Restrictive Covenants & Non-Compete Agreements
At the Law Office of Kevin O’Mahony, we represent healthcare providers, businesses and professionals regarding restrictive covenants in their contracts. Specifically, we review, prepare, negotiate, litigate and advise clients concerning:
- Non-Compete Agreements
- Non-Solicitation Agreements
- Non-Disclosure & Confidentiality Agreements
- Employment Agreements Containing Restrictive Covenants
- Severance Agreements Containing Restrictive Covenants
- Settlement Agreements Containing Restrictive Covenants
Most professionals and businesspeople are familiar with restrictive covenants, either as an employee being asked to sign one before starting a new job, or as an employer seeking to enforce one to protect their business from competition. A restrictive covenant is any agreement between parties that limits an individual’s ability to engage in certain activities for a period of time.
Restrictive covenants are generally used to protect an employer or business owner(s) from unfair competition by an employee who potentially could take patients, other employees or confidential or proprietary information with him or her upon departure from the employer, practice or business. Employment agreements that contain properly drafted restrictive covenants, including non-compete agreements, non-solicitation agreements, non-disclosure and confidentiality agreements, are essential to adequately protect employers and business owners’ intellectual property and other proprietary rights. Medical groups, for example, often use restrictive covenants to protect their owners’ investments in individual physicians and other healthcare providers, by encouraging them to remain employed with the medical group, or at least not compete with them in their service area for a specified period after they leave.
One of the first questions often posed by an employer, business owner, seller, partner, employee or former employee to an attorney is: “Is this non-compete agreement (or other restrictive covenant) enforceable?” Unfortunately in Georgia, rarely is the correct answer just a simple “yes” or “no.” In most cases, it will depend upon the particular facts and circumstances.
Enforceability of restrictive covenants has been a heavily litigated issue for many years due to public policy concerns, such as an individual’s right to earn a living in his or her chosen profession, and (in the medical realm) a patient’s right of access to the physician or other healthcare provider of his or her choice. Moreover, Georgia courts have historically been particularly skeptical of overreaching restrictive covenants in the healthcare arena. Consequently, restrictive covenant clauses that are too broad risk being deemed unreasonable and unenforceable. Additionally, the federal Stark law places constraints on the use of restrictive covenants in physician recruitment activities.
So the mere existence of an “agreement” does not necessarily mean that it is valid or enforceable. Proper assessment of the enforceability of a restrictive covenant requires careful evaluation of numerous factors. A court typically will evaluate the reasonableness of a restrictive covenant based upon its duration (time), geographic scope (territory), and the scope of the prohibited activity.
The best way to assess whether a covenant’s duration, territory or scope of restricted activities will likely be viewed by a judge as reasonable is through legal research and analysis of court decisions that involve similar facts. The process of finding and properly evaluating such decisions (most of which are factually and legally complex and require careful review) is often time-consuming and difficult, if done correctly. But when the financial stakes are sufficiently large, retaining qualified counsel to perform these tasks is well worth the expense.
The Georgia Restrictive Covenants Act
In late 2010, Georgia enacted a new law, the Georgia Restrictive Covenants Act (“RCA”), which made it easier to enforce non-compete clauses entered into on or after May 11, 2011. The RCA includes several provisions that have led to significant changes in drafting and litigating non-competition agreements in Georgia. Most of the changes are considered more favorable to employers than employees. For example, courts may now “blue pencil” agreements (i.e., modify or re-write overly broad contract provisions to render them enforceable). Courts also may evaluate non-compete and non-solicitation agreements separately, and enforce one without regard to the enforceability of the other. And “confidential information” is now defined in such a way as to enhance the enforceability of non-disclosure provisions.
But the RCA does not guarantee that at least some restriction will be enforced in every case. The RCA permits, but it does not require, judges to modify overbroad restrictions. Although the RCA gives judges the power to modify overbroad or otherwise invalid restrictive covenants to the extent necessary to make them enforceable, the RCA does not require judges to do so. Instead, such modifications are discretionary, and judges have wide latitude in deciding whether and how to exercise that discretion. They therefore may still refuse or decide not to enforce overbroad restrictions. In other words, judges may blue pencil, and even re-write, covenants to make them enforceable. But they do not have to. And it is difficult to predict with any degree of certainty in advance whether a particular restriction will be enforced when it finally is ruled upon, particularly when the views of the judge who will hear the case are unknown.
