Proposed ban on noncompetition agreements could impact dialysis, nephrology practices
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Threats by the Federal Trade Commission of “cracking down” on noncompetition agreements moved forward in early 2023 with two dramatic moves by the agency.
On Jan. 4, the FTC ordered three companies, Prudential Security, O-I Glass Inc. and Ardagh Group SA, not to enforce noncompetition agreements based upon the finding by the FTC that the noncompetition agreements were illegal restraints on employees of the companies.
Second, and more striking, on Jan. 5 the FTC proposed an outright ban on noncompetition clauses in employment contracts. The proposed ban would prohibit employers from entering into or enforcing such clauses and would require employers to nullify any existing noncompetition clauses within 6 months of the rule taking effect.
According to FTC Chairperson Lina Khan, a staunch critic of noncompetition agreements, the enforcement power of the FTC allows it to engage in “more legal challenges against businesses engaging in alleged coercive or deceptive conduct that undermines competition.” Chairperson Khan’s statement could be translated to “this power gives the FTC the ability to strike down noncompetition agreements and the FTC intends to use this power.”
Impact on kidney care
A new rule requiring companies to nullify existing noncompetition agreements could fundamentally change not only how and where health care providers practice, but also could impact some employers’ willingness to invest in their workforce or engage in strategic acquisitions of companies owned or controlled by health care providers. In the dialysis and nephrology profession, eliminating many different types of restrictive covenants could have far-reaching consequences on an already-shrinking pool of nephrologists. Dialysis center valuations and the value of nephrologists’ equity could change, along with the value of dialysis providers on Wall Street.
Exploited workers
The legal action of the FTC against Prudential Security, O-I Glass Inc. and Ardagh Group SA prohibits the companies from enforcing, threatening to enforce or imposing noncompetition agreements against any employees. In reaching its decision, the FTC argued that Prudential Security “exploited” its “superior bargaining power against low-wage security guards” by requiring them to sign contracts containing noncompetition agreements prohibiting the guards from working for a competing business within a 100-mile radius of their Prudential job site for 2 years after leaving Prudential.
The noncompetition clause also required Prudential employees to pay $100,000 as a penalty for any alleged violations of the clause.
The FTC also took issue with the noncompetition restrictions of O-I Glass that prohibited employees, for 1 year after leaving O-I Glass, from working for, owning or being involved in any other way with any business in the United States selling similar products and/or services without the prior written consent of O-I Glass.
For Ardagh Group SA, the FTC took issue with the noncompetition restrictions of Ardagh that prohibited employees, for 2 years after leaving Ardagh, from directly or indirectly performing “the same or substantially similar services” to those the employee performed for Ardagh to any business in the United States, Canada or Mexico that is involved in the sale, design, development, manufacture or production of glass containers in competition with Ardagh.
The FTC determined that all of the above restrictions above restrictions were unfair restraints on competition and issued orders against the three companies, which included prohibiting the companies from enforcing, threatening to enforce or imposing noncompetition agreements against employees and required the companies to void and nullify the challenged noncompetition agreements without penalizing employees.
Although the action by the FTC against these three companies is unprecedented, it is worth noting the FTC did not pursue such action against larger companies. It is also worth noting a court would have likely struck down the restrictions contained in these agreements due to the restrictions being overly broad and not tailored to protect a legitimate business interest. Put another way, a court would have likely reached the same conclusion as the FTC with respect to these restrictions.
Health care industry
The decision by the FTC to go after comparatively small companies and restrictions that a court would likely declare unenforceable may indicate that the FTC wishes to establish a track record of such actions before pursuing larger companies and restrictions that have previously been enforced by state and federal courts. Given the actions by the FTC and its recent comments, it may only be a matter of time before the FTC sets its sights on larger companies.
As (un)surprising as the enforcement actions by the FTC against the companies may have been, the recently proposed rule by the FTC, if enacted, could have far-reaching effects on the health care industry, where noncompetition covenants are widely used by health care systems, physician practices, dialysis organizations, surgery centers, vascular access centers and private equity-backed provider organizations. Eliminating many different types of restrictive covenants could have far-reaching consequences for the dialysis and nephrology industry, including the following:
- A shrinking pool of nephrologists could lead to greater competition among employers willing to pay higher wages, or nephrologists may be more willing to move for slight compensation increases or better working conditions or benefits;
- Without noncompetition protections preventing nephrologists from opening competing dialysis facilities, dialysis center valuations and the value of nephrologists’ equity in such centers, could deteriorate;
- Stock prices of publicly traded dialysis organizations that rely upon the use of noncompetition covenants to help safeguard market position could falter;
- Dialysis medical director compensation could be impacted; and
Private-equity backed physician roll-up platforms and value-based care companies could decrease the purchase price offered to nephrology group practices wishing to partner if these groups become concerned about not receiving the “benefit of their bargain” if physicians are more easily able to depart from a platform.
Alternatively, such platforms may insist upon sellers acquiring a greater amount of rollover equity to appropriately align financial and growth incentives.
Only time will tell whether, and the degree to which, any of these trends occur. In the meantime, the proposed rule by the FTC is striking not only due to its scope, but also because it raises questions implicating the nondelegation doctrine, which is the theory that Congress cannot delegate its lawmaking power to any other entity or person. The actions by the FTC also implicate the major questions doctrine, which, generally, provides that when a governmental agency seeks to decide an issue of economic or political significance, a vague or general delegation of authority from Congress is insufficient.
Instead, the agency must have clear statutory authorization to decide the issue.
Finally, laws governing noncompetition agreements have always been decided under the purview of state law. A federal agency suddenly issuing rules governing noncompetition agreements will likely be met with resistance.
Not surprisingly then, many companies, trial lawyers, academics, trade associations and the U.S. Chamber of Commerce hold that the actions by the FTC are outside of the charge of the agency, and the proposed rule is likely to face years of legal challenges before it is implemented, if ever. However, even if the proposed rule ultimately does not take effect, it appears to have accelerated a trend of states enacting new laws to ban or significantly restrict the use and enforceability of a wide variety of different types of restrictive covenants, including in Colorado, Indiana and a variety of other states.
- Reference:
- FTC proposes rule to ban noncompete clauses, which hurt workers and harm competition. https:www.ftc.gov/news-events/news/press-releases/2023/01/ftc-proposes-rule-ban-noncompete-clauses-which-hurt-workers-harm-competition.
- For more information:
- Jake Cilek is a partner at Benesch Healthcare+Benesch Friedlander Coplan & Aronoff LLP and can be reached at jcilek@beneschlaw.com.
- Scott Downing is a partner at Benesch Healthcare+Benesch Friedlander Coplan & Aronoff and can be reached at sdowning@beneschlaw.com.
- Jason Greis is a partner in Benesch Healthcare+Benesch Friedlander Coplan & Aronoff LLP and can be reached at jgreis@beneschlaw.com.
- J. Scott Humphrey is a partner at Benesch Healthcare+Benesch Friedlander Coplan & Aronoff LLP and can be reached at shumphrey@beneschlaw.com.
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