In veterinary medicine, non-compete agreements have long been a contentious issue. These agreements, often included in contracts between employers and employees, restrict veterinarians from practicing within a certain geographical area for a specified period after leaving their current job. However, a proposed ban by the Federal Trade Commission (FTC), which mirrors California law on non-competes, has sparked debate among industry professionals and policymakers alike. While some support a complete ban on veterinary non-competes, others advocate for a more limited approach, citing the potential negative consequences of an outright prohibition.
Understanding Non-Compete Agreements
Before delving into the proposed ban and its implications, it’s essential to understand the main requirements for a valid non-competition agreement. Typically, for a non-compete to be enforceable, it must meet certain criteria:
- Reasonableness — The agreement must be reasonable in scope, duration (time), and geographic area. It should protect legitimate business interests without imposing undue hardship on the employee.
- Consideration — There must be valid consideration provided in exchange for the employee’s agreement to the non-compete, such as employment or access to confidential information. In some states, additional financial compensation is required.
- Legitimate business interest — The employer must have a legitimate business interest to protect, such as trade secrets, customer relationships, or goodwill. Generally speaking, the restrictive covenants should be no more restrictive than necessary to protect this legitimate interest.
The Proposed FTC Ban
The FTC is set to vote on the final ruling of a proposed ban on non-compete agreements this month, which as proposed, largely prohibits such restrictive covenants entirely, except in the limited circumstances of restricting an owner from selling a business. This move has stirred significant debate within the veterinary community.
While the intention behind the proposed ban is to protect employee mobility, foster competition, and protect the veterinarian-client-patient-relationship, there are several drawbacks to consider relative to the veterinary industry and the practical legal landscape.
A complete ban on non-competes could be seen as overreaching and taxing on individually owned practices in favor of corporate-owned practices. The veterinary profession is currently facing a shortage of professionals. A complete ban on non-competes could exacerbate this shortage by making it easier for veterinarians to leave their current positions without regard for the impact on their former employers. For small, private veterinary practices, retaining skilled veterinarians is essential, not only for providing quality care to patients but also for maintaining the goodwill and value of the practice. Non-competes can help ensure that small practice owners have a place to foster talented veterinarians, but not be punished by having key talent poached away to competing practices or startups, thus preserving the viability of small practices and quality mentors in the industry.
The FTC’s Authority, or Lack Thereof
The FTC likely lacks the authority to unilaterally impose such bans without congressional approval. The FTC stated in its notice of proposed rulemaking that it has the authority to issue the non-compete clause rule pursuant to Sections 5 and 6(g) of the Federal Trade Commission Act. Section 5 declares “[u]nfair methods of competition” unlawful. Section 6(g) grants the FTC authority “to make rules and regulations for the purpose of carrying out the provisions of” the subchapter of the U.S. Code concerning the FTC. However, from 1914 to 1962, the FTC Commissioners expressly agreed that they did not have binding rulemaking authority outside of internal procedures. Thereafter, when the FTC began asserting rulemaking authority under Section 6(g) (in the ’60s and ’70s) it did so to define unfair and deceptive acts or practices, and specifically not unfair methods of competition. To date, the FTC has only promulgated one rule regarding unfair methods of competition, in 1968, and the rule was never enforced and ultimately withdrawn.
Recent Supreme Court decisions cast doubt on proclaimed legal authority when an agency claims to uncover a long-extant, unheralded power over a significant portion of the American economy. [1] Instead, the Court looks for “clear congressional authorization” for Congress to pass such rulemaking authority to a legislative agency as required by the “nondelegation doctrine” routed in the balance of powers left to the legislative branch, rather the executive branch, in the United States Constitution. In other words, congress will likely have to approve such a substantive, rather than procedural, change to states’ longstanding ability to self-govern employment-related restrictive covenants.
As such, a complete ban as proposed would likely be short-lived before an enjoined by a Federal District Court pending judicial intervention. Any ban to survive such scrutiny would likely have to be extremely paired down and limited—such as limiting non-competes to highly compensated employees—which in all likelihood would still result in a definition battle that would hold veterinarians in limbo for several years.
Veterinary Employment Agreements Post Ban
Should the FTC restrictive covenant ban come to light, practice owners and attorneys will likely resort to longer-term veterinary employment agreements with employer-favored termination provisions to rebalance the employment risk of hiring associates. With non-compete enforcement off the table, these new employment agreements and terms will be met with a re-emergence of liquidated damages clauses to compensate employers for early breach of contract and result in increased litigation in the industry. Additionally, there would likely be a spike in partnerships, associate buy-ins, restrictive stock grants, and other minority equity arrangements where restrictive covenants may still hold favor as part of fiduciary duties owed to business partners. In short, the shift in risks to employers coupled with the DVM shortage will result in risk adjustments in employment contracts that should be considered.
While the proposed ban on veterinary non-competes by the FTC may seem like a step in the right direction for employee rights, it’s crucial to consider the potential consequences and practical aspects of such a ban passing legal muster. Instead of a blanket prohibition, a more targeted approach that limits non-competes to highly compensated employees could strike a balance between protecting employee mobility and preserving legitimate business interests. By acknowledging the unique challenges faced by the veterinary profession, policymakers can work toward solutions that benefit both employees and employers while ensuring the continued availability of quality veterinary care for animals and their owners.
[1] Util. Air Regulatory Grp. v. EPA, 573 U.S. 302, 134 S. Ct. 2427, 2434 (2014)
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