Antitrust, Labor / Employment, On The Job

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Does using non-compete agreements to restrict the supply of viable employees violate the Sherman Act?

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Bad contractSummary: This article discusses whether strategic use of non-compete agreements to restrict the supply of viable employees violates Section 2 of the Sherman Act. The answer seems to be “maybe.”

Companies use non-compete agreements for different reasons. They may want to prevent a scenario in which the company invests significant time and expense to train an employee only to have the employee up and leave when they start becoming profitable. They may want to prevent a scenario in which the company gives an employee access to confidential information only to have the employee defect to a competitor and make use of the information with which they were entrusted.

These are both common uses of non-compete agreements and are (generally) fine in most jurisdictions.

But what if a company strategically uses non-compete agreements to harm a competitor? What if a company lured all of the viable talent in a particular area into its employ and then ensured they would not leave by disincentivizing departure through non-compete agreements containing significant financial penalties?

Is that strategy workable from a legal perspective? The answer seems to be a firm “maybe.”

In BRFHH Shreveport, LLC v. Willis-Knighton Medical Center, 176 F. Supp. 3d 606 (W.D. La. 2016), one of the plaintiffs (a healthcare insurer) claimed that the defendant (a hospital system) engaged in anticompetitive conduct through its strategic use of “punitive” non-compete agreements. The plaintiff claimed that the use of the non-compete agreements by the defendant violated Section 2 of the Sherman Act.

If you’re like me and don’t specialize in antitrust law, you may be wondering what Section 2 of the Sherman Act is and what it has to do what non-compete agreements. So here’s quick-and-dirty primer on the Sherman Act for my fellow neophytes.

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The Sherman Act was the first American antitrust statute, enacted in 1890. It was designed primarily to protect the competitive marketplace in the United States in an era of increasing industrial consolidation. Section 2 of the Sherman Act prohibits monopolization and attempts or conspiracies to monopolize interstate or foreign trade. Section 2 is focused on anticompetitive behavior by a single business as well as coordinated action taken by several businesses.

In the BRFHH case, the plaintiff alleged that the defendant hospital secured a monopolization of acute-care hospital services, adult primary care, and obstetrics/gynecology services in the Shreveport, Louisiana area. The plaintiff claimed that the hospital system secured the monopolization by, among other things, purchasing physician practices and luring physicians away from other facilities.

Once the physicians began work with the defendant hospital system, they were required to sign non-compete agreements. The non-compete agreements restricted the physicians from practicing in the region if they left employment with the defendant hospital and also imposed significant financial penalties on the physicians if and when they left their employment. The plaintiff claimed this combination of restrictions ensured the physicians would stay put.

The plaintiff contended that the hospital’s efforts constituted actual or attempted monopolization made unlawful by Section 2. The plaintiff asserted that the defendant hospital system (which purportedly controlled 75% of the commercially-insured hospital admissions in the area) was not a member of its insurance network, unlike the competing area hospital. The plaintiff alleged that the monopolization efforts therefore damaged it by limiting its business development opportunities in that region. The plaintiff sought about $67 million in damages.

This was a pretty novel theory of liability. The Court recognized that there was “no authority specifically holding or suggesting that . . . [such conduct] is anticompetitive under Section 2.” The Court thus applied the general Section 2 analysis to the claim, finding that both the hospital system’s stated purpose and the actual effect of its behavior “was to treat more patients,” which is not anticompetitive and serves a “rational business purpose.”

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The Court explained that if there had been facts suggesting that the hospital system was, for example, using the non-compete agreements solely to restrict the supply of physicians, the hospital system may have violated Section 2. Lacking such allegations, however, the Court held that the hospital system’s use of the non-competes did not violate Section 2 as a matter of law. (Note: This order was early in the case on the defendant’s 12(b)(6) motion.)

To me, this means proving that a company’s strategic use of non-compete agreements violates the Sherman Act is very difficult. While it’s certainly possible, I think there would have to be significant evidence showing that the company’s intended goal or purpose of its efforts were specifically to harm a competitor. Absent such evidence, I think a plaintiff will have a tough row to hoe to be successful on such a claim.

Nevertheless, I thought this was an interesting and creative theory of liability by the plaintiff in the BRFHH case. For companies who’re actively consolidating in a particular region, this is an issue I think counsel should be aware of and consider in their risk assessment.

evan-gibbsEvan Gibbs is an attorney at Troutman Sanders, where he primarily litigates employment cases and handles traditional labor matters. Connect with him on LinkedIn here, or e-mail him here. (The views expressed in this column are his own.)

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