Supreme Court denies McDonald’s appeal in class action

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The Supreme Court’s refusal this week to take up McDonald’s appeal of a lower court ruling means the fast food giant will have to face a class action that alleges the company violated antitrust laws.

The burger chain was sued in 2017 over no-poaching agreements between franchise owners that allegedly violated workers’ rights by limiting their job mobility. The U.S. Court of Appeals for the 7th Circuit resurrected the proposed class action lawsuit after a lower court dismissed it.

The Supreme Court denied the petition for certiorari, or review, in the case of McDonald’s USA LLC v. Deslandes in an unsigned order on March 18. No justices dissented. The court did not explain its decision. At least four of the nine justices must vote to grant the petition for the case to move forward to the oral argument stage.

Leinani Deslandes is the lead respondent. Ms. Deslandes said in her lawsuit that she was hired for an entry-level job at a McDonald’s franchise in Florida in 2009, and applied for a better-paying position in 2015 at a different franchise. A manager informed her that even though he wanted to give her the job, the no-poaching policy tied his hands.

The Supreme Court’s order came days after the Biden administration demanded that the often-broken soft serve ice cream machines at McDonald’s and other fast food chains be made easier to fix, Fox Business reported on March 15.

The Federal Trade Commission (FTC) and the antitrust division of the Department of Justice (DOJ) sent a letter to the U.S. Copyright Office seeking exemptions from the Digital Millennium Copyright Act, a statute that discourages restaurant franchise owners from carrying out their own repairs or hiring a third-party repair technician. At present, only the company that makes the machines is permitted to carry out digital repairs.

“In the Agencies’ view, renewing and expanding repair-related exemptions would promote competition in markets for replacement parts, repair, and maintenance services, as well as facilitate competition in markets for repairable products,” the letter said.

The breakdown of the equipment “can lead to $625 per day of loss of sales … there are long wait times for authorizer [sic] repairs, and … a licensed repair technician charges over $300 per 15 minutes.”

In the Supreme Court case, McDonald’s said in its petition that its franchise agreements have contributed to the company’s success.

“Franchising agreements are cornerstones of today’s commercial landscape, combining the aspirations and hard work of individual entrepreneurs with the strength of established brands. Their value lies in ensuring quality across franchise locations, so a customer in Dallas has the same positive experience as one in Des Moines.”

A standard provision in the McDonald’s franchise agreement is known as Paragraph 14. Paragraph 14 states in part:

“During the term of this Franchise, Franchisee shall not employ or seek to employ any person who is at the time employed by McDonald’s, any of its subsidiaries, or by any person who is at the time operating a McDonald’s restaurant or otherwise induce, directly or indirectly, such person to leave such employment.”

The ban expires six months after the employee leaves his or her job.

Paragraph 14 gave McDonald’s a “significant competitive advantage” by stopping one franchisee from raiding another’s employees, “which would have threatened the guest experience, undermined the McDonald’s brand, and risked driving unhappy customers to McDonald’s competitors,” the petition states.

But given a changing business environment, the company announced before the lawsuit was filed in 2017 that it would exclude Paragraph 14 from future franchise agreements and stop enforcing the provision in existing agreements.

Despite this change, Ms. Deslandes and another person sued McDonald’s in separate lawsuits in 2017, claiming Paragraph 14 was an unlawful restraint of trade that was prohibited by Section 1 of the federal Sherman Act. The lawsuits were consolidated.

The litigants argued that Paragraph 14 held down wages for McDonald’s workers by limiting competition among McDonald’s restaurants and violated the law.

After discovery had taken place, a federal district court in Illinois ruled that Paragraph 14 was not unlawful and refused to dismiss the case, while also denying a motion to certify the lawsuit as a class action. After the ruling denying class action status, McDonald’s then asked the court to throw out the lawsuit and it agreed to do so.

The 7th Circuit reversed and acknowledged that prohibiting poaching might advance competition.

The appeals court found that “a ban on poaching could allow [a franchisee] to recover its training costs and thus make training worthwhile to both franchise and worker.”

The 7th Circuit remanded the case to the district court for “discovery, economic analysis, and potentially a trial” to resolve whether Paragraph 14 should be upheld.

McDonald’s urged the Supreme Court to accept its petition, arguing that the 7th Circuit’s decision “turns back the clock on antitrust analysis. In so doing, it breaks sharply from the decisions of other circuits holding that intrabrand franchise restraints and employee ‘noncompete’ agreements made in conjunction with a legitimate business transaction are subject to” a rule of interpretation in antitrust law.

The Biden administration supported Ms. Deslandes’s position when the case was before the 7th Circuit. The DOJ and FTC filed a joint amicus brief saying the agreements were illegal.

The Epoch Times reached out for comment to McDonald’s attorney, Thomas G. Hungar of Gibson, Dunn, and Crutcher in Washington, and Ms. Deslandes’s attorney, Jennifer Bennett of Gupta Wessler in San Francisco, but had not received a reply from either as of press time.

After the Supreme Court declined the McDonald’s petition, Dean Harvey, another lawyer for Ms. Deslandes, told Reuters that the 7th Circuit was correct to acknowledge that antitrust laws safeguard workers from collusion the same way that they shield consumers from price fixing.

“We look forward to resuming this important case in the trial court, and to obtaining relief for the hundreds of thousands of workers who were underpaid because of McDonald’s misconduct,” Mr. Harvey told the media outlet.

This article by Matthew Vadum appeared March 22, 2024, in The Epoch Times.