Pharmacy Law Brief: Revisiting Noncompetition Clauses in Employment Contracts

Author(s)Joseph L. Fink III, JD, DSC (Hon.), BSPHARM, FAPhA

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Key Takeaways

The