Noncompete agreements between employers and their employees traditionally are governed by state law. But that didn’t stop the Antitrust Division of the U.S. Department of Justice (DOJ) from recently filing a statement of interest encouraging a Nevada state court to consider federal antitrust principles to invalidate noncompete agreements between a large medical group and its physician-employees.
Taken together with other recent actions by the president and federal enforcement agencies, the DOJ’s decision to file the statement signals a more aggressive approach to noncompete enforcement at the federal level.
Facts
The lawsuit was filed by a group of anesthesiologists and employees of Pickert Medical Group, which employs approximately two-thirds of all permanently employed anesthesiologists in Northern Nevada. Under the terms of a professional services agreement (PSA), Pickert is the sole supplier of anesthesiologists for Renown Regional Medical Center, which has the only trauma center in the region and is the sole provider of complex surgical care.
As part of their Pickert employment agreements, the anesthesiologists are subject to a two-year, postemployment noncompete restraint that prohibits them from providing anesthesiology services within 25 miles of Renown or at any other facility where they worked for the two years before termination of their employment.
In October 2021, Renown issued a 90-day notice of its intent to terminate the PSA based on Pickert’s alleged failure to meet required staffing levels. The anesthesiologists subsequently filed a lawsuit in Nevada state court to challenge the validity of the noncompete provisions in their employment agreements under state law.
DOJ’s Arguments
First, the DOJ argued the noncompete provisions should be characterized as horizontal agreements between competing healthcare providers and condemned outright as “per se” antitrust violations unless Pickert could demonstrate the restraints are “ancillary” to the otherwise procompetitive employment agreements (at which point the restraints would be subject to the comparatively relaxed “rule of reason”).
In support of its horizonal-restraints theory, the DOJ noted (1) the individual litigants were board-certified and licensed anesthesiologists when they signed their Pickert employment agreements, and (2) the noncompete clauses in question stated the employer “has a legitimate interest in protection from competition by Employee.” Applying traditional antitrust principles, the department characterized the noncompete provisions “as agreements among actual or potential competitors to allocate to Pickert the area within 25 miles of Renown or at any other facility where anesthesiologists employed by Pickert worked.”
Second, the DOJ questioned whether the ancillary-restraints defense that would entitle Pickert to rule-of-reason scrutiny would hold up here, particularly if the restraints weren’t “reasonably necessary” to achieve the purposes of either the broader employment agreements or the 2016 merger agreement between Pickert and other anesthesiology entities.
For example, to the extent the medical group might claim the noncompete provisions were reasonably necessary to effectuate the merger agreement, the department noted the related 2016 shareholder agreement already required a seven-year minimum term contract, meaning the noncompete restraints could be in force for a minimum of nine years, significantly longer than such restraints typically are considered reasonable under the ancillary-restraints doctrine.
The DOJ further argued the language of the employment agreements themselves suggested the noncompetes weren’t about guarding investments in human capital (a traditional protectible interest under state noncompete laws) but rather about shielding Pickert from competition by its employees.
Finally, even if the court determined rule-of-reason scrutiny should apply, the DOJ expressed concerns that the noncompete provisions’ anticompetitive effects significantly outweighed any procompetitive benefits. The department noted the allegations in the complaint suggested:
- The noncompete provisions “collectively tie up approximately two-thirds of all permanently employed anesthesiologists in Northern Nevada”.
- Enforcing the noncompetes in conjunction with the PSA’s termination could result in Pickert anesthesiologists being functionally prohibited from performing anesthesiology services in the region.
The statement also describes how Pickert’s goals likely would be achieved without the noncompete provisions because their employment agreements already include clauses prohibiting employees from soliciting patients or customers, soliciting or hiring employees, and disclosing a wide range of confidential information and trade secrets.
The statement is notable for its reliance on recent empirical scholarship to question traditional justifications for noncompete agreements. For example, the DOJ cited one paper that surveyed noncompete enforcement in different states and found no difference in human capital investments in jurisdictions with broader noncompete protections for employers. Similarly, other studies have found noncompete agreements diminish worker earnings and job mobility.
Bigger Picture
The DOJ’s filing is consistent with the “whole-of-government” competition policy outlined in President Joe Biden’s July 2021 “Executive Order on Promoting Competition in the American Economy,” which described how “powerful companies require workers to sign noncompete agreements that restrict their ability to change jobs.” The president encouraged the Federal Trade Commission (FTC) to “exercise its statutory rulemaking authority . . . to curtail the use of noncompete clauses . . . that may unfairly limit worker mobility.”
In November 2021, the FTC signaled its intent to begin acting on the president’s directive when it released its draft strategic plan for public comment. The plan describes how the commission will work to “increase use of provisions to improve worker mobility including restricting use of noncompete provisions” and will “study and investigate the impact on worker wages and benefits from . . . noncompete and other potentially unfair contractual terms resulting from power asymmetries between workers and employers.”
Not all judges have been receptive to the DOJ’s efforts to educate the court about the agency’s current views regarding litigation between private parties. On March 2, 2022, a judge in the U.S. District for the Northern District of Illinois denied the department’s request to file a statement of interest in a private antitrust lawsuit filed by a former McDonald’s employee who alleged that a no-hire clause in the company’s franchise agreement amounted to an unlawful no-poach agreement.
At a motion hearing on the DOJ’s request to file the statement of interest, Judge Jorge Alonso noted the U.S. Constitution and Supreme Court precedent demand that the judiciary’s independence from the executive branch “be zealously guarded” and that he would rule on McDonald’s dismissal motion “based on the facts that are properly before [him].”
While it’s too early to make predictions about how the broader judiciary may respond to updated agency priorities and guidelines, Judge Alonso’s decision may foretell an upcoming tension between the Biden administration’s aggressive antitrust enforcement efforts and a comparatively conservative federal bench’s commitment to traditional antitrust principles.
Bottom Line
The state and federal laws governing noncompete agreements are nuanced and complex, and their application involves a fact-intensive inquiry into the individual markets involved. While it isn’t yet clear how much the Biden administration and its enforcement agencies will wield the power of the antitrust laws to curb the use of noncompetes, you should nonetheless consider involving antitrust counsel to assess the potential competitive impact of proposed noncompete provisions in your employment agreements, particularly where you have significant market share.
Kathy L. Osborn, David A. Given, Anna M. Behrmann, and Susanne A. Johnson are attorneys with Faegre Drinker in Indianapolis, Indiana. You can reach them at kathy.osborn@faegredrinker.com, david.given@faegredrinker.com, anna.behrmann@faegredrinker.com, or suzanne.johnson@faegredrinker.com.