At their core, state and federal antitrust laws are designed to protect free and open markets by ensuring robust competition. The more commonly understood application of antitrust law concerns competition in the sale of goods or services. As most are aware, preserving competition among sellers benefits consumers by, among other things, lowering prices, creating higher quality goods and services, sparking innovation, and increasing consumer options.
But the application of antitrust law is not limited to conspiracies among sellers, it applies as equally to conspiracies and coordination among buyers, including buyers of labor. Employers—buyers of labor—that compete to hire or retain employees are competitors in a labor market. And under state and federal antitrust laws, it is unlawful for competing employers to expressly or implicitly agree not to compete with another for employees or potential employees. By preserving and protecting competition among employers, antitrust law ensures a free and open labor market that benefits employees through higher wages, better benefits, and other conditions of employment.
Washington State is at the forefront of labor competition and enforcement efforts, and has made protecting competition among firms to hire employees a focus of the Antitrust Division. In particular, the Washington Attorney General’s Office has taken enforcement actions against companies that have used no-poach agreements, employers that use restrictive non-competes, and reviews proposed mergers and acquisition for effects in labor markets.
Initiative to Eliminate No-Poach Clauses in Franchise Agreements
Jersey Mike’s Lawsuit
Merger Review for Monopsonization
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Initiative to Eliminate No-Poach Clauses in Franchise Agreements
In January 2018, the Washington Attorney General launched an initiative to eliminate no-poach clauses in franchise agreements nationwide.
These particular no-poach provisions were covenants in lengthy franchise agreements—agreements between a franchisor and a legally distinct and independent franchisee—that restricted employee mobility among locations within the same franchise system. Typically, employees of the franchisee never saw these provisions and were not even aware that they existed.
By restricting franchise entities’ ability to hire or recruit new employees, no-poach provisions decrease competition for the labor of franchise employees. This decrease in competition for labor has the potential to lead to reduced opportunities and stagnant wages. It can also diminish competition for better benefits and working conditions.
The use of no-poach provisions in franchise agreements first came to the Attorney General’s Office’s attention from a September 2017 New York Times article titled “Why Aren’t Paychecks Growing? A Burger Joint Clause Offers a Clue.” That article explored why wages were stagnating across the country’s economy, specifically looking at low-wage employees in fast food and quick serve restaurants. Underlying that New York Times article was research by leading labor economists suggesting that downward pressure from no-poach agreements may be partly responsible for the stagnating wages.
Informed by the facts set forth in both the news article and the academic literature on franchise no-poach provisions, the Antitrust Division concluded that what was described were naked restraints of trade among horizontal competitors for labor, and were thus per se illegal under the antitrust provisions of Washington State’s Consumer Protection Act.
From this, the Antitrust Division launched an industry-wide investigation into franchise systems’ use of no-poach provisions. Within seven months of beginning this investigation, the Attorney General’s Office secured legally binding agreements, in the form of an Assurance of Discontinuance (AOD), from seven fast food franchisors to immediately stop enforcing and eliminate no-poach clauses from their franchise agreements nationwide. The AOD also required the franchisor to provide notice of the agreement nationwide to the entire franchise system. This notice ensured that all franchisees know that they are no longer subject to the restriction.
While the investigation initially focused on the fast food industry, where the majority of workers tend to make minimum wage and may be especially vulnerable to anticompetitive practices that artificially suppress their wages, all no-poach provisions in franchise agreements are per se violations of Washington’s antitrust laws. Accordingly, this initiative eventually reached all franchise systems that have a significant presence in Washington State, including those in such industries as: automotive services, child care, cleaning services, convenience stores, custom window treatment, electronic repair services, home healthcare services, home repair services, hotels, insurance adjustors, parcel services, tax preparation, and travel agencies.
By the initiative’s close in early 2020, the Antitrust Division investigated hundreds of franchise systems. When it found a franchise system who at the time of the investigation used or recently used a no-poach provision, the Division began negotiations to secure that company’s compliance with the AOD terms. Through negotiations, the Attorney General’s Office secured binding commitments from over 225 corporate chains to eliminate no-poach clauses from all franchise agreements nationwide. This number represents over 4,700 locations in Washington and nearly 200,000 locations nationwide, and freed competition for the labor of millions of workers across the United States.