The RCA also includes some provisions that favor employees. For instance, lower level employees may be exempt from particular provisions of the law, if they do not have certain skills, abilities, customer (client or patient) contacts or confidential information. Also, an employee can demand clarification of a restrictive covenant, and the employer must respond within 30 days. And a failure by the employer to respond to such a demand can be considered against the employer by a court. Overall, however, the RCA has made it somewhat easier for employers to enforce restrictive covenants against employees in Georgia – although the case law is only slowly developing, and the precise contours of the law remain unpredictable.
Executive Order Targets Noncompete Clauses
President Joe Biden signed an executive order on July 9, 2021, seeking a ban or limitation on noncompete clauses and some licensing requirements for workers. President Biden ordered federal regulators to crack down on noncompete clauses, occupational licensing requirements and other measures that administration officials say harm employees’ ability to pursue better jobs, as part of a broad executive order intended to bolster competition across the economy.
The order encourages the Federal Trade Commission (“FTC”) to ban or limit noncompete agreements, which employers increasingly have used in recent years to try to inhibit employee moves to competitors. The effectiveness of the order will depend on whether regulators can devise and carry out the rules the president seeks in ways that survive legal challenges. Many of the policies that labor economists consider problematic for employees, including enforcement of noncompete provisions, are set at the state level, leaving a limited federal role.
Nonetheless, the executive order demonstrates the administration’s adherence to a growing school of economic thought that urges more aggressive government action to break up monopolies and inject increased competition into the economy. Noncompete agreements in healthcare have recently been in the federal government’s crosshairs. For example, in January 2021, a federal grand jury charged UnitedHealth Group-owned Surgical Care Affiliates and its related entities with conspiring with other healthcare companies to suppress competition between them for the services of senior-level employees. The full executive order can be viewed here.
Once this executive order was issued, employers and employees wondered whether their noncompete agreements were illegal as a result of the president’s order. The short answer at the time was no. But until actual proposed rules were presented, there was no way to know how far the push to limit the use of noncompete agreements would go.
FTC Issues Proposed & Final Rules Banning Certain Noncompetes
On January 5, 2023, the FTC released a proposed rule that would ban noncompete clauses in employment agreements as an unfair method of competition. According to the FTC, noncompetes, which are widely used in the healthcare industry as well as other industries, suppress wages and harm competition in U.S. labor markets.
The proposed rule would prohibit employers from using noncompete clauses for employees and independent contractors. Employers also would be required to rescind any existing noncompetes and actively inform workers that they are no longer in effect.
FTC Chair Lina M. Khan stated that “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy.” “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
On the other hand, U.S. Chamber of Commerce Senior Vice President Sean Heather called the proposed ban “blatantly unlawful.” According to Heather, “[a]ttempting to ban noncompete clauses in all employment circumstances overturns well-established state laws which have long governed their use and ignores the fact that, when appropriately used, noncompete agreements are an important tool in fostering innovation and preserving competition.”
Comments on the proposed rule were due 60 days after publication in the Federal Register. So, employers and employees were advised to be on alert for further developments.
On March 27, 2023, Kaiser Health News (Meyer) reported that the FTC in January proposed “prohibiting noncompete clauses in employment contracts,” arguing that “ending those provisions would boost economic competition, reduce prices, and increase workers’ earnings overall by up to $296 billion a year.” Additionally, “eliminating noncompete contracts would allow doctors to practice wherever their services are needed, which would improve patients’ access to care.”
However, the report noted that “the FTC’s proposal faces resistance from employers in all industries, including hospitals and private equity-backed medical groups that employ thousands of physicians, nurse practitioners, and other medical professionals.” As such, “business and hospital groups are likely to sue to block the rule, arguing that Congress hasn’t authorized the commission to regulate noncompete clauses.” Although “there is bipartisan support in Congress for legislation that would restrict noncompete clauses and authorize FTC action, the bill hasn’t advanced,” and “similar legislation stalled in past years.”
