Amicus Curiae Brief — McDonald's USA, LLC, et al., Petitioners v. Leinani Deslandes, et al.

No. 23-562

In the Supreme Court of the United States

MCDONALD’S USA, LLC, ET AL., PETITIONERS

v.

LEINANI DESLANDES, ET AL., RESPONDENTS

ON PETITION FOR A WRIT OF CERTIORARI

TO THE U.S. COURT OF APPEALS FOR THE SEVENTH CIRCUIT

BRIEF FOR INTERNATIONAL CENTER FOR

LAW & ECONOMICS AS AMICUS CURIAE

SUPPORTING PETITIONERS

GEOFFREY A. MANNE

DANIEL J. GILMAN

INTERNATIONAL CENTER

FOR LAW & ECONOMICS

SHAI BERMAN

WEIL, GOTSHAL & MANGES LLP

767 5th Avenue

New York, NY 10153

MARK A. PERRY

Counsel of Record

WEIL, GOTSHAL & MANGES LLP

2001 M Street NW

Washington, DC 20036

(202) 682-7000

mark.perry@weil.com

MARK I. PINKERT

WEIL, GOTSHAL & MANGES LLP

1395 Brickell Avenue

Miami, Fl 33131

Counsel for Amicus Curiae

TABLE OF CONTENTS

Interest of Amicus Curiae............................................... 1

Summary of Argument ................................................... 2

Argument......................................................................... 4

I. The Seventh Circuit Flipped The Rule Of

Reason Presumption On Its Head ........................ 5

A. The Rule Of Reason Presumptively

Applies…………... ............................................. 5

B. The Lack Of Judicial Experience Here

Precludes Per Se Condemnation ..................... 7

II. Intrabrand No-Poach Provisions In Franchise

Agreements Tend To Be Procompetitive ............ 11

A. Paragraph 14 Was Designed,

Implemented, And Functioned Chiefly As

A Vertical Restraint ....................................... 11

B. Economic Literature Does Not Support

Per Se Condemnation Of This Type Of

Restraint………... ........................................... 14

III. Courts Analyzing Competitive Effects Of NoPoach Restraints In Labor Markets Need Not

Ignore The Downstream Impacts On Product

Markets................................................................. 20

Conclusion ..................................................................... 22

(i)

TABLE OF AUTHORITIES

Cases

Page(s)

Bogan v. Hodgkins,

166 F.3d 509 (2d Cir. 1999) ................................... 9

Broad. Music, Inc. v. Columbia Broad.

Sys., Inc.,

441 U.S. 1 (1979) .............................................. 9, 10

Bus. Elecs. Corp. v. Sharp Elecs. Corp.,

485 U.S. 717 (1988) ............................................ 2, 7

Concord Assocs., L.P. v. Ent. Props.

Trust,

817 F.3d 46 (2d Cir. 2016) ..................................... 7

Continental T.V., Inc. v. GTE Sylvania

Inc.,

433 U.S. 36 (1977) .......................................... 12, 13

Craftsmen Limousine, Inc. v. Ford

Motor Co.,

363 F.3d 761 (8th Cir. 2004) .................................. 8

E. Food Servs., Inc. v. Pontifical Cath.

Univ. Servs. Ass’n,

357 F.3d 1 (1st Cir. 2004) ...................................... 7

Eastman Kodak Co. v. Image Tech.

Servs., Inc.,

504 U.S. 451 (1992) .................................... 4, 20, 21

Epic Games, Inc. v. Apple Inc.,

67 F.4th 946 (9th Cir. 2023) ................................ 20

(ii)

Innovation Ventures, LLC v. Custom

Nutrition Laboratories, LLC,

912 F.3d 316 (6th Cir. 2018) .................................. 7

Kestenbaum v. Falstaff Brewing Corp.,

514 F.2d 690 (5th Cir. 1975) .................................. 9

Leegin Creative Leather Prods., Inc. v.

PSKS, Inc.,

551 U.S. 877 (2007) ........................ 2, 3, 5, 6, 16, 21

Matsushita Elec. Indus. Co. v. Zenith

Radio Corp.,

475 U.S. 574 (1986) ................................................ 5

Midwestern Waffles, Inc. v. Waffle

House, Inc.,

734 F.2d 705 (11th Cir. 1984) .......................... 9, 12

Nat’l Soc’y of Pro. Eng’rs v. United

States,

435 U.S. 679 (1978) .............................................. 10

NCAA v. Alston,

141 S. Ct. 2141 (2021) ............................ 4, 5, 20, 21

NCAA v. Bd. of Regents of Univ. of

Okla.,

468 U.S. 85 (1984) ................................................ 20

Nw. Wholesale Stationers, Inc. v. Pac.

