By: Howard Bogard and Matthew Scully, Burr & Forman
Under Alabama statutory law, “professionals” are exempt from non-compete agreements, which serve to restrict competing activity within a defined geographic area and time period. The law does not define the term “professional” but, with respect to the healthcare industry, Alabama courts have found that professionals include physicians and physical therapists. Based on case law, other healthcare professionals who practice independently, have direct patient contact, and are separately licensed might also be found to fall under the professional exemption.
However, on January 5, 2023, the Federal Trade Commission (“FTC”) announced a Notice of Proposed Rulemaking that would prohibit and rescind all non-compete provisions in employment contracts. The public has 60 days to offer comment on the proposed rule, and a final rule will be published thereafter.
Background on the FTC Act
Section 5 of the FTC Act declares, “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” On November 10, 2022, the FTC Commission issued a Policy Statement concerning its interpretation of Section 5, stating that part of its role is to identify unfair methods of competition, which the Commission defined as conduct undertaken by an actor in the marketplace that (1) is coercive, exploitative, collusive, abusive, deceptive, predatory, or overly restrictive, and (2) negatively affects competitive conditions (e.g., reduces output, limits choice, lowers quality, reduces innovation, impairs market participants, or reduces potential competition).
Building off the Policy Statement — as well as President Biden’s July 2021 Executive Order calling for the FTC to limit non-compete agreements — the FTC announced on January 5, 2023 a Notice of Proposed Rulemaking labeling non-compete agreements as unfair methods of competition. The FTC found that non-compete agreements reduce workers’ wages, stifle new businesses and new ideas and hinder workers’ economic liberty. Indeed, the proposed rule specifically relied upon a study that showed non-compete clauses increase consumer prices and concentration in the healthcare sector.
The proposed rule defines non-compete agreements as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.” The proposed rule would:
- Prohibit an employer from entering into or attempting to enter into a non-compete agreement with a worker;
- Require employers to rescind existing non-compete agreements with workers;
- Prohibit any contractual provision that would require a worker to repay training costs upon separation within a specific time period if the required payment is not reasonably related to the actual costs incurred by the employer; and
- Put at risk other agreements (e.g., protection of confidential information) if the agreement could prevent a worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.
Moreover, the proposed rule would define “worker” broadly as any natural person who works, whether paid or unpaid, for an employer, which would include an employee, independent contractor, extern, intern, volunteer, apprentice or sole proprietor who provides a service to a client or customer. The only exception to the FTC’s proposed ban is a limited exclusion for non-compete agreements between the seller and buyer of a business.
Impact on Alabama Healthcare Companies
Given that the proposed rule reverses over a hundred years of legal precedent enforcing non-compete agreements, it is likely that any final rule will be subject to years of litigation, with the U.S. Supreme Court likely ruling on the FTC’s authority to issue the non-compete ban. If the FTC’s rule is upheld, it would arguably have a marginal impact on Alabama healthcare providers currently protected by the Alabama professional exemption (although it would serve to solidify such exemption). An FTC ban on all non-compete agreements in an employment setting would, however, prevent healthcare companies from using such agreements with employed “non-professionals.” For example, many dermatology and pathology practices, clinical laboratories, diagnostic imaging centers, and durable medical equipment providers, to name a few, commonly use non-compete agreements with marketing and sales staff and certain employees who are not likely covered by the Alabama professional exemption, such as aestheticians, laboratory technicians, and senior management. If the FTC’s proposed rule is finalized and upheld by the courts, healthcare companies would be prohibited from using non-compete agreements in any form with employees (both professionals and non-professionals). The question then becomes what tools other than non-compete agreements (such as trade secret laws and confidentiality and non-solicitation agreements) might employers use to protect valuable investments in employees, and how sufficient are these alternatives?
Howard Bogard is a partner with Burr & Forman LLP and is the Chair of the firm’s Health Care Industry Group. Howard may be reached at (205) 458-5416 or hbogard@burr.com. Matthew Scully is a partner with Burr & Forman LLP and exclusively practices labor and employment law. Matthew can be reached at (205) 458-5321 or mscully@burr.com.