The US Department of Justice (“DOJ”) recently filed a Statement of Interest in connection with a pending case in Nevada State Court, Samuel Beck, et al. v. Pickert Medical Group, P.C. et al., further highlighting the DOJ’s heightened scrutiny of post-employment restrictive covenants under the antitrust laws and their effects on competition. In this noteworthy Statement of Interest, the DOJ takes the position that post-employment restrictive covenants may constitute both horizontal and vertical restraints of trade that violate the Sherman Antitrust Act. The Statement of Interest follows the DOJ and FTC’s 2017 Antitrust Guidance for Human Resources Professionals which addressed how antitrust law can apply to employee hiring and compensation and a December 2021 DOJ and FTC workshop that addressed how contractual restraints on trade can harm labor markets, as well as recent executive orders and statements by the Biden administration limiting and criticizing the use of noncompetition agreements with employees. The DOJ’s Statement of Interest thus represents yet another step up in pressure by the federal government signaling it will continue taking more action to discourage the use of contractual restraints on trade in employment-related agreements.
The underlying Nevada state court case involves allegations by several employees of defendant Pickert Medical Group challenging the validity of non-compete provisions of their employment agreements under state law. Specifically, as part of their employment agreements with Pickert, plaintiffs are subject to two-year, post-employment non-compete restraints that prohibit them from providing anesthesiology services within 25 miles of any facility where they worked for the two years before termination of their employment.
In its statement, the DOJ takes no position of the merits of plaintiff’s claims under Nevada state law, but instead opines that the “disputed non-compete agreements raise concerns under Section 1 of the Sherman Act” and stresses that “assessing their competitive effects pursuant to the Act may inform the Court’s determination whether Nevada law treats them as void and unenforceable.”
Section 1 of the Sherman Act declares “[e]very contract, combination . . . or conspiracy, in restraint of trade or commerce among the several States . . . illegal.” 15 U.S.C. § 1. Despite the broad declaration, this provision has long been interpreted by the Supreme Court to just outlaw “unreasonable” restraints of trade. Yet some restraints are in fact per se illegal under the Sherman Act because of their inherent anticompetitive tendencies, including agreements among actual or potential competitors to fix prices, rig bids, or allocate markets. In general, agreements among actual or potential competitors on the way in which they will compete with one another – also referred to as “horizontal restraints” – are considered to be particularly concerning.
For other agreements, courts are directed to analyze restraints under the “rule of reason,” namely, whether the restrained practice “imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.” State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).
Analyzing the “several overlapping contractual restrictions” present in the non-compete agreement between Pickert Medical Group and its employees in this case, the DOJ found that it prevented the employees from competing both directly (a horizontal restriction) and through another employer (a vertical restriction). The DOJ explained, “[t]o the extent that there is any procompetitive rationale behind the non-compete provisions, it may already be effectuated sufficiently by [] less restrictive and more narrowly tailored covenants” which would render the non-compete agreements unreasonable. This remains the case “even under the more accommodating rule-of-reason standard.” The DOJ’s conclusion follows 2017 guidance by the DOJ and FTC with respect to how antitrust law can apply to employee hiring and compensation, a December 2021 DOJ and FTC workshop that addressed how contractual restraints on trade can harm labor markets, and recent executive orders and statements by the Biden administration limiting and criticizing the use of noncompetition agreements with employees.
This case should serve as a reminder to employers that the DOJ considers non-compete agreements between an employer and employee to implicate the Sherman Act; therefore employers must ensure that any post-employment restraints it imposes are not unreasonable.