Stationery & Printing Co.,

472 U.S. 284 (1985) ................................................ 6

Ohio v. Am. Express Co.,

138 S. Ct. 2274 (2018) ..................... 3, 6, 12, 21, 22

(iii)

Paladin Assocs., Inc. v. Mont. Power

Co.,

328 F.3d 1145 (9th Cir. 2003) ................................ 8

Polk Bros. v. Forest City Enters., Inc.,

776 F.2d 185 (7th Cir. 1985) ................................ 15

Quality Mercury, Inc. v. Ford Motor Co.,

542 F.2d 466 (8th Cir. 1976) .................................. 9

Standard Oil Co. of N.J. v. United

States,

221 U.S. 1 (1911) .................................................... 5

Sullivan v. NFL,

34 F.3d 1091 (1st Cir. 1994) ................................ 20

Texaco, Inc. v. Dagher,

547 U.S. 1 (2006) .................................................... 5

Twin City Sportservice, Inc. v. Charles

O. Finley & Co.,

676 F.2d 1291 (9th Cir. 1982) ................................ 9

United States v. Brewbaker,

No. 22-4544, 2023 WL 8286490 (4th

Cir. Dec. 1, 2023) ............................................ 13, 15

United States v. Int’l Harvester Co.,

274 U.S. 693 (1927) .............................................. 16

United States v. Microsoft Corp.,

253 F.3d 34 (D.C. Cir. 2001) ................................ 16

Wilcox v. First Interstate Bank of

Oregon, N.A.,

815 F.2d 522 (9th Cir. 1987) ................................ 16

(iv)

Will v. Comprehensive Acct. Corp.,

776 F.2d 665 (7th Cir. 1985) ................................ 11

Other Authorities

Phillip E. Areeda & Herbert

Hovenkamp, Antitrust Law (5th ed.

2023) ....................................................................... 6

Chris Brunau, Turnover and Retention

Rates for QSR Businesses, Daily Pay

(Nov. 15, 2022),

https://tinyurl.com/46jb27yd ................................ 18

Bureau of Labor Statistics, Economic

News Release, Job Openings and

Labor Turnover (Dec. 5, 2023),

https://www.bls.gov/news.release/jolt

s.htm ..................................................................... 18

Bureau of Labor Statistics,

Occupational Outlook Handbook,

Food and Beverage Serving and

Related Workers (Sept. 6, 2023),

https://www.bls.gov/ooh/foodpreparation-and-serving/food-andbeverage-serving-and-relatedworkers.htm ......................................................... 18

Herbert Hovenkamp, The Rule of

Reason, 70 Fla. L. Rev. 81 (2018) .......................... 5

Arturs Kalnins and Francine

Lafontaine, Multi-Unit Ownership in

Franchising: Evidence from the FastFood Industry in Texas, 35(4) The

RAND J. Econ. 747 (2004) ................................... 14

(v)

Alan B. Krueger & Orley Ashenfelter,

Theory and Evidence on Employer

Collusion in the Franchise Sector, 57

J. Hum. Res. S324 (2022). ................................... 16

Francine Lafontaine & Margaret Slade,

Exclusive Contracts and Vertical

Restraints: Empirical Evidence and

Public Policy, 10 Handbook of Antitrust Economics 391 (Buccirossi ed.,

2008) ..................................................................... 12

Francine Lafontaine & Margaret E.

Slade, Transaction Cost Economics

and Vertical Market Restrictions—

Evidence, 55(3) The Antitrust Bulletin 587 (2010). ...................................................... 12

G. Frank Mathewson & Ralph A.

Winter, The Economics of Franchise

Contracts, 28 J.L. & Econ. 503 (1985) ................. 11

Alan J. Meese, Farewell to the Quick

Look: Redefining the Scope and

Content of the Rule of Reason, 68 Antitrust L.J. 461 (2000) .......................................... 10

Oliver E. Williamson, Assessing Vertical

Market Restrictions: Antitrust

Ramifications of the Transaction

Cost Approach, 127 U. Pa. L. Rev.

953 (1979) ............................................................. 15

(vi)

In the Supreme Court of the United States

NO. 23-562

MCDONALD’S USA, LLC, ET AL., PETITIONERS

v.

LEINANI DESLANDES, ET AL., RESPONDENTS

ON PETITION FOR A WRIT OF CERTIORARI

TO THE U.S. COURT OF APPEALS FOR THE SEVENTH CIRCUIT

BRIEF FOR INTERNATIONAL CENTER FOR

LAW & ECONOMICS AS AMICUS CURIAE

SUPPORTING PETITIONERS

INTEREST OF AMICUS CURIAE1

The International Center for Law & Economics

(“ICLE”) is a nonprofit, non-partisan global research

and policy center aimed at building the intellectual

foundations for sensible, economically grounded policy.

ICLE promotes the use of law and economics methodologies, as well as the results of economic research, to inform public policy debates, and it has longstanding expertise in antitrust law. It has filed amicus briefs in this

Court and others around the country. See, e.g., Apple,

1 Pursuant to S. Ct. Rule 37.2(a), counsel for all parties have been

notified about the filing of this brief. No counsel for a party authored

this brief in whole or in part and no person or entity other than amicus, its members, or counsel made a monetary contribution to its

preparation or submission.

(1)

2

Inc. v. Epic Games, Inc., No. 23-344 (U.S.); United States

v. Am. Airlines Grp. Inc., No. 23-1802 (1st Cir.);

Giordano v. Saks Inc., No. 23-600 (2d Cir.).

ICLE respectfully submits that the decision below

undermines the economic foundations of antitrust law

by presuming that a potentially procompetitive restraint is per se unlawful, rather than analyzing the restraint under the default rule of reason. The Court

should grant the petition for a writ of certiorari to clarify

that the type of restraint at issue here is presumptively

procompetitive and thus subject to the rule of reason.

ICLE scholars have written extensively on issues

closely related to this case, and respectfully submit that

their expertise will help clarify the economic problems

with the decision below and highlight the reasons for

the Court to grant certiorari.