The number of responses the FTC received to its proposed rule extended the estimated timing of a final rule, with the FTC expected to vote on a final rule as late as April 2024. Given the current makeup of the FTC’s commissioners, a ban was expected to pass in some form, even if not as broad as first proposed. Once any final rule becomes effective, litigation challenging its validity is almost certain, with opponents pledging to sue the FTC over any ban. Such litigation will take months or longer, and the outcome of any lawsuit is unpredictable at this stage.
Uncertainty regarding the proposed FTC rule (which is now final – see below) is likely to continue well into at least 2024 and probably beyond. Additionally, a bipartisan group of U.S. senators recently introduced the Workforce Mobility Act of 2023, which, if passed, would also prohibit the use of non-competition provisions across the nation. As of this writing, it is unknown whether this or similar federal legislation will be enacted or when it will become effective.
In the meantime, healthcare entities should monitor the changing environment surrounding noncompete provisions and the FTC’s proposed (and now final) rule at the federal level, as well as any changes in laws at the state level. Especially with new contracts, healthcare clients should evaluate what they want to achieve with their non-compete provisions and consider whether their objectives could be achieved in less restrictive ways that might minimize the risks of potential legal challenges or invalidation of their non-competes later.
On December 7, 2023, HHS, the FTC, and the U.S. Department of Department of Justice announced several new actions to promote competition in healthcare and support lower prescription drug costs. The actions included launching a public inquiry into how private equity and other corporations’ increasing power and control of healthcare is affecting Americans; identifying anticompetitive “roll ups” (a strategy in which a series of small acquisitions can lead to market consolidation and contribute to worse patient outcomes); and increasing ownership transparency.
On April 16, 2024, the FTC announced it will decide on April 23 whether to issue a final rule that would prohibit most employers from enforcing noncompetes against workers. The FTC issued the controversial proposed rule (88 Fed. Reg. 3482) last year with an initial 60-day comment period, which later was extended by an additional month due to the high volume of comments. The FTC said it received more than 26,000 comments on the proposal.
According to the FTC, noncompetes, which are widely used including in the healthcare industry, suppress wages and harm competition in U.S. labor markets. The proposed rule would prohibit employers from using noncompete clauses for employees and independent contractors. Employers also would be required to rescind any existing noncompetes and actively inform workers that they are no longer in effect.
In announcing the April 23 vote, the FTC said the proposed final rule under consideration “would generally prevent most employers from using noncompete clauses.” The FTC said it would not take additional public comments at the April 23 meeting.
On April 18, 2024, the FTC, DOJ and HHS also jointly launched a new online portal, HealthyCompetition.gov, for the public to report potentially anticompetitive healthcare practices. DOJ’s Antitrust Division and the FTC will review the complaints initially. If they determine the complaints raise sufficient antitrust concerns, they will escalate them to the appropriate agency for further investigation.
Assistant Attorney General of the Antitrust Division Jonathan Kanter called the new portal “a one-stop shop to report potential violations of our competition laws to the Justice Department and FTC,” which “will allow the agencies to collaborate early and often, helping to promote economic opportunity and fairness for all.”
“All too often, we hear how unfair methods of competition and monopolistic practices may be depriving Americans of access to affordable, high-quality healthcare,” said FTC Chair Lina Khan. “This joint initiative between FTC, DOJ and HHS will provide a crucial channel for the agencies to hear from the public, bolstering our work to check illegal business practices that harm consumers and workers alike.”
