FTC Sends Warning Letters to Health Care Organizations Regarding Legality of their Noncompete Agreements

On Wednesday Sept. 10, the Federal Trade Commission (the Commission) announced in a press release that it had issued letters to several large healthcare employers and staffing firms urging them to conduct a comprehensive review of their employment agreements, including any noncompetes or other restrictive agreements, to ensure they are appropriately tailored and comply with the law.

The identities of the organizations receiving the letters was not disclosed. However, the form of the letter, which will also serve as the template for letters to be sent in the future to other health care organizations, did accompany the press release.

In the letters signed by Chairman Andrew Ferguson, the Commission encourages recipients to conduct a comprehensive review of their employment agreements—including any noncompetes or other restrictive covenants—to ensure that they comply with applicable laws and are appropriately tailored to the circumstances. Recipients are advised to immediately discontinue any that do not comply and notify employees to that effect.

While acknowledging that narrowly tailored noncompetes can serve valid purposes in certain circumstances, the letters set forth to state the Commission’s view that available evidence indicates that in practice many employers impose noncompetes without due consideration as to whether they are necessary and appropriate under the circumstances, including whether less restrictive alternative contract terms may sufficiently achieve the same procompetitive purposes. It provides as examples, noncompetes that are overbroad in duration or geographic scope or may be inappropriate for certain roles entirely.[1]  

The issuance of the letters follows the Commission’s recent withdrawal of its defense of its previously issued nationwide ban on noncompete agreements which had been enjoined from taking effect by two federal district courts. (See our prior blog post.)

In announcing the withdrawal, the Commission emphasized that it would continue to aggressively enforce the antitrust laws on a case-by-case basis against noncompete agreements it believes violate Section 5 of the Federal Trade Commission Act which prohibits unfair methods of competition and unfair or deceptive acts or practices.

To that end, the Commission also issued a request for information (RFI) to members of the public, including current and former employees restricted by noncompete agreements, employers facing hiring difficulties due to a rival’s noncompete agreements, and market participants in the health care industry in particular. The RFI invited them to share detailed information about the use of noncompete agreements to assist it in understanding the scope, prevalence and effects of these agreements and, importantly, to assist it in gathering information to inform possible future enforcement actions.[2]

With respect to noncompete agreements being used in the health care sector, the RFI requested that interested parties provide it with examples of noncompete agreements that have:

• Affected wages, labor mobility or the availability, quality or cost of health care services
• Made it more difficult for providers of health care services to hire physicians, nurses or other professionals
• Substantially affected competition within a specific geographic area as to a specific health care service

In the press release that accompanied its warning letters, the Commission stated that many health care employers and staffing companies may be including unreasonable noncompete agreements in employment contracts for vital roles like nurses, physicians and other medical professionals.

According to the Commission, these restrictions can unreasonably limit health care professionals’ employment options and thereby limit patients’ choices over who provides their medical care, including, critically, in rural areas where medical services are already stretched thin.

With the issuance of the warning letters and the accompanying template clearly signals the Commission’s commitment to enforcing Section 5 of the FTC Act in the health care sector, and should serve as a serious reminder to organizations utilizing those agreements of the importance of assessing their validity on a continuing basis.

[1] The letters state that similar notifications are being distributed to other large employers and staffing firms in the health care sector and receipt of a letter is not intended to suggest that the recipient has engaged in illegal conduct.

[2]  At the same, it announced that it had ordered the nation’s largest pet cremation business to stop enforcing its noncompete agreements because they violated Section 5 of the Act.