SUMMARY OF ARGUMENT

This Court has clearly and repeatedly recognized

that “[t]he rule of reason is the accepted standard for

testing whether a practice restrains trade in violation of

[Sherman Act] § 1” and that per se prohibitions are “confined to restraints … ‘that would always or almost always tend to restrict competition and decrease output.’”

Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551

U.S. 877, 885–86 (2007) (quoting Bus. Elecs. Corp. v.

Sharp Elecs. Corp., 485 U.S. 717, 723 (1988)). The decision below cannot be reconciled with those important

principles.

The Seventh Circuit committed at least three errors

that threaten the economic foundations of antitrust law

and are worthy of this Court’s attention.

First, the Seventh Circuit inverted the strong presumption in favor of rule of reason analysis—a presumption that is critical in preventing antitrust law

3

from deterring productive and beneficial conduct. Plaintiffs can overcome that presumption, but only when they

show that the challenged restraint falls squarely within

a class or category that “always or almost always”

harms competition. Leegin, 551 U.S. at 885–86. For a

court to make that prediction with confidence, it must

have sufficient experience with the restraint. Here, the

Seventh Circuit turned settled law on its head. From a

dearth of experience, the court of appeals reasoned that

a per se claim was plausible and sustainable. This approach threatens to chill interbrand competition.

Second, the Seventh Circuit sustained a per se challenge to a restraint that has significant procompetitive

virtues. The challenged contractual provision was designed, and chiefly functioned, as a vertical restraint.

The economic literature shows that intrabrand vertical

restraints tend to benefit competition. While there are

circumstances under which certain vertical restraints

can be anticompetitive, there is no literature demonstrating that they are typically anticompetitive. In the

franchise context, intrabrand vertical restraints

strengthen the franchise’s brand overall and thus foster

competition. The existence of some horizontal aspects or

applications of such a restraint, moreover, does not negate these procompetitive virtues. The rule of reason

fosters consideration of such issues, whereas the Seventh Circuit’s decision curtails it.

Third, the Seventh Circuit held that positive effects

on consumers cannot justify a restraint in the labor

market. This holding is in deep tension with this Court’s

admonition that antitrust analysis focus on “the commercial realities” of a business or industry rather than

on “formalistic distinctions.” See Ohio v. Am. Express

Co., 138 S. Ct. 2274, 2285 (2018) (“AmEx”) (quoting

4

Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S.

451, 466–67 (1992)). Second, the decision below is at

odds with this Court’s teaching that “reasonableness” is

a holistic endeavor, which incorporates consideration of

consumer welfare. See NCAA v. Alston, 141 S. Ct. 2141,

2151 (2021). As petitioners explain, a growing circuit

split on this fundamental, analytical issue warrants this

Court’s immediate attention.

ARGUMENT

Former McDonald’s employees challenged a provision in the McDonald’s franchise agreement (“Paragraph 14”) that once allegedly restricted franchisees’

ability to hire employees from other McDonald’s restaurants for a limited period of time.

The district court entered judgment on the pleadings,

dismissing the plaintiffs’ claims. Pet. App. 12a. It declined to condemn Paragraph 14 as per se unlawful, in

part because the court lacked judicial experience with

the type of intrabrand franchise “no-poach” provision at

issue, and it could not say with confidence that the restraint would always or almost always harm competition. Pet. App. 21a. The claims failed under the rule of

reason due to the plaintiffs’ failure to allege a relevant

market in which they sold their labor or in which

McDonald’s had market power. Pet. App. 19a.

The Seventh Circuit vacated and remanded. Pet.

App. 8a. Although it agreed that the complaint failed to

allege a violation under the rule of reason, the Seventh

Circuit held that the lower court “jettisoned the per se

rule too early”—not because of case law demonstrating

the type of restraint at issue was manifestly anticompetitive (there is none)—but because the potential procompetitive benefits of the provision raised “complex

questions” that required “careful economic analysis.”

5

Pet. App. 4a, 8a. In other words, the Seventh Circuit

held that the per se rule applies as the default presumption, even when the class of restraint that is challenged

may have procompetitive justifications. Even though

the primary operation of the challenged restraint is vertical, the court focused on its horizontal aspects. Further, the Seventh Circuit held that the only procompetitive benefits relevant to assessing the challenged provision were benefits in the labor market, not those in the

associated product market. Pet. App. 5a.

I. The Seventh Circuit Flipped The Rule Of Reason

Presumption On Its Head

The substantive issue in this case is whether an intrabrand franchise hiring restraint should be evaluated

under the rule of reason framework or the per se approach. While the court of appeals opted for per se analysis, this Court’s precedents demand the application of

the rule of reason.

A. The Rule Of Reason Presumptively Applies

Whether a restraint violates § 1 “‘presumptively’

calls for . . . ‘rule of reason analysis.’” Alston, 141 S. Ct.

at 2151 (citing Texaco, Inc. v. Dagher, 547 U.S. 1, 5

(2006), and Standard Oil Co. of N.J. v. United States,

221 U.S. 1, 60-62 (1911)). That is, “[t]he rule of reason is

the accepted standard for testing whether a practice restrains trade in violation of § 1.” Leegin, 551 U.S. at 885;

see also Herbert Hovenkamp, The Rule of Reason, 70

Fla. L. Rev. 81, 83 (2018) (“Courts evaluate most antitrust claims under the ‘rule of reason.”).