In launching the investigation, the Attorney General’s goal was “to end no-poach practices. Period.” The Initiative succeeded in its goal.
During the course of the No-Poach Initiative, the Attorney General’s Office offered all franchisors found to have used no-poach provisions the opportunity to amicably negotiate a resolution to the State’s investigation. If, however, a franchisor refused to enter into a legally binding agreement committing to stop using no-poach provisions, the Attorney General’s Office was prepared to pursue an enforcement action.
In October 2018, the Office filed one such suit against national restaurant chain Jersey Mike’s Franchise System and all of its Washington franchisees in state court in Seattle. This was the first suit brought by a state attorney general against a company for using no-poach clauses. The court rejected Jersey Mike’s attempt to dismiss the State’s suit, leaving intact all of the State’s theories of liability.
The parties eventually settled in August 2019—two months before trial—on terms substantively identical to the AOD offered to Jersey Mike’s pre-litigation, as well as every other target as described earlier, plus a $150,000 monetary component.
No other franchise system declined the State’s pre-complaint settlement offer.
In addition to its own investigations and litigation, the Attorney General's Office, where appropriate, will file amicus curiae briefs—also known as friend of the court briefs— in another party's lawsuit, if it believes the State's perspective, knowledge, or understanding of law would aid a court in deciding an issue of law.
In March 2019, Washington did just this, and submitted amicus briefs in three separate class actions filed in federal court in the Eastern District of Washington. Those class actions were brought by private plaintiffs against three fast food chains over those companies' use of no poach clauses in franchise agreements. Washington's amicus briefs responded to statements of interest filed earlier by the U.S. Department of Justice arguing, in favor of the defendants’ motions to dismiss, that franchise no poach agreements should be evaluated under the more lenient rule of reason standard.
Washington's reply, linked here, argued that determination of the proper standard—per se like Washington believes, or rule of reason as DOJ argued—is premature at this early phase of litigation as discovery had yet to commence. Washington further stressed its extensive experience investigating and litigating no poach cases to directly counter erroneous factual assumptions DOJ made in its statements of interest. Based on that experience, Washington advised the federal district court that franchisors would have a heavy burden to secure rule of reason treatment. Moreover, Washington noted that state antitrust law does not necessarily mirror its federal analogs, and accordingly, DOJ's opinions on the application of federal law does not resolve plaintiffs' state law antitrust cause of action.
All three underlying class actions settled before the district court could opine on the merits of the parties' or the regulators’ briefs.
Non-competes in employment agreements prevent employees from one business from leaving and working for or starting a competing business. By eliminating competition for labor, an employer has reduced incentives to compete to retain its own employees; competition that would otherwise result in the employer providing market wages, better working conditions, or promotional opportunities. Non-competes also harm competition by depriving businesses, who were not a party to the non-compete agreements, the opportunity to hire available, qualified workers.
In the State of Washington, non-competes are unlawful and unenforceable against an employee if, among other reasons, the employee earns less than $100,000 annually or if the employee is terminated as the result of a layoff. See RCW 49.62.020(1). Moreover, employee non-competes with durations longer than eighteen months are presumptively unreasonable and unenforceable. See RCW 49.62.020(2). Non-competes against independent contractors are unenforceable unless the independent contractor earned more than $250,000 per year from the party seeking enforcement. See RCW 49.62.030.
In addition to the above restrictions, the use of non-competes under certain conditions may constitute an unfair method of competition in violation of the State’s Consumer Protection Act.
Accordingly, the Antitrust Division investigates restrictive non-competes to determine if they violate the State’s laws on noncompetition covenants or otherwise constitute an unfair method of competition in violation of antitrust law.
