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FTC Proposes to Prohibit Non-compete Clauses in Employment Contracts

The Federal Trade Commission has proposed to ban the practice of adding non-compete clauses to employment contracts, which the FTC states are an impediment to competition. In comments on the proposal, the Advanced Medical Technology Association (AdvaMed) countered with the argument that the proposed rule is overly broad and would impede innovation in medical technology.

The FTC stated that eliminating non-compete clauses could increase wages by $300 million per year and expand careerFTC May Blog post 800x800 px opportunities for millions of American workers. The proposed rule would ban employers from both entering into and attempting to enter into a non-compete agreement with an employee, but would also ban the continuation of an existing agreement. The ban would also apply to independent contractors providing services on a contractual basis.

The document refers to Section 5 of the FTC Act in describing the proposal as an effort to suppress unfair methods of competition. A non-compete clause is defined as one which would prevent a worker from seeking or accepting employment elsewhere or from operating a business after the conclusion of that worker’s employment. This proposed rule does not apply to non-disclosure agreements or non-solicitation agreements.

One limited exception to the terms of the rule would be between the seller and the purchaser of a business, so long as the seller holds at least a 25% ownership interest in the business for sale. The FTC stated that data are available to suggest that as many as 30 million workers in the U.S. are subject to non-compete clauses in their employment agreements, which would constitute approximately 20% of U.S. employees.

The FTC claims that non-compete clauses increase consumer prices and concentration in the healthcare sector, and may suppress entrepreneurship. The agency presumes a suppressive effect on new business formation as well, along with a damaging effect on patents for products such as pharmaceuticals and computer equipment. Non-compete clauses are also presumed to lead to less employee training and less investment in capital equipment in knowledge-intensive businesses.

Any arrangements that would function in an anticompetitive manner may be deemed a non-compete clause if a functional test supports such a conclusion. The first part of this test examines whether the employee would be effectively precluded from working in the same field after leaving the employer. The second part of the test is whether the employee would be responsible for paying for training provided by the employer or a third party if the employment is terminated within a specified period. This second condition may not apply if the payment is reasonably related to the cost of that training.

AdvaMed stated that it opposes the FTC’s proposed rule, which the organization described as a threat to patient health, innovation, and competition. AdvaMed general counsel and chief policy officer Christopher White stated that the proposed rule “would significantly impede medical technology innovation and reduce competition, resulting in diminished quality and increased cost of healthcare available to patients.”

White stated that the ability of device manufacturers to make significant and sometimes rapid advances in medical technology depends on the ability to recoup those investments. A company’s ability to prevent misappropriation of confidential business information and protect investments in innovation and talent “are essential for ensuring patient access to the best medical technology possible,” he stated.

AdvaMed believes, White said, that the FTC’s “overly broad and nebulous ban” on non-compete and de facto non-compete agreements will impede a manufacturer’s ability to recoup its investments and continue development of innovative products. “Any rule must take a more nuanced approach to regulating non-compete agreements and recognize that certain confidential business information needs to be protected – anything less jeopardizes patient health, innovation, and competition,” White said.

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