The rule of reason presumption is critical from an

economic perspective because it eschews rigid and categorical rules that tend to result in “false positives” that

penalize beneficial conduct. See, e.g., Matsushita Elec.

6

Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594

(1986) (false condemnations “are especially costly, because they chill the very conduct the antitrust laws are

designed to protect”). Instead, the rule of reason allows

courts to assess actual effects, providing for nuanced

economic analysis, tailored to the particular restraint in

the relevant market. See AmEx, 138 S. Ct. at 2284 (“The

rule of reason requires courts to conduct a fact-specific

assessment of market power and market structure to

assess the restraint’s actual effect on competition.”

(cleaned up)).

By contrast, the per se rule risks chilling procompetitive conduct by enabling plaintiffs to skip over their

normal evidentiary burdens—i.e., establishing anticompetitive effects in a relevant market—and also blocking

defendants from coming back with evidence of procompetitive justifications. See Phillip E. Areeda & Herbert

Hovenkamp, Antitrust Law, ¶ 1509c (5th ed. 2023) (observing that per se analysis “dispenses with costly proof

requirements, such as proof of market power,” but consequently “produces a certain number of false positives”).

Accordingly, plaintiffs must clear a high bar in order

to invoke per se condemnation. They must “present a

threshold case that the challenged activity falls into a

category likely to have predominantly anticompetitive

effects.” Nw. Wholesale Stationers, Inc. v. Pac. Stationery & Printing Co., 472 U.S. 284, 298 (1985) (emphasis

added). Moreover, a plaintiff can sustain a per se challenge at the pleading stage only if she can first show

that “courts have had considerable experience with the

type of restraint” alleged and its predominantly anticompetitive nature. Leegin, 551 U.S. at 886. That show-

7

ing is a logical prerequisite because, without such experience, the court cannot make accurate predictions

about the overall effects of a restraint on competition—

much less say that the restraint will “always or almost

always tend to restrict competition and decrease output.’” Id. at 885–86 (quoting Bus. Elecs., 485 U.S. at

723).

When plaintiffs do not plausibly allege that the restraint falls within a predominantly anticompetitive

category and show that courts have the requisite experience to condemn the challenged practice, courts must

reject application of the per se rule at the pleading stage.

See, e.g., Concord Assocs., L.P. v. Ent. Props. Trust, 817

F.3d 46, 53 n.5 (2d Cir. 2016); E. Food Servs., Inc. v. Pontifical Cath. Univ. Servs. Ass’n, 357 F.3d 1, 4 (1st Cir.

2004). That does not mean the underlying claim necessarily fails; rather, a plaintiff’s inability to establish the

prerequisites to per se treatment leads to analysis of the

challenged conduct under the rule of reason.

The plaintiff’s burden is onerous by design. Given the

attendant risks that improper per se condemnation has

on the economy, a plaintiff must be able to show that a

“restraint clearly and unquestionably falls within one of

the handful of categories that have been collectively

deemed per se anticompetitive.” Innovation Ventures,

LLC v. Custom Nutrition Laboratories, LLC, 912 F.3d

316, 340–41 (6th Cir. 2018) (emphasis added). If a plaintiff cannot make that showing, it has not overcome the

presumption, and the rule of reason applies instead.

B. The Lack Of Judicial Experience Here Precludes Per

Se Condemnation

The district court correctly concluded that courts lack

sufficient experience with the particular type of re-

8

straint at issue to say with confidence that the challenged provision would almost always harm competition. Pet. App. 21a. Despite ample opportunity to do so,

respondents never came forward with cases holding

that intrabrand no-poach agreements are manifestly

anticompetitive.

In vacating and remanding, the Seventh Circuit believed that the district court had “jettisoned the per se

rule too early.” Pet. App. 4a. That is wrong. The district

court merely recognized that the plaintiffs failed to

carry their burden at the pleading stage to overcome the

presumption in favor of the rule of reason. The district

court applied precisely the presumption it was supposed

to apply.

To the extent the Seventh Circuit thought that the

plaintiffs had overcome the presumption in favor of the

rule of reason because “[t]he complaint alleges a horizontal restraint” (Pet. App. 4a), the court was also mistaken. As explained below, Paragraph 14’s no-poach

provision was a predominantly vertical restraint with

procompetitive benefits in the product market. If the

court had considered either of these factors, it would

have recognized—at the least—the potential for procompetitive benefits, and thus would have applied the rule

of reason. See Craftsmen Limousine, Inc. v. Ford Motor

Co., 363 F.3d 761, 776 (8th Cir. 2004) (“[W]hen determining whether to apply the rule of reason analysis …

the issue is not whether the restrictions were procompetitive, but whether they could be.”); Paladin Assocs.,

Inc. v. Mont. Power Co., 328 F.3d 1145, 1154-55 (9th Cir.

2003) (“When a defendant advances plausible arguments that a practice enhances overall efficiency and

makes markets more competitive, per se treatment is

inappropriate, and the rule of reason applies.”).

9

Even putting those mistakes aside, it is not enough

to label a restraint “horizontal” and presume it is per se

unlawful—because not all horizontal restraints are per

se unlawful. See Broad. Music, Inc. v. Columbia Broad.

