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Ogden v. Little Caesar Enterprises, Inc.

United States District Court, E.D. Michigan, Southern Division

July 29, 2019

CHRISTOPHER OGDEN, Plaintiff,
v.
LITTLE CAESAR ENTERPRISES, INC. and LC TRADEMARKS, INC., Defendants.

          OPINION AND ORDER GRANTING DEFENDANTS' MOTION TO DISMISS AND DISMISSING COMPLAINT WITH PREJUDICE

          DAVID M. LAWSON United States District Judge.

         Plaintiff Christopher Ogden has sued Little Caesar Enterprises, alleging that the pizza maker violated the Sherman Act by requiring its franchisees to adhere to a “no poaching” provision in its franchise agreement, which has the effect of stifling competitive wages and mobility of their restaurant managers, including Ogden. That provision prevents one franchisee from hiring the management employee of another franchisee without permission. The defendants, Little Caesar Enterprises, Inc. (LCE) and LC Trademarks, Inc., have moved to dismiss the complaint, arguing that it does not state a viable antitrust claim. The plaintiff has not made a serious effort to state a case under a rule-of-reason antitrust theory. And the plaintiff has not pleaded sufficient facts to show that his case fits within the narrow set of cases to which the Supreme Court has applied the per se analysis, and even under the hybrid “quick look” approach the complaint fails to state a claim. Finally, he had not advanced sufficient facts to establish that he has suffered any cognizable “anti-trust injury” as a result of the alleged no poaching agreement. Therefore, the Court will grant the defendants' motion and dismiss the complaint.

         A.

         Because this is a motion to dismiss, all of the following facts are stated as alleged in the plaintiff's complaint.

         Defendants LCE and LC Trademarks, Inc. are the principal corporate constituents of the nationally popular Little Caesar chain of pizza restaurants, which operates more than 4, 300 locations in the United States. Of those, approximately 12% are company stores, that is, they are owned directly by the corporate entity, while the other 88% are independent franchises that are licensed to operate under a comprehensive franchise agreement between the local franchise owner and the corporate parents. Franchisees must pay an up-front fee of $20, 000 upon submission of their application, and they also must locate a suitable store front approved by LCE. The franchise agreements typically have a term of 10 years, and each franchisee must operate solely from the site approved by LCE. Depending on the geographic market, a franchisee may be assured that it will have a limited radius of “exclusive territory” in which other LC franchisees will not be permitted to operate; but the exclusive territory may be diminished or even eliminated at the sole discretion of LCE.

         Ogden alleges that “beginning no later than 2009, Little Caesar franchisees contracted, combined, and/or conspired to not solicit, poach, or hire each other's management employees.” Compl. ¶ 7. He says that this conspiracy “was evidenced by franchisees' written pledge in Paragraph 15.2.3 of their franchise agreements to not: ‘Employ or seek to employ, directly or indirectly, any person serving in a managerial position who is at the time or was at any time during the prior six (6) months employed by Little Caesar or its affiliates, or a franchisee of any restaurant concept franchised by Little Caesar or its affiliates, without the prior written consent of the then-current or prior employer.'” Ibid. This agreement was in effect across the company up to March 21, 2107, binding every franchisee. And the version in effect before sometime in 2010 contained a liquidated damages provision favoring the prior employer if a franchisee hired a management employee away. Violating the “no poaching” provision was a ground for terminating the franchise agreement, which carried with it severe economic consequences.

         Apparently as a measure to effectuate the no-poaching clause, LCE's management employee application forms included a block for the applicant to disclose previous employment with an LCE store, along with the dates, location, and supervisors, and whether the location was a company store.

         The plaintiff alleges that the “no-poach agreement inhibit[ed] . . . lateral hiring of current employees because, unless Franchise B grants permission, Franchise A cannot hire Franchise B's current (or recent) manager employee.” Compl. ¶ 23. The complaint incorporates extensive background material from published news accounts and scholarship tending to suggest generally that “no-poach” or “non-compete” agreements have had a widespread impact in reducing the mobility and wages of low paid workers in the fast-food industry. Ogden also alleges in the complaint that, in August 2018, after Little Caesar and other franchisors were sued by the Attorney General of the State of Washington, Little Caesar “entered into an ‘Assurance of Discontinuation' agreement with the Washington AG, under which it agreed ‘(i) to not include no-poach provisions in any future franchise agreements in the United States, (ii) to not enforce the provisions in any existing franchise agreements in the United States, (iii) to notify all U.S. franchisees of its agreement with the Washington AG, and (iv) to take steps to remove the provisions from existing agreements with franchisees that have restaurants in Washington.'” Compl. ¶ 40.

