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Although the Federal Trade Commission (FTC) announced on September 5 that it was ending its appeals of decisions in the Fifth and Eleventh Circuits which set aside the FTC nationwide non-compete ban thereby ending its defense of the Biden administration's 2024 rule, the FTC has simultaneously communicated that it intends to pursue enforcement action alleging anticompetitive conduct with respect to restrictive covenants that it views as being overly broad or unnecessary, and that it is particularly focused on the healthcare industry.
Last week, the FTC sent letters to several employers in the healthcare industry to emphasize the FTC's “commitment to vigorously protecting Americans from anticompetitive conduct and unfair methods of competition.”
The FTC's Role in Regulating Healthcare Employment Contracts
In a two-page letter, FTC Chairman Andrew Ferguson promoted the Commission's commitment to eradicating anticompetitive behavior in the healthcare sector, specifically highlighting the use of non-compete agreements or other restrictive covenants that unreasonably limit post-employment opportunities for physicians, nurses, and other medical professionals. The letter also notes that “non-competes may have particularly harmful effects in healthcare markets where they can restrict patients' choices of who provides their medical care-including, critically, in rural areas where medical services are already stretched thin.”
The letter does not suggest that all non-competes in the healthcare industry are unlawful, indeed noting that “narrowly tailored non-competes can serve valid purposes in certain circumstances.” However, Chairman Ferguson goes on to posit that “in practice many employers impose noncompetes without due consideration to whether they are necessary and appropriate under the circumstances, including whether less restrictive alternative contract terms may sufficiently achieve the same procompetitive purposes. For example, noncompetes may be overbroad in duration or geographic scope. Or they may be inappropriate for certain roles entirely.”
Key Considerations for Healthcare Employers in Restrictive Covenants
The summary by the FTC of its position regarding non-competes is consistent with the advice we have given to employers, whether in the healthcare sector or other industries, for the past several years. In addition to confirming that your restrictive covenant agreements comply with applicable state law and local ordinances, care must also be taken to limit non-compete and customer non-solicit covenants to those employees from whom the employer legitimately requires protection from unfair competition, whether as a result of access to confidential information having been provided or the good will with customers, clients, patients, or referral sources that the employee may have developed during the employment relationship.
Further consideration should then be given to limiting the duration and geographic scope of the restrictive covenants as much as possible while still reasonably achieving that protection in order to convince a judge, jury, or arbitrator (or the FTC) that the covenants are not overly broad and should be enforced. The strategy of relying on the courts to narrow an overly broad non-compete in those jurisdictions that permit such contract reformation must also be considered with an eye toward possible FTC enforcement action.
On September 4, the Commission provided an example of what it views as unlawful use of non-competes, filing a complaint against the largest pet cremation business in the United States. The FTC alleged that the company implemented a blanket non-compete policy that applied to all new hires – except for California employees – regardless of position or compensation. According to the FTC, the lack of any “individualized consideration” regarding whether a non-compete was warranted for each role constituted unlawful anticompetitive behavior.
That same day, the FTC issued a public Request for Information relating to the use of employee non-compete agreements. According to the FTC's press release, “Members of the public including current and former employees restricted by noncompete agreements, and employers facing hiring difficulties due to a rival's noncompete agreements, are encouraged to share information about the use of noncompete agreements.”
Employers should assume that their current or former employees who are subject to restrictive covenants (or their potential new employers) will be inviting the FTC to review their agreements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