Sys., Inc., 441 U.S. 1, 23 (1979) (“Not all arrangements

among actual or potential competitors that have an impact on price are per se violations of the Sherman Act or

even unreasonable restraints”); Areeda & Hovenkamp,

supra, ¶ 1902a (although horizontal agreements are

more “suspect,” that “does not mean that all or even

most horizontal agreements are unlawful, or that they

should be discouraged”). It was thus critical for the Seventh Circuit to determine whether that particular class

of allegedly horizontal restraints—i.e., intrabrand nopoach agreements—is manifestly anticompetitive.

But neither respondents nor the Seventh Circuit

cited or relied on any precedent holding that such agreements are always or almost always anticompetitive.

Pet. App. 1a–10a. To the contrary, most federal courts

that have analyzed similar intrabrand restraints have

done so under the rule of reason, recognizing their potential procompetitive virtues. See Bogan v. Hodgkins,

166 F.3d 509 (2d Cir. 1999); Kestenbaum v. Falstaff

Brewing Corp., 514 F.2d 690, 695–96 (5th Cir. 1975);

Quality Mercury, Inc. v. Ford Motor Co., 542 F.2d 466,

470 & n.4 (8th Cir. 1976); Twin City Sportservice, Inc. v.

Charles O. Finley & Co., 676 F.2d 1291, 1303 (9th Cir.

1982); Midwestern Waffles, Inc. v. Waffle House, Inc.,

734 F.2d 705 (11th Cir. 1984).

More problematically, the Seventh Circuit itself recognized that this type of restraint is potentially procompetitive, pointing out that “[c]ommon training and job

classifications could in principle justify restraints on

10

poaching.” Pet. App. 6a; see also Pet. App. 7a–8a (acknowledging the potential benefits of Paragraph 14 in

“protecting franchises’ investments in training”). Based

on the existence of these potential benefits—and the

simultaneous absence of cases showing guaranteed anticompetitive effects—the Seventh Circuit stated the

case raised “complex questions” that would ultimately

require “careful economic analysis.” Pet. App. 8a.

Ironically, the court of appeals’ own reasoning shows

why the rule of reason, and only the rule of reason, must

apply in this case. The rule of reason is the careful economic analysis the Seventh Circuit envisioned. See Alan

J. Meese, Farewell to the Quick Look: Redefining the

Scope and Content of the Rule of Reason, 68 Antitrust

L.J. 461, 488–89 (2000) (“[T]here is, of course, only one

way to gain the information necessary to categorize such

restraints properly: full-blown rule of reason scrutiny in

an environment receptive to claims that such restraints

may, in fact, further competition.”). By contrast, the per

se rule the court of appeals imposed applies only when

agreements “are so plainly anticompetitive that no elaborate study of the industry is needed to establish their

illegality.” Nat’l Soc’y of Pro. Eng’rs v. United States, 435

U.S. 679, 692 (1978). The per se rule does not apply in

situations—like this—when the court had “never examined a practice like this one before.” Broad. Music, 441

U.S. at 10.

Accordingly, this Court should grant certiorari to

clarify how the rule of reason presumption operates at

the pleading stage, particularly when there is a lack of

judicial experience with the challenged restraint. When

courts flip the default presumption and improperly apply per se rules, they preclude careful economic analysis

of new types of restraints—even though the economic

11

analysis, in the end, may prove the restraints to be beneficial to competition. In that way, the decision below

creates a substantial risk of chilling productive behavior

and warrants this Court’s review.

II. Intrabrand

No-Poach

Provisions

In

Agreements Tend To Be Procompetitive

Franchise

Far from being universally condemned, the type of

restraints at issue—i.e., intrabrand franchise no-poach

agreements—are, as a class, not manifestly anticompetitive. That is another reason that per se condemnation

is inappropriate and this Court’s review is warranted.

A. Paragraph 14 Was Designed, Implemented, And

Functioned Chiefly As A Vertical Restraint

Franchise agreements are vertical arrangements between the franchisor and its franchisees, which operate

at different levels of the supply chain. See Will v. Comprehensive Acct. Corp., 776 F.2d 665, 670 n.1 (7th Cir.

1985) (“A franchiser and its franchisees are part of a

business organization not altogether different from vertical integration.” (citing G. Frank Mathewson & Ralph

A. Winter, The Economics of Franchise Contracts, 28

J.L. & Econ. 503 (1985))); see also Areeda &

Hovenkamp, supra, ¶ 2033 (noting that franchisor market division is “strongly presumed to be vertical rather

than horizontal”).

Such vertical restraints are typically not a threat to

competition; to the contrary, they are “a customary and

even indispensable part of the market system” and “not

even presumptively ‘suspect.’” Areeda & Hovenkamp,

supra, ¶ 1902d. For that reason, vertical restraints are

subject to the rule of reason, as this Court has repeat-

12

edly held. See, e.g., AmEx, 138 S. Ct. at 2284; Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 54–59

(1977).

Economic research further explains how and why

vertical restraints are procompetitive. Reviewing the

empirical and theoretical literature on vertical restraints, Francine Lafontaine and Margaret Slade observe that:

[T]he empirical evidence concerning the effects

of vertical restraints on consumer well-being is

surprisingly consistent. Specifically, it appears

that when manufacturers choose to impose such

restraints, not only do they make themselves

better off but they also typically allow consumers to benefit from higher quality products and

better service provision.

Francine Lafontaine & Margaret Slade, Exclusive Contracts and Vertical Restraints: Empirical Evidence and

Public Policy, 10 Handbook of Antitrust Economics 391,

408-09 (Buccirossi ed., 2008); see also Francine Lafontaine & Margaret E. Slade, Transaction Cost Economics

and Vertical Market Restrictions—Evidence, 55(3) The

Antitrust Bulletin 587 (2010).

