 2018).