For healthcare entities that use non-compete agreements, the landscape has changed as much recently as at any time in recent memory. Several developments at the federal level have created a potential trap that did not materially exist until recently, that’s to say, a non-competition agreement violating competition law. Additionally, several recent state laws have raised the bar for an employer seeking to enforce a non-compete clause. Finally, the new landscape of unionization has created another key consideration for healthcare organizations wishing to protect themselves from unfair competition, while maintaining high morale and avoiding unwanted unionization.
Until recently, it was rare for a party to challenge a non-competition clause on the grounds that it violated antitrust law. However, several executive actions over the past year have significantly altered the landscape. Last summer, President Biden issued an executive order that “encouraged” the Federal Trade Commission to consider new regulations that would limit the “unfair” use of non-compete agreements. Although the FTC has yet to issue such a rule, the executive branch has taken several actions that show a new strategy for challenging certain types of non-compete agreements. The FTC has held public workshops to gather information that will help it assess how to limit non-competition. The Justice Department has also filed several lawsuits challenging the non-competition that it believes violated antitrust laws.
In a recent case, which involved a challenge to a medical group’s non-competition with anesthesiologists, the DOJ provided important guidance on when it considers antitrust issues to exist. In this case, the Medical Group entered into a non-competition clause prohibiting anesthesiologists from providing services within 25 miles of their workplace with the Medical Group. The DOJ filed a case asking the court to consider the non-competition a violation of antitrust law. The DOJ seemed motivated, in large part, by the fact that the medical group would have employed most anesthesiologists in the northern part of the state and would have been the only entity providing several types of health services in the region. The DOJ asserted that the non-competition constituted a “horizontal agreement” between competing healthcare providers (that’s to say, the Medical Group, and the Anesthesiologists), and therefore violated federal antitrust law (unless the Medical Group establishes that they were merely “incidental” to employment contracts that otherwise would not were not anti-competitive and survived under a less strict rule of reason). The DOJ also appeared to rely on the fact that the anesthesiologists could indeed have provided the services unilaterally had they ceased to do so as part of their relationship with the medical group. In other words, in the opinion of the DOJ, this relationship was more akin to a relationship between two organizations than a traditional relationship between an employer and an employee unable to provide the services at issue independently.
Other recent DOJ actions show that the DOJ will take a closer look at non-competitions when they exist between two organizations, or between an organization and a group of employees who might independently provide the services at issue (for example, a group of doctors). The DOJ and other government agencies have recently filed several lawsuits challenging “no-poaching” agreements, that’s to say, when an organization agrees not to solicit or hire the employees of another organization. The DOJ also recently filed documents that show it will take a closer look at non-competitions when the applicable non-competitions impose unique limits on employee mobility, such as when employees have specialized knowledge that they can use in relatively few organizations in a field, or where the employer enters into a categorical non-competition with employees in a way that indicates that it seeks to limit their movement rather than genuinely prevent unfair competition (e.g. example when the employer enters into non-competition with lower paid employees or with virtually all employees).
Although the DOJ’s analysis does not differ in some respects from the analyzes that state courts typically apply (where they also assess whether non-competition clauses are narrowly tailored and reasonably necessary), this new executive branch approach creates an additional layer of pitfalls for organizations. who maintain non-competition. For now, healthcare organizations should proceed with caution when entering into non-competition with other organizations (or with groups of physicians or other employees who could practice independently if they so choose) , and should avoid taking sweeping or categorical approaches to non-competition. competes for large groups of employees, but instead tailors its approach to the situation of the employees in question. It will also be important to continue to monitor this area, as the executive branch should continue to provide more guidance on how it will approach this area.
New State Developments
Major changes have also taken place recently at the state and local levels. Many states have changed their laws to impose more onerous obligations on employers who seek to use non-competition.
In late 2021, Illinois enacted its Freedom to Work Act, which prohibits non-competition for Illinois employees who earn less than $75,000 per year, prohibits other types of restrictive covenants, and requires employers to take specific steps when delivering a non-compete proposal to an employee in order to make it effective (including giving them 14 days to consider it). In Colorado, which already prohibited non-competition and non-solicitation that did not fall under specific statutory exceptions, the state has increased penalties for those who violate its non-competition law. Nevada recently changed its own law to ban most non-competitions with hourly paid employees. Washington DC recently enacted an ordinance that would ban most types of non-competition in the district, though its effective date has been delayed and its status is uncertain. At the same time, courts in several states have issued decisions that show they are changing their analysis to consider non-competition, and several other jurisdictions have considered laws that would impose new barriers (including New York). These developments reiterate the need for employers to tailor any non-competition clause to the circumstances at hand, rather than using a “one size fits all” form or making categorical decisions about large groups of employees.
Impact of unionization on non-competition
Recent events clearly show that employees’ perceptions of trade unions have changed. The National Labor Relations Board recently reported that labor organizing petitions increased 57% in the first half of fiscal 2022. At the same time, several recent high-level labor organizing victories show that even sophisticated employers are faced with a new landscape.
This is particularly notable for employers in the health sector, which often have nurses, maintenance workers, custodial workers and other employees seeking to unionize. Additionally, this is especially true as employees become more knowledgeable about their legal rights and options and are increasingly aware of the impact of employment actions such as non-competition. For a healthcare organization whose employees are considering unionizing, onerous non-competition should be the straw that breaks the camel’s back.
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This presents yet another area that healthcare organizations must continue to monitor as they seek to strike a balance between minimizing liability while showcasing the major resources they expend to protect their investments and goodwill.
© Copyright 2022 Squire Patton Boggs (USA) LLPNational Law Review, Volume XII, Number 169