Just as a manufacturer may impose vertical restraints on its distributors in order to promote interbrand competition, so too may a franchisor impose restraints on its franchisees through the standard franchise contract. Such restraints are procompetitive, as

they enhance the franchise brand overall and in that

way promote interbrand competition. See Midwestern

Waffles, 734 F.2d at 720 (franchise restraints “promote

interbrand competition by allowing the franchisor or

manufacturer to achieve certain efficiencies in the distribution of his goods and services”).

13

The record here clearly indicates that Paragraph 14

was such a restraint. It was originally designed—and in

large part operated—as a vertical restraint. In 1955,

McDonald’s included in its franchise agreement the predecessor to the Paragraph 14 restriction as part of an

initial bundle of brand standards that were intended to

enhance the McDonald’s brand overall. Pet. App. 46a–

47a. The terms of the agreement were consistent across

franchisees, but not implemented by those franchisees

qua competitors. Pet. App. 46a, 141a–142a.

Even assuming that Paragraph 14 had some horizontal elements, moreover, that alone would be an insufficient basis to ignore the vertical aspects. For purposes

of determining the appropriate framework of analysis, a

court cannot simply disentangle the component parts of

the arrangement. As this Court has explained, “problems in differentiating vertical restrictions from horizontal restrictions” do not alone “justify a per se rule.”

GTE Sylvania, 433 U.S. at 58 n.28. Rather, a court must

look at the entire commercial relationship between the

contracting parties—here, the franchisor and franchisees. A court should not “parse” the various components to isolate the competitive effects. See United

States v. Brewbaker, No. 22-4544, 2023 WL 8286490, at

*8 (4th Cir. Dec. 1, 2023). Doing so would ignore the economic realities of the commercial venture, which overall

may prove to be productive. Ibid.

Thus, the court of appeals should have recognized

that this predominantly vertical franchise relationship

had significant procompetitive benefits, as most vertical

restraints do; and, in recognition of those potential benefits, it should have rejected application of a per se rule.

14

B. Economic Literature Does Not Support Per Se

Condemnation Of This Type Of Restraint

Because franchise arrangements function vertically

and within one brand, it is no surprise that economic research shows there are legitimate procompetitive rationales to include “no-poach” requirements in standard

franchise agreements. By contrast, there is no peer-reviewed economic literature (and certainly no economic

consensus) demonstrating that these types of restraints

are always anticompetitive.

1. Economic Literature Reveals The Procompetitive

Benefits Of Intrabrand Franchise Restraints

The economic literature shows that the franchise

business model has the potential to generate significant

procompetitive efficiencies.

First, local business owners may have various advantages in the operation of specific outlets, including

familiarity with local labor markets; whereas a national

franchisor “may be more efficient at organizing supply

chains, marketing, and other tasks that involve scale,

national information, or [that are] otherwise inherently

common across retail outlets.” C.A.J.A. 129; see also Arturs Kalnins and Francine Lafontaine, Multi-Unit Ownership in Franchising: Evidence from the Fast-Food Industry in Texas, 35(4) The RAND J. Econ. 747, 749

(2004) (“[F]ranchisees may possess special expertise in

operating units in particular types of markets.”).

Kalnins and Lafontaine note that “a number of [economic] models have proposed franchisees’ knowledge of

local market conditions as a reason for franchisors to

use franchising.” Ibid.

Second, and relatedly, intrabrand restraints in franchise agreements can address a particular risk posed by

15

the franchisor/franchisee relationship: while each franchisee stands to benefit from the success of the franchise

as a whole, its main goal is still to maximize its own

profits, even at the expense of other franchisees. See,

e.g., Oliver E. Williamson, Assessing Vertical Market Restrictions: Antitrust Ramifications of the Transaction

Cost Approach, 127 U. Pa. L. Rev. 953, 956 (1979). Thus,

a franchisee’s individual interest in acquiring experienced labor might favor “poaching” employees from

neighboring franchisees that have already invested in

training their workers, even at the expense of the larger

franchise system. The benefits of poaching ultimately

accrue to the poacher, who bears only a very small share

of the harm done to the brand. This is the classic “freerider” problem.

Courts have recognized that parties in productive

ventures can seek to prevent or mitigate the risks that

the ventures may create, including the risks of free-riding. As the Seventh Circuit has explained, businesses

may collaborate for the benefit of consumers without

“cutting [their] own throat.” Polk Bros. v. Forest City Enters., Inc., 776 F.2d 185, 189 (7th Cir. 1985); see also

Brewbaker, 2023 WL 8286490, at *12. Agreements that

“limit free riding” are procompetitive insofar as they

“encourage investment.” Areeda & Hovenkamp, supra,

¶ 2134b. Because intrabrand no-poach restraints encourage such investment, they have legitimate, procompetitive benefits—and should be evaluated under the

rule of reason.

2. There Is A Dearth Of Literature On The Actual

Effects Of Intrabrand No-Poach Agreements

While there are legitimate, procompetitive reasons

for franchisors to impose intrabrand no-poach rules,

there is a dearth of literature on the actual effects of this

16

class of restraint. Indeed, amicus is not aware of any

published empirical literature illustrating the average

or likely effects that these restraints have on competition. Thus, there is insufficient economic evidence to

conclude that they are manifestly anticompetitive.