         The complaint included allegations directed to certification of a putative class of all Little Caesar management employees. However, presently the claims pleaded are advanced by only a single named plaintiff, Christopher Ogden. Ogden resides in McMinnville, Tennessee. He was employed by McMillan Properties, LLC, a Little Caesar franchisee that owns and operates Little Caesar stores in the vicinity of Murfreesboro, Tennessee. Ogden began his employment with the McMillan franchise as a crew member, then became an assistant manager, and then a restaurant general manager. He was first hired in October 2014 as a crew member, at a rate of $7.25 per hour, but in November 2015 he was promoted to the position of assistant manager and shift leader, and his pay was increased to a rate of $8.25 per hour. In July 2015, Ogden was promoted to General Manager of one of McMillan's Murfreesboro, Tennessee Little Caesar stores, with an annual salary of $34, 000 (approximately $16 to $17 per hour). Ogden contends, however, that he was “overworked and had no assistant manager, ” and that he requested additional staff or a raise. Compl. ¶ 106. Ogden eventually became frustrated with the lack of support and poor compensation, but “[b]ecause [he] was unable to transfer to a competing Little Caesar franchise restaurant, his only options were to stay at McMillan Properties' store, or quit and start over at an entry [level] job and wage in another setting.” Compl. ¶ 107. “Ogden quit in October 2016, when McMillan Properties still had not provided [any] assistance or raises, ” and he subsequently “took a job making $11.20 per hour at Taco Bell.” Compl. ¶ 108.

         Ogden asserts, based on those above facts, that “[t]he no-poach and no-hire agreement among Little Caesar franchisees suppressed [his] wages, inhibited his employment mobility, and lessened his professional work opportunities.” Compl. ¶ 109. He also contends that “[t]he Little Caesar franchisees' no-hire agreement significantly restricts employment opportunities for low-wage workers at all Little Caesar restaurants, including those who have not sought employment with a competitor franchise and those who have not been contacted by a competitor franchise.” Compl. ¶ 114. Ogden also alleges that he “was a victim of the no-poach and no-hire agreement, ” because “[b]y adhering to that agreement, otherwise independently owned and operated competitor businesses suppressed wages and stifled labor market competition for improved employment opportunities.” Compl. ¶ 115. However, Ogden asserts that neither he nor any other members of the putative class of Little Caesar managers “had . . . actual [or] constructive knowledge of the unlawful no-poach and no-hiring conspiracy orchestrated by Defendants, nor would any reasonable amount of diligence by Plaintiff . . . have put [him] on notice of the conspiracy, ” because “[n]either Defendants nor [any of their] franchisees disclosed the existence of the no-poach and no-hire conspiracy to Plaintiff.” Compl. ¶¶ 124-25.

         In a single count under the Sherman Act, 15 U.S.C. § 1, the plaintiff alleges that the defendants “engaged in predatory and anticompetitive behavior by orchestrating an agreement to restrict competition among Little Caesar franchisees, which unfairly suppressed management employee wages, and unreasonably restrained trade.” Compl. ¶ 140. According to the plaintiff, the “Defendants' conduct included concerted efforts, actions and undertakings among the Defendants and franchise owners with the intent, purpose, and effect of: (a) artificially suppressing the compensation of Plaintiff and Class Members; (b) eliminating competition among franchise owners for skilled labor; and (c) restraining management employees' ability to secure better compensation, advancement, benefits, and working conditions.” Compl. ¶ 141. Ogden alleges that the “Defendants' contracts, combinations, and/or conspiracies are per se violations of Section 1 of the Sherman Act, ” Compl. ¶ 145, or that “[i]n the alternative, [the] Defendants are liable under a ‘quick look' analysis [because] an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on employees and labor, ” id. ¶ 146.

         On September 7, 2018, the plaintiff filed his complaint pleading a single claim under the Sherman Act, 15 U.S.C. § 1, alleging that the “no-poaching” clause in the franchise agreement was an illegal restraint of trade under either the “per se” or “quick look” rules of decision applicable to “horizontal” agreements by potential competitors to refrain from competition. The defendants responded with their motion to dismiss.

         II.

         “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 547 (2007)). A “claim is facially plausible when a plaintiff ‘pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'” Matthew N. Fulton, DDS, P.C. v. Enclarity, Inc., 907 F.3d 948, 951-52 (6th Cir. 2018) (quoting Iqbal, 556 U.S. at 678). When reviewing the motion, the Court “must ‘construe the complaint in the light most favorable to the plaintiff[] [and] accept all well-pleaded factual allegations as true.'” Id. at 951 (quoting Hill v. Snyder, 878 F.3d 193, 203 (6th Cir. 2017)).