For example, in 2019, the Antitrust Division resolved an investigation into Mercurys Coffee’s use of unlawful non-compete agreements. Specifically, Mercurys required all of its employees—from entry-level to managers—to sign highly restrictive non-compete agreements, regardless of whether the employees had access to trade secrets or other proprietary information, and regardless of whether the employees would generate a customer base such that the employee’s departure would lead to customer or revenue loss.
Beyond that, the non-compete’s specific terms were broad. First, it restricted an employee’s ability to work for a competitor within a set radius of any of the company’s locations, not simply the location that the employee worked. As this company had multiple locations, the effective geographic restriction was quite broad. Second, the non-compete applied for well over a year, an excessive period to lock a noncritical employee from gaining meaningful and better alternate employment. And third, the non-compete required the employee to provide a copy of the non-compete agreement to any prospective employer at the application stage, regardless of industry, for the length of the restriction plus an additional six months.
Non-competes such as that described above protects no legitimate business interest of the employer. The only purpose of such a non-compete is to stifle competition for workers’ labor.
In light of these facts, the Attorney General’s Office filed a complaint alleging that Mercurys’s non-competes constituted an unfair method of competition in violation of the Consumer Protection Act. Together with the complaint, the State filed a consent decree resolving the State’s suit, and requiring Mercurys to, among other things, void all then in-effect non-competes and pay the Attorney General’s Office $50,000 to cover attorneys fees and associated costs. Under the consent decree, for the following five years, Mercurys must first seek the Attorney General’s permission before using any non-compete agreements and could only do so for certain senior level executives.
The Antitrust Division continues to investigate the use of non-competes against all categories of employees.
Merger Review for Monopsonization
Along with enforcement efforts, the State of Washington also conducts merger reviews—both on its own, and alongside the federal regulators. In addition to focusing on potential harm to buyers of the merged firms’ products, the Attorney General’s Office also focuses on reviewing potential harm to sellers that provide inputs to the merged company. Labor “sold” by current or future employees is one such input. In antitrust terms, a dominant buyer of a good or service raises “monopsony” concerns. Monopsonists, like monopolists, have the potential to distort competition that would otherwise fairly dictate appropriate pricing. In the labor monopsony context, appropriate pricing is better known as wages.
Because labor is inherently localized, the Washington Attorney General is uniquely positioned to identify situations in merger review where two merging companies may compete for employees and raise monopsony concerns in a local labor market.
Washington State’s activity in protecting competition in labor markets has put it at the forefront of state and federal enforcement efforts. Because of the State’s leadership in this area, it has been frequently asked to play a role in shaping the national conversation around labor competition.
For example, in October 2019, an Assistant Attorney General for the Antitrust Division testified before the U.S. House of Representative’s Judiciary Committee’s Subcommittee on Antitrust, Commercial and Administrative Law in Washington, D.C. The Assistant Attorney General testified as to the Washington Attorney General’s Office’s labor competition enforcement efforts, specifically highlighting the Office’s role in eliminating franchise no-provisions nationwide as well as investigating overly-restrictive non-compete agreements.
Written testimony for the Attorney General’s Office can be found here, and video of the live testimony here.
In addition to appearing before the United States Congress, attorneys with the Antitrust Division have provided testimony to and participated in workshops hosted by the U.S. Department of Justice and Federal Trade Commission on ways antitrust law can better protect labor markets.
Attorneys with the Antitrust Division are also frequently asked to speak and write about the intersection of labor and antitrust law, and have spoken on this topic at conferences and other events hosted by various sections of the American Bar Association as well as to the National Association of Attorneys General.
We depend on members of the public to bring potential violations of the antitrust laws to our attention. Your vigilance and tips help us enforce Washington's laws.
Please feel free to contact the Antitrust Division if you have any concerns about possible illegal practices impacting labor markets. Such practices could include, but are not limited by, agreements between two separate companies to limit each other's ability to hire or recruit employees, as well as excessively broad non-compete agreements.
You can click here to file an electronic complaint or contact us at the address below.
Office of the Attorney General
800 Fifth Avenue, Suite 2000
Seattle, WA 98104-3188