Washington State Investigating Use of No-Poaching Provisions in Franchise Agreements

The State of Washington has started issuing Civil Investigative Demands (“CIDs”), requiring franchisors to provide information on their use of no-poaching provisions in Franchise Agreements. By the end of this year, if not sooner, all franchisors offering franchises in Washington, or having franchisees in Washington, should expect to receive a CID.

No-Poach Provisions in Franchise Agreements

Until 2018, Franchise Agreements routinely contained “no-poach” or non-solicitation clauses that restricted franchisees from hiring the employees of another franchisee in the system. These provisions had several purposes.

First, they protected franchisees from losing their investment in employees to other franchisees in the system.

Second, they helped encourage franchisees to enroll their employees in franchisor-sponsored training programs and conferences, without fear that the employee would be “poached” by another franchisee they met at these programs, thus providing more education and advancement opportunities to these employees within the franchisee’s organization.

However, the U.S. Department of Justice’s Antitrust Division started looking into the use of these provisions in 2016, concluding that poaching provisions that are not reasonably necessary to protect the interests of the franchisees are illegal. Several state attorney general offices followed suit, asking for information on the use of no-poaching provisions by some of the largest quick-service food franchisors. After being threatened with legal action, and in some case, after legal action was initiated by government officials, many of these franchisors have agreed to not enforce no-poaching provisions and to remove them from their Franchise Agreements.

Washington Civil Investigative Demands

The State of Washington started investigating the use of no-poaching provisions a few years ago. Over the past few weeks, the State of Washington has been issuing CIDs to franchisors offering or selling franchises in the state. The Washington Attorney General’s Office alleges that the inclusion of a no-poaching provision in a Franchise Agreement constitutes a contract, combination, or conspiracy in restraint of trade in violation of the Consumer Protection Act, RCW 19.86.030.

The CID includes several interrogatories about the use of no-poaching provisions in the last 5 years in Franchise Agreements. If the franchisor has not used these provisions in the last 5 years, then responding to the CID generally only requires denying the use of these provisions in the past 5 years and providing a copy of the form Franchise Agreement currently used in the state. However, if the franchisor has included these provisions in their Franchise Agreements, several other questions must be answered and the franchisor must provide additional documentation.

Responding to a CID

If a franchisor has included no-poaching provisions in their Franchise Agreements, they have a couple options upon receiving a CID.

First, to avoid having to comply with the interrogatories in the CID, a franchisor can enter into an Assurance of Discontinuance in which the franchisor must agree not to enforce its existing no-poaching provision throughout the United States. Of note, upon renewal, the State of Washington may insist on the removal of that clause from the Franchise Agreement. The Washington Department of Financial Institutions has not categorically determined whether these Assurances of Discontinuance need be disclosed in Item 3 of the franchisor’s Franchise Disclosure Document.

Second, a franchisor can respond to the interrogatories and provide the required documentation. A few of the most onerous requests require:

• An explanation of the reason for having no-poaching provisions in the Franchise Agreement.
• If a no-poaching provision has been recently rescinded or changed, the reason for rescinding or changing it.
• A list of all Franchise Agreements for any franchisees in the State of Washington for the past 5 years with the name and address of the franchisee.
• Copies of all Franchise Agreements for any franchisees in the State of Washington for the past 5 years.

We have responded to these CIDs for several clients. If you should receive a CID and are uncertain of your options, or how to respond, contact the Larkin Hoffman franchise attorneys for assistance.