To amicus’ knowledge, there is currently only one paper published in a peer-reviewed journal that addresses

this question—but the paper’s primary empirical conclusion is only that “no-poach” restrictions are included

in “58 percent of major franchisors’ contracts.” Alan B.

Krueger & Orley Ashenfelter, Theory and Evidence on

Employer Collusion in the Franchise Sector, 57 J. Hum.

Res. S324, S324 (2022). Krueger and Ashenfelter also

found that such restraints vary by industry and are (or

were in 2016) common among quick-serve restaurant

franchises like McDonald’s. Id. at S327-29. The prevalence of this type of restraint counsels in favor of caution—and in favor of rule of reason analysis—to the extent there is a risk of chilling a common procompetitive

behavior. Indeed, widespread industry adoption may be

evidence that the restraint is, in fact, procompetitive.

See United States v. Microsoft Corp., 253 F.3d 34, 92–

93, 95 (D.C. Cir. 2001) (“ubiquity” of a practice should

give courts “reason to pause,” as condemning a “common

practice,” as per se unlawful “may cast a cloud over . . .

innovation”); cf. Leegin, 551 U.S. at 897 (the number of

manufacturers that adopt a practice “can provide important instruction”); Wilcox v. First Interstate Bank of

Oregon, N.A., 815 F.2d 522, 526 (9th Cir. 1987) (following the prevailing practice in an industry “does not establish any suppression of competition or show any sinister domination” (quoting United States v. Int’l Harvester Co., 274 U.S. 693, 708–09 (1927))).

17

To be sure, Krueger and Ashenfelter offer some theoretical discussion suggesting that such agreements

“can limit turnover and reduce labor market competition.” Krueger & Ashenfelter, 57 J. Hum. Res. at S338.

But their theoretical claim is just that, theoretical. They

do not employ any causal design or econometric analysis

of franchise employee wage data, and their paper did

not establish—nor even purport to establish—that employers generally have or exercise antitrust-relevant

market power to affect competition. Indeed, while Krueger and Ashenfelter expressed interest in the question

of whether such agreements “can meaningfully alter

employer market power,” they themselves note that

“systematic evidence on the impact of nopoaching agreements on workers’ pay and within-franchise job mobility

is unavailable.” Id. (emphasis added). These theoretical

considerations thus warrant, first, careful empirical

study and, then, a more fulsome, evidence-based examination—but only the rule of reason would permit such

rigorous analysis, whereas a per se rule prevents it.

3. This Type Of Restraint Is Unlikely To Have

Anticompetitive Effects

Although there is a dearth of evidence on actual economic effects, it is worth noting that it is highly unlikely

that these types of intrabrand franchise restraints

would have substantial anticompetitive effects in the labor markets in which they operate.

Only an employer with market power could use nopoach restrictions to artificially limit turnover. Yet

there is no reason to believe fast-food employers possess

such market power. Recent data show that the turnover

in the quick-service sector is incredibly high, at around

144%—which means that if a restaurant has a total of

30 people on staff at any given time, it faced about 43

18

departures in the last year alone. See Chris Brunau,

Turnover and Retention Rates for QSR Businesses,

Daily Pay (Nov. 15, 2022), https://tinyurl.com/46jb27yd.

And while the Bureau of Labor Statistics (“BLS”) has

not published seasonally-adjusted quit rates for quickserve restaurants specifically, it has found that the seasonally-adjusted “quits rate” for the broader accommodation and food services industry was 5.8% as of October

2022—higher than any other industry. See BLS, Economic News Release, Job Openings and Labor Turnover,

Table 4 (Dec. 5, 2023), https://www.bls.gov/news.release/jolts.htm. Moreover, when restaurant workers

quit, they frequently leave the restaurant industry altogether, creating high numbers of job openings for new

entrants into restaurant employment. See BLS, Occupational Outlook Handbook, Food and Beverage Serving

and

Related

Workers

(Sept.

6,

2023),

https://www.bls.gov/ooh/food-preparation-and-serving/food-and-beverage-serving-and-related-workers.htm.

Thus, despite the prevalence of no-poach restrictions

in quick-serve restaurants, there is still very high turnover in the labor market. That suggests that the franchises imposing those restraints do not have market

power to restrain mobility (or, in turn, wages). And that

makes sense practically, given the large number of interchangeable, substitute employers at which such employees can work.

These macroeconomic observations are also reflected

in the facts of this case. The district court and the court

of appeals both expressly noted that Paragraph 14 did

not in any way constrain the ability of current or recent

McDonald’s employees to accept work at a competing

quick-serve restaurant (or limit the ability of those other

19

employers to hire McDonald’s employees). As the court

of appeals observed, “[p]eople who work at McDonald’s

one week can work at Wendy’s the next, and the reverse,” and “[p]eople entering the labor market can

choose where to go—and fast-food restaurants are only

one of many options.” Pet. App. 3a; see also Pet. App.

57a.

Indeed, petitioners’ expert, Dr. Kevin Murphy, observed that one of the named plaintiffs had some fifty

quick-serve restaurants within only three miles of her

home and 517 quick-serve restaurant employers (besides McDonald’s) within ten miles of her home.

C.A.J.A. 322–23. Hence, petitioners’ share of the market

in which that plaintiff sold her labor was extremely low.

