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Proposed FTC Ban on Noncompete Agreements Could Be Highly Disruptive to Lab Staffing

by Glenn S. Demby | May 17, 2023 | Compliance-nir, Essential, National Lab Reporter

A proposed move to make noncompete agreements illegal could impact retention of some laboratory employees.

Recruiting, hiring, and training physicians, scientists, nurses, and other skilled personnel for key roles like laboratory director or technician often requires a significant investment. And once you do get the right people into these key positions, you may need to trust them with sensitive, proprietary information. But the tables can turn against you if that person decides to quit and use the knowledge, skills, and business assets you’ve provided to compete against you.

For these reasons, many labs insert a clause into the employment contract that forbids employees from competing directly against the lab after their employment ends. These clauses, known as “noncompete agreements,” have protected labs and other healthcare providers for decades. However, the Biden administration wants to make them illegal. Here’s a look at the proposed rule and its potential impact on lab staffing.

Importance of Noncompete Agreements

Noncompete agreements ban employees, typically those in key leadership and management positions, from engaging in business—either alone or for another company—that competes with the employer, typically within a defined geographical area for a set period (generally one to three years) after the contract ends. Nearly half of the businesses in the US (49.4 percent) report that they enter noncompete agreements (noncompetes) with at least some of their employees, according to an Economic Policy Institute (EPI) study published in 2019. Almost one-third of responding businesses (31.8 percent) say they require all employees to enter into noncompetes, regardless of their pay level or job duties.¹

According to the EPI study, noncompete agreements are especially prevalent in the healthcare industry. The downside of noncompete agreements is that they restrain trade. Explanation: In a capitalist society, employers must have the freedom to hire employees that have the qualifications, experience, and skills they need without having to worry about their contractual obligations to former employers. Employees should also be free to pursue a career in their chosen field without being shackled by the terms of a noncompete. For these reasons, courts have historically frowned on noncompetes and been reluctant to enforce them unless they’re skillfully and narrowly drafted.

The Biden Proposal

Enforcing noncompetes would go from difficult to impossible if the Biden administration gets its way. On July 9, 2021, President Biden issued an Executive Order setting out measures to promote economic growth and competition by, among other things, encouraging the Federal Trade Commission (FTC) to ban or limit noncompete agreements in employment contracts.²

On January 5, 2023, the FTC responded to this “encouragement” by publishing a Proposed Rule that would provide that noncompete clauses are an unfair method of competition and ban employers from entering into them with their employees and independent contractors.³ The proposed rule would also require employers to rescind their existing noncompete agreements and “actively inform” employees that the agreement is no longer in effect. According to FTC estimates, finalizing the proposed rule would:

Increase workers’ earnings by nearly $300 billion per year;

Save consumers up to $148 billion per year on health costs; and

Double the number of companies founded by a former worker in the same industry.

How the Rule Will Impact Lab Staffing

The impact of the rule, should it take effect in its present form, could be massively disruptive to staffing and employment in the healthcare industry where noncompetes have been a staple of employment contracts for many decades, especially with physicians, scientists, and other highly trained and compensated individuals. There are good reasons for that: Noncompetes are necessary to protect labs willing to make the necessary investment to recruit, hire, train, and, in many cases, retain these people. They also enable labs and other employers to protect their proprietary information.

To be fair, the FTC has noble motives. Most reasonable people would acknowledge that noncompete agreements thwart competition and the freedom of employees to ply their trade. While these are problems that need to be addressed, what’s required is an appreciation of context and the legitimate and reasonable purposes that noncompetes serve. But instead, the FTC proposed a ban that would apply regardless of employee type, compensation, industry, or any other contextual factors.

While giving workers more freedom is all well and good, as the American Hospital Association (AHA) points out in a February 22 letter to the FTC, all workers aren’t the same.⁴ This is especially true in hospitals and other healthcare establishments where highly compensated physicians, nurses, scientists, and technicians work in the same establishment as food service, custodial, and other employees who lack economic bargaining power.

Even the American Medical Association (AMA), which represents the physicians that noncompetes target, thinks the FTC has gone too far. In response to the rule, the AMA issued a statement noting that its “ethics policy opposes unreasonable noncompetes” (emphasis added). Many states have adopted their own healthcare-specific noncompete laws that account for “their unique healthcare markets and that balance the competing stakeholder interests,” the statement notes. “The balanced approach of these states must be considered against a proposed universal federal ban on all noncompete agreements,” it concludes.⁵

There are also legitimate questions about the FTC’s legal authority to impose what the AHA characterizes as “a one-size-fits-all rule for all employees across all industries.” Regulation of employment contracting, including noncompete agreements, is a domain that has historically been left to the states. Should it take effect, the FTC rule would supersede all these state laws to the extent they’re inconsistent with the rule’s provisions. Nor does the FTC point to any statute in which Congress granted the agency the power to implement such a sweeping rule.

Even if the FTC did have the legal authority to issue the rule, “now is not the time to upend the healthcare labor markets with a rule like this,” argues the AHA, citing the current shortages of skilled healthcare workers exacerbated by the COVID-19 pandemic. “At the very least, any rule that the FTC finalizes must specifically exempt physicians and senior hospital executives or, more generally, highly skilled, highly compensated employees,” the letter concludes.

FTC Rule May Not Cover Nonprofits

The legal authority for the FTC noncompetes ban comes from Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce” committed by “persons, partnerships, or corporations” who are engaged in commerce. It’s well established that the Section 5 ban doesn’t apply to nonprofits. Accordingly, labs and other healthcare providers that are nonprofits would presumably be exempt from the ban.

Nonprofit status for purposes of applying Section 5 is based not just on an entity’s tax-exempt status but on how it actually operates, notes a North Carolina-based attorney who asked not to be named. Thus, labs primarily dedicated to charitable purposes could be exempt from Section 5 even if they’re not tax-exempt; similarly, tax-exempt labs may be deemed not to be nonprofits to the extent their business operations and missions are profit-based.

Takeaway

Labs need to be aware of the proposed FTC rule and its potential impact while waiting to see what happens next. Keep in mind that this is just a proposed rule and the agency has received a flood of public comments—so many that it extended the comment period until April 19. The FTC must still finalize the rule on the basis of these public comments. It will take at least a couple of years before a final rule would take effect, notes a North Carolina-based attorney who asked not to be named for this article. While there may be gradations, exceptions, and other changes, the lawyer expects that some form of the FTC rule will go into effect eventually.⁶

Under the current parameters, labs would be in violation of the rule if they:

Enter into a noncompete with a worker;

Seek to enter into a noncompete with a worker, even if those efforts don’t come to fruition; and/or

Maintain a noncompete agreement.

Accordingly, the attorney suggests using this as an opportunity to go through your current employment agreements to determine whether they include any noncompete provisions that will have to be eliminated or amended if the FTC rule takes effect.

Beware of Hidden Noncompetes

Although the rule doesn’t ban other forms of “restrictive covenants,” such as non-disclosure and non-solicitation clauses commonly found in healthcare employment contracts, the lawyer stresses that these provisions may still be problematic if they have the effect of a noncompete agreement.

In other words, it’s not what you call the agreement but the types of restrictions it actually imposes that will determine whether a contract clause constitutes an illegal noncompete agreement under the FTC rule.

Unfortunately, the lawyer notes that the FTC has no current guidelines for determining whether a non-solicitation, non-disclosure, or other restrictive covenant is actually a noncompete.