Then, on April 23, 2024, the FTC announced it was issuing a final rule to promote competition by banning noncompetes nationwide, saying it would protect the fundamental freedom of workers to change jobs, increase innovation, and foster new business formation. “Under the FTC’s new rule, existing noncompetes for the vast majority of workers will no longer be enforceable after the rule’s effective date. Existing noncompetes for senior executives – who represent less than 0.75% of workers – can remain in force under the FTC’s final rule, but employers are banned from entering into or attempting to enforce any new noncompetes, even if they involve senior executives. Employers will be required to provide notice to workers other than senior executives who are bound by an existing noncompete that they will not be enforcing any noncompetes against them.” The final rule defines senior executives as workers earning more than $151,164 annually who are in policy-making positions.
The announcement went on to say: “In the final rule, the Commission has determined that it is an unfair method of competition, and therefore a violation of Section 5 of the FTC Act, for employers to enter into noncompetes with workers and to enforce certain noncompetes.” However, the Commission eliminated a provision in the proposed rule that would have required employers to legally modify existing noncompetes by formally rescinding them. That change should help streamline compliance, at least somewhat. Instead, under the final rule, employers will have to provide notice to workers bound to an existing noncompete that the noncompete agreement will not be enforced against them in the future. To assist employers’ compliance with this requirement, the FTC included model language in the final rule that employers can use to communicate to workers.
The final rule will become effective 120 days after publication in the Federal Register. Once the rule is effective, information about a suspected violation of the rule can be reported to the Bureau of Competition by emailing noncompete@ftc.gov. A Fact Sheet on the FTC’s Noncompete Rule appears here.
Legal challenges are certain to follow, including: (1) whether the FTC has authority under the Federal Trade Commission Act to establish such a wide-reaching ban infringing on the freedom to contract; and (2) whether the agency can so forcefully preempt an area of law that has, to date, been governed by state law. Opponents may argue that the relevant federal statute is too vague to guide the agency in promulgating a rule banning noncompetes, and the evidence the agency has on their effects is too limited to support such a rule. They may also argue that the FTC’s action is an impermissible delegation of Congress’ legislative authority under the non-delegation doctrine.
As STAT (Bannow, Subscription Publication) reported, these “changes may not take effect for years – if they ever do – because the contentious rule will almost certainly be held up in litigation.” The article notes that “Crucially for the health care industry, the noncompete ban does not apply to nonprofit companies, as the FTC determined it only has jurisdiction over for-profit companies.” This “means the ban likely won’t apply to most of the country’s hospitals, the majority of which are nonprofit, and some of the country’s biggest health insurers.” However, there is one exception. “The final rule holds that if a tax-exempt company is organized in a way that seeks to drive profit to its members, the FTC can treat that company as for-profit and make it subject to the ban. That could include certain cases where nonprofit hospitals have relationships with for-profit physician practices.”
Two lawsuits were filed within one day of the FTC issuing its Final Rule – one by the Chamber of Commerce in the U.S. District Court for the Eastern District of Texas and the other by a tax services and software company in the Northern District of Texas – each challenging the Final Rule and arguing that the FTC lacked the authority to issue it. Many experts expect that one or both courts will issue a nationwide injunction staying enforcement of the Final Rule until the issue can be decided on the merits and, ultimately, by a higher court. In addition, many believe the Final Rule may violate the Major Questions Doctrine, which holds that Congress presumptively does not delegate to executive agencies issues of major political or economic significance. The FTC is not an executive branch agency, but an independent agency set up under Congress’ authority and oversight, so time will tell what the courts decide.
Please stay tuned. We will continue to monitor this issue as it develops.
How We Can Help
Despite the inherent uncertainty in this area of the law, based on our extensive experience, we can assess the strengths and weaknesses of your restrictive covenants, and provide helpful, effective guidance, to inform your decision-making process and develop the best strategy. We understand that for employers and business owners, it is critical to protect your practice or business. And for individual healthcare providers and employees, we can help protect your current and future rights.
We have many years’ experience drafting, negotiating, enforcing and litigating employment and other contracts containing non-competition, non-solicitation, confidentiality, anti-piracy and trade secrets provisions for healthcare and business clients in Alpharetta, Atlanta, Cumming, Duluth, Johns Creek, Milton, Norcross, Roswell, Suwanee and all of Georgia. If you need help with a non-compete agreement or other restrictive covenant in Georgia, please contact us.
