Elizabeth T. Castillo
Cotchett, Pitre & McCarthy, LLP
On November 13, 2018, the district court in Yi v. SK Bakeries LLC et al., No. 3:18-cv-05627 (W.D. Wash.) denied Defendants Cinnabon Franchisor SPV LLC (“Cinnabon”) and SK Bakeries, LLC (“SK”)’s motions to dismiss a complaint alleging Defendants violated the Sherman Act, 15 U.S.C. 1, et. seq., and Washington’s Unfair Business Practices Act, RCW 19.86, et seq., by entering into a franchise agreement that included a no-hire and non-solicitation provision until July 12, 2018. See Order Denying Defendants’ Motion to Dismiss, No. 3:18-cv-05627 (ECF No. 33), Nov. 13 2018 (W.D. Wash.) (“Order”). Plaintiff, a former SK employee, filed the putative class action complaint claiming the provision required a franchisee to agree that it would “not employ or seek to employ an employee of [Cinnabon], of another franchisee, or attempt to induce such employee to cease his/her employment without prior written consent of such employee’s employer.” Order at 2. Plaintiff contends this provision was in Cinnabon’s franchise agreement with SK and in Cinnabon’s franchise agreements with other franchisees. Order at 3. Plaintiff argued the agreement prevented franchises from hiring workers from other Cinnabon franchises, thereby eliminating wage competition that could increase salaries and benefits. Id.
In an opinion by United States District Judge Robert J. Bryan, the court found that the complaint sufficiently alleged an agreement, conspiracy, or combination between two or more entities capable of violating the Sherman Act. Order at 5. The allegations reflect that the franchisor and franchisees’ agreement joins separate decision makers in direct competition for employees such that “the agreement deprives the marketplace of independent centers of decisionmaking” pursuant to Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 195 (2010) (“American Needle”). Order at 6. Even if Cinnabon and its franchisees, including SK, are considered a single firm, and actions of a single firm are considered independent actions and do not violate Sherman Act, “[a]greements made within a firm can constitute concerted action covered by § 1 when the parties to the agreement act on interests separate from those of the firm itself” under American Needle. Order at 6 (citing Am. Needle, 560 U.S. at 200).
The court did not find the two cases to which Defendants cited in support of their motions to dismiss persuasive. Order at 6-7. The court remarked it was premature to dismiss the complaint based on Williams v. I.B. Fischer Nevada, which held that a franchisor and franchisee were a single entity that could not violate the Sherman Act, because “[w]hether corporate entities are sufficiently independent requires an examination of the particular facts of each case.” Order at 6-7 (citing Williams v. I.B. Fischer Nevada, 999 F.2d 445, 447-48 (1993) (“Williams”)). The court likewise stated Danforth & Assoc., Inc. v. Coldwell Banker Real Estate, LLC, an unpublished case which cites Williams without analysis for the same proposition, was not binding and is of questionable application at the motion to dismiss stage. Order at 7 (citing Danforth & Assoc., Inc. v. Coldwell Banker Real Estate, LLC, 2011 WL 338798 (W.D. Wash. Feb. 3, 2011)).
After the court decided that defendants were capable of conspiring under the Sherman Act, the court turned to whether the restraint of trade was unreasonable and therefore illegal. While Restraints can be unreasonable per se because they “always or almost always tend to restrict competition and decrease output” or restraints can be unreasonable under the rule of reason, which requires courts to “conduct a fact-specific assessment of market power and market structure . . . to assess the restraint’s actual effect on competition.” Order at 7 (citing Ohio v. Am. Express Co., 138 S. Ct. 2274, 2283-84 (2018)). Defendants argued that the alleged restraint at issue is a vertical restraint that requires a full rule of reason analysis. Order at 8. Plaintiff contended that the restraint at issue is a horizonal restraint that warrants a per se analysis or a quick look rule of reason analysis (see infra). Id. The court found the restraint was both vertical (the franchisee agrees not to solicit or hire a Cinnabon employee) and horizontal (the franchisee agrees not to solicit or hire another franchisee’s employee without permission). Order at 9.
The court stated that Plaintiff failed to allege a per se violation of the Sherman Act because “‘it is not clear that the Defendants’ agreements ‘lack any redeeming virtue.’” Order at 9. The court noted a truncated rule of reason or “quick look” antitrust analysis was appropriate at this stage because “an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and markets.” Order at 7-8 (citing California ex rel. Harris v. Safeway, Inc., 651 F.3d 1118, 1138 (9th Cir. 2011) (“Harris”). Plaintiff alleges an arrangement between competing firms to not compete with each other in the market for employees, such that someone with a basic understanding of economics would understand would have an anticompetitive effect on the prevailing wage. Order at 10. The court found Plaintiff met her initial burden of showing Defendants’ agreement restrained trade unreasonably under the quick look rule of reason analysis. Id. at 11. The court remarked that this case is similar to another case where the plaintiff asserted a Sherman Act claim based on a provision in the franchise agreement under which franchisees agreed not to hire employees of other McDonald’s stores. Order at 10-11 (citing Deslandes v. McDonald’s USA, LLC, 2018 WL 3105955 (N.D. Ill. June 25, 2018)). There, the court deemed the per se analysis was inappropriate but stated that the plaintiff plausibly stated a claim for relief under the quick look analysis. Order at 10.
Thus, while the court rejected Defendants’ motions to dismiss, it did so based on the quick look rule of reason analysis and not the more lenient per se standard. Plaintiff must prove that Defendants’ anticompetitive effects outweighed their procompetitive benefits and justifications under the quick look rule of reason standard. Order at 8 (citing Harris, 651 F.3d at 1134). The court noted that Plaintiff failed to allege sufficient facts to support a full rule of reason analysis at this time and warned that she does so at her own risk and those she seeks to represent if she is unable to prevail under a quick look rule of reason analysis.