For healthcare entities that use non-compete agreements, the landscape has changed as much recently as it has at any point in recent memory. Several developments at the federal level have created a potential pitfall that did not materially exist until recently, i.e., a non-compete agreement violating antitrust law. Further, several recent state laws have heightened the bar for an employer seeking to enforce a non-compete. Finally, the new landscape of union organizing has created another key consideration for healthcare organizations that wish to protect against unfair competition, while at the same time maintaining high morale and avoiding unwanted union organizing.
Until recently, it was rare for a party to challenge a non-compete on the basis that it violated antitrust law. Several executive branch actions in the last year have significantly changed the landscape, however. Last summer, President Biden issued an executive order that “encouraged” the Federal Trade Commission to consider new regulations that would curtail the “unfair” use of non-compete agreements. Although the FTC has not yet issued such a rule, the executive branch has taken several steps that show a new strategy of pursuing challenges to certain types of non-compete agreements. The FTC has held public workshops for the purpose of gathering information that will help it assess how to limit non-competes. The Department of Justice also has brought several legal actions challenging non-competes that it deems to have violated antitrust laws.
In one recent case, which involved a challenge to a medical group’s non-competes with anesthesiologists, the DOJ provided important guidance about when it deems antitrust issues to exist. In this case, the medical group entered into non-competes that barred anesthesiologists from providing services anywhere within 25 miles of their work location with the medical group. The DOJ submitted a filing that requested the court to deem the non-competes to violate antitrust law. The DOJ appeared motivated, in large part, by the fact that the medical group allegedly employed most of the anesthesiologists in the northern part of the state, and purportedly was the sole entity that provided several types of healthcare services in the region. The DOJ claimed that the non-competes constituted a “horizontal agreement” between competing healthcare providers (i.e., the medical group and the anesthesiologists), and that they accordingly violated federal antitrust law (unless the medical group established that they were simply “ancillary” to employment agreements that otherwise were not anti-competitive and survived under a less stringent rule of reason). The DOJ appeared to rely also on the fact that the anesthesiologists effectively could have provided the services unilaterally if they ceased doing so under their relationship with the medical group. In other words, in the DOJ’s view, this relationship was largely 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 scrutinize non-competes far more closely when they exist between two organizations, or between an organization and a group of employees who could independently provide the services at issue (e.g., a group of doctors). The DOJ and other government agencies have brought several actions recently to challenge “no poach” agreements, i.e., where one organization agrees not to solicit or hire another organization’s employees. The DOJ also has made filings recently that show it will scrutinize non-competes more closely when the applicable non-competes impose unique limits on employee mobility, such as when the employees have specialized knowledge that they can use at relatively few organizations in an area, or when the employer categorically enters into non-competes with employees in a way that indicates it is seeking to limit their movement rather than truly prevent unfair competition (such as when the employer enters into non-competes with lower paid employees or with virtually all employees).
Although the DOJ’s analysis does not differ in some ways from the analyses that state courts typically apply (where they also assess whether non-competes are narrowly tailored and reasonably necessary), this new approach by the executive branch creates an additional layer of pitfalls for organizations that maintain non-competes. For now, healthcare organizations should proceed with caution when entering into non-competes with other organizations (or with groups of doctors or other employees who could practice independently if they wished to do so), and should avoid taking broad or categorical approaches to non-competes for large groups of employees, but instead tailor its approach to the circumstances of the employees at issue. It also will be important to continue monitoring this area, as the executive branch should continue providing more guidance about how it will be approaching this area.
New State Developments
Major changes also have occurred recently at the state and local level. Many states have modified their laws to impose more onerous obligations upon employers that seek to use non-competes.
In late 2021, Illinois enacted its Freedom to Work Act, which prohibits non-competes against Illinois employees who earn less than $75,000 per year, bars other types of restrictive covenants, and requires employers to take specific steps when delivering a proposed non-compete to an employee in order to make it effective (including by giving the employee 14 days to review it). In Colorado, which already barred non-competes and non-solicits which did not fall within specific statutory exceptions, the state increased the penalties for those who violate its non-compete statute. Nevada recently amended its own statute to prohibit most non-competes with employees who are paid via an hourly wage. Washington D.C. recently enacted an ordinance that would ban most types of non-competes in the District, although 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 for scrutinizing non-competes, and several other jurisdictions have been considering laws that would impose further hurdles (including New York). These developments reiterate the need for employers to tailor any non-competes to the circumstances at issue, rather than using a “one size fits all” form or making categorical decisions about broad groups of employees.
Impact of Union Organizing on Non-Competes
Recent events clearly show that employees’ perceptions have shifted regarding labor unions. The National Labor Relations Board recently reported that union organizing petitions increased 57% in the first half of FY 2022. At the same time, several recent high profile union organizing wins show that even sophisticated employers are facing a new landscape.
This is particularly notable for healthcare employers, who frequently have nurses, maintenance, custodial, and other employees seek to become unionized. Furthermore, this is especially true where employees are becoming more educated about their legal rights and options, and are becoming more cognizant of the impact of employment actions such as non-competes. For a healthcare organization who has employees that are considering unionization, an onerous noncompete should be the straw that breaks the camel’s back.
This presents yet another area for healthcare organizations to continue to monitor, as they seek to strike a balance between minimizing liability while at the same time presenting the major resources that they expend to protect their investments and good will.