There did not appear to be any submission to the contrary or a submission suggesting that the plaintiff was

locked into McDonald’s employment for any other reason.

***

The decision below short-circuits rule of reason analysis in favor of per se condemnation; but a review of the

available economic literature shows that the type of restraint here is likely to be procompetitive—and it certainly does not establish that such restraints are always

or almost always anticompetitive. This highlights the

risks of allowing per se claims to go forward when the

plaintiffs fail to carry their burden at the pleading stage.

Rather than condemn anticompetitive conduct, the decision below will ultimately chill interbrand competition

by making such restraints more costly to undertake.

20

III.Courts Analyzing Competitive Effects Of No-Poach

Restraints In Labor Markets Need Not Ignore The

Downstream Impacts On Product Markets

In justifying its decision to apply per se analysis, the

court of appeals held that benefits in the relevant output

market—the market for “burgers and fries”—cannot

counterbalance purported harms in an input market—

“detriments to workers”—produced by the challenged

restraint. Pet. App. 5a. The court of appeals believed

that this Court’s decision in Alston required that conclusion. Ibid. That is incorrect, and the Court should grant

the petition to clarify as much.

Although this Court has not squarely decided the

question, it has considered cross-market rationales in

rule of reason and monopolization cases. See Kodak, 504

U.S. at 482–84 (relevant market of Kodak-brand service

and parts; procompetitive rationale in market for photocopiers); NCAA v. Bd. of Regents of Univ. of Okla., 468

U.S. 85, 104–08, 115–17 (1984) (relevant market of college football television; procompetitive rationale of protecting the market for college football tickets); see also

Epic Games, Inc. v. Apple Inc., 67 F.4th 946, 989 (9th

Cir. 2023), pets. for cert. filed, No. 23-337 (Sept. 29, 2023)

and No. 23-344 (Oct. 2, 2023); Sullivan v. NFL, 34 F.3d

1091, 1113 (1st Cir. 1994).

Alston does not hold to the contrary. In Alston, this

Court “t[ook] as given” that “the NCAA may permissibly

seek to justify its restraints in the labor market by

pointing to procompetitive effects they produce in the

consumer market.” 141 S. Ct. at 2155. Although “[s]ome

amici argue[d]” otherwise, the Court “express[ed] no

views on” this issue. Ibid. Moreover, Alston “involve[d]

admitted horizontal price fixing in a market where the

defendants exercise monopoly control.” Id. at 2154. The

21

Court “t[ook] as given” that the NCAA enjoyed market

power, that it used its market power to artificially suppress athlete compensation, and that “decreases in compensation also depress participation by student-athletes

in the relevant market—so that price and quantity are

both suppressed.” Ibid. (citing 12 P. Areeda & H.

Hovenkamp, Antitrust Law ¶ 2011b, p.134 (4th ed.

2019)). Yet even against that backdrop, and in addressing a labor-market restraint, the Court emphasized that

its “goal is to distinguish between restraints with anticompetitive effect that are harmful to the consumer and

restraints stimulating competition that are in the consumer’s best interest.” Id. at 2151 (emphasis added)

(quoting AmEx, 138 S. Ct. at 2284).

This Court’s decision in AmEx illustrates the full-picture approach antitrust law demands. There, the Court

considered a “two-sided transaction market[],” with

merchants on one side and credit card holders on the

other. AmEx, 138 S. Ct. at 2287. The Court held that

“the definition of the relevant market must correspond

to the commercial realities of the industry,” and that

courts must therefore “combine [the] products or services” offered to both “merchants and cardholders” into

“a single market.” Id. at 2285–86 (cleaned up). In so

holding, the Court reinforced the principle that “‘[l]egal

presumptions that rest on formalistic distinctions rather than actual market realities are generally disfavored in antitrust law.’” Id. at 2285 (quoting Kodak, 504

U.S. at 466–67); see also Leegin, 551 U.S. at 885-86 (noting that “reasonableness” analysis examines “all of the

circumstances”).

The Seventh Circuit’s decision breaks from these

cases insofar as it categorically excludes the product

22

market from its analysis, thereby maintaining “formalistic distinctions” between related markets. AmEx, 138

S. Ct. at 2285. The approach avoids “actual market realities” and the overall economic impact of the challenged restraint. The court of appeals got the analysis

backward by adopting a rule that repudiates all crossmarket effects and thereby risks condemning restraints

that are, on net, procompetitive.

This Court should grant review to correct that mistake and to provide clarity regarding the circuit split on

this issue. See Pet. 25–27 (collecting cases). Economic

arrangements should be measured by their overall competitive effects, factoring in their effects on consumer

welfare. An overly formalistic repudiation of “cross-market” effects risks condemnation of restraints that are, on

balance, beneficial to both competition and consumers.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted.

GEOFFREY A. MANNE

DANIEL J. GILMAN

INTERNATIONAL CENTER

FOR LAW & ECONOMICS

SHAI BERMAN

WEIL, GOTSHAL & MANGES

LLP

767 5th Avenue

New York, NY 10153

MARK A. PERRY

Counsel of Record

WEIL, GOTSHAL & MANGES LLP

2001 M Street NW

Washington, DC 20036

(202) 682-7000

mark.perry@weil.com

MARK I. PINKERT

WEIL, GOTSHAL & MANGES LLP

1395 Brickell Avenue

Miami, Fl 33131

Counsel for Amicus Curiae

DECEMBER 2023