         “Section 1 of the Sherman Act prohibits ‘[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States.'” Ohio v. American Express Co., ___ U.S.____, 138 S.Ct. 2274, 2283 (2018) (quoting 15 U.S.C. § 1). The Supreme Court, however, “has long recognized that, ‘[i]n view of the common law and the law in this country' when the Sherman Act was passed, the phrase ‘restraint of trade' is best read to mean ‘undue restraint.'” Ibid. (quoting Standard Oil Co. of N.J. v. United States, 221 U.S. 1, 59-60 (1911)). The “Court's precedents have thus understood § 1 ‘to outlaw only unreasonable restraints.'” Ibid. (quoting State Oil Co. v. Khan, 522 U.S. 3, 10 (1997)). “For a plaintiff to successfully bring an antitrust claim under Section 1 of the Sherman Act, the plaintiff must establish that the defendant's actions constituted an unreasonable restraint of trade which caused the plaintiff to experience an antitrust injury.” In re Se. Milk Antitrust Litig., 739 F.3d 262, 269 (6th Cir. 2014).

         “Restraints can be unreasonable in one of two ways”; in the first category, “[a] small group of restraints are unreasonable per se because they always or almost always tend to restrict competition and decrease output.” Ohio v. American Express, 138 S.Ct. at 2283 (quotations and alterations omitted in this and following citations). “Typically only ‘horizontal' restraints - restraints imposed by agreement between competitors - qualify as unreasonable per se.” Id. at 2283-84. “Restraints that are not unreasonable per se are judged 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.” Id. at 2284. Under that rubric, “[t]he 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.” Ibid. “[V]ertical restraints - i.e., restraints imposed by agreement between firms at different levels of distribution [nearly always] should be assessed under the rule of reason.” Ibid. “Vertical restraints often pose no risk to competition unless the entity imposing them has market power, which cannot be evaluated unless the Court first defines the relevant market.” Id. at 2285 n.7. The Court “usually cannot properly apply the rule of reason [to the analysis of a vertical restraint] without an accurate definition of the relevant market, ” because “[w]ithout a definition of the market there is no way to measure the defendant's ability to lessen or destroy competition.” Id. at 2285.

         The Sixth Circuit has recognized the application of a third approach known as the “quick look, ” which it denotes as a special case of a rule-of-reason analysis in which the requirements for definition of the relevant market are relaxed. Se. Milk Antitrust, 739 F.3d at 274 (“This Court has characterized ‘quick look' analysis as a third type of category arising from the blurring of the line between per se and rule of reason cases.”). “This less-rigid approach aligns with the Supreme Court's recognition of the value of the ‘quick look' approach as an abbreviated form of the rule of reason analysis used for situations in which ‘an observer with even a rudimentary understanding of economics could conclude that the arrangements in question would have an anticompetitive effect on customers and market.'” Ibid. (quoting California Dental Association v. FTC, 526 U.S. 756, 770 (1999)). In the California Dental Association case, the Supreme Court explained that “no elaborate industry analysis is required to demonstrate the anticompetitive character of horizontal agreements among competitors to refuse to discuss prices, or to withhold a particular desired service.” 526 U.S. at 770 (citations omitted). The Court noted that the exemplar cases that had inspired the quick look approach involved explicitly restrictive agreements such as (1) a national sports league's television plan that “expressly limited output (the number of games that could be televised) and fixed a minimum price, ” (2) an “absolute ban on competitive bidding, ” and (3) “a horizontal agreement among the participating dentists to withhold from their customers a particular service that they desire.” Ibid. (collecting cases).

         A.

         The defendants argue that the plaintiff has not pleaded facts that would justify application of the per se approach, and even the “quick look” method is inappropriate here. The plaintiff counters by citing several cases for the proposition that courts typically defer the commitment to a rule of decision until after discovery has produced a sufficient record for the typically fact-bound inquiry into the market effects of the defendants' conduct. However, the plaintiff pointedly resists the defendants' insistence that the claims can and should be subjected to the default and most commonly applied “rule of reason” analysis which is favored by the federal courts in nearly all anti-trust cases. Thus, the plaintiff himself has tethered the viability of his pleading to the application of either the per se or “quick look” rules of decision, which are more amenable to analysis at the pleading stage. He has not even attempted to advance allegations or arguments supporting any claim under the rule-of-reason standard.

         That may make sense for a tactical reason, as the plaintiff seeks to certify this case as a class action and represent a putative nationwide class. Attempting to define the relevant market for fast-food employees generally - and Little Caesar employees in particular - could be problematic. As one court explained:

As defendants have pointed out, plaintiff has not attempted to plead a claim under the rule of reason. This is perhaps unsurprising. To state a claim under the rule of reason, a plaintiff must allege market power in a relevant market. The relevant market for employees to do the type of work alleged in this case is likely to cover a relatively-small geographic area. Most employees who hold low-skill retail or restaurant jobs are looking for a position in the geographic area in which they already live and work, not a position requiring a long commute or a move. That is not to say that people do not move for other reasons and then attempt to find a low-skill job; the point is merely that most people do not search long distances for a low-skill job with the idea of then moving ...

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