March 04, 2022

DOJ Encourages State Court to Consider Antitrust Principles to Invalidate Non-Compete Agreements

Non-compete agreements between employers and their employees traditionally are governed by state law. But that did not stop the Antitrust Division of the Department of Justice (DOJ) from recently filing a statement of interest encouraging a Nevada state court to consider federal antitrust principles to invalidate non-compete 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 this statement signals a more aggressive approach to non-compete enforcement at the federal level.

The lawsuit was brought 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, post-employment non-compete 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 non-compete provisions in their employment agreements under Nevada law.

As a preliminary matter, the DOJ argued that the non-compete provisions should be characterized as horizontal agreements between competing health care 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 that the individual plaintiffs were board-certified and licensed anesthesiologists when they signed their Pickert employment agreements, and that the non-compete clauses in question state that “Employer has a legitimate interest in protection from competition by Employee.” Applying traditional antitrust principles, the DOJ characterized the non-compete 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.”

The DOJ further questioned whether the ancillary restraints defense that would entitle Pickert to rule of reason scrutiny would hold up here, particularly if the restraints were not “reasonably necessary” to achieve the purposes of the broader employment agreements, or the 2016 merger agreement between Pickert and other anesthesiology entities. For example, to the extent Pickert might claim the non-compete provisions were reasonably necessary to effectuate the merger agreement, the DOJ noted that the related 2016 shareholder agreement already required a seven-year minimum term contract, meaning the non-compete 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 that the language of the employment agreements themselves suggested the non-competes were not about protecting investments in human capital — a traditional protectible interest under state non-compete laws — but rather about protecting Pickert from competition by its employees.

Moreover, even if the court determined that rule of reason scrutiny should apply, the DOJ expressed concerns that the anticompetitive effects of the non-compete provisions significantly outweighed any procompetitive benefits. The DOJ noted that the allegations in the complaint suggested that the non-compete provisions “collectively tie up approximately two-thirds of all permanently employed anesthesiologists in Northern Nevada,” and that enforcement of the non-competes in conjunction with the termination of the PSA 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 non-compete provisions because their employment agreements already include clauses that prohibit 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 non-compete agreements. For example, the DOJ cited one paper that surveyed non-compete enforcement in different states and found no difference in human capital investments in jurisdictions with broader non-compete protections for employers. Similarly, other studies have found that non-compete agreements diminish worker earnings and job mobility.

The DOJ’s filing is consistent with the “whole-of-government” competition policy outlined in President Biden’s July 2021 Executive Order on Promoting Competition in the American Economy, which described how “[p]owerful companies require workers to sign non-compete 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 non-compete 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 FTC will work to “[i]ncrease use of provisions to improve worker mobility including restricting use of non-compete provisions,” and that it will “[s]tudy and investigate the impact on worker wages and benefits from . . . non-compete and other potentially unfair contractual terms resulting from power asymmetries between workers and employers.” And in December 2021, the FTC negotiated a merger settlement that curbed the exercise of non-compete clauses for the merged entity.

Not all judges have been receptive to DOJ efforts to educate the court about the agency’s current views regarding litigation between private parties. On March 2, 2022, a district court judge in the Northern District of Illinois denied the DOJ’s request to file a statement of interest in a private antitrust lawsuit brought by a former McDonald’s employee who alleged that a no-hire clause in McDonald’s franchise agreement amounted to an unlawful no-poach agreement. At a motion hearing on the DOJ’s request to file a statement of interest, Judge Jorge Alonso noted that the U.S. Constitution and Supreme Court precedent demand that the judiciary’s independence from the executive “be zealously guarded,” and that he would rule on McDonald’s dismissal motion “based on the facts that are properly before [him].” While it is 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.

The state and federal laws governing non-compete agreements are nuanced and complex, and their application involves a fact-intensive inquiry into the individual markets involved. While it is not yet clear how much the Biden administration and its enforcement agencies will wield the power of the antitrust laws to curb the use of non-competes, businesses should nonetheless consider involving antitrust counsel to assess the potential competitive impact of proposed non-compete provisions in their employment agreements, particularly where businesses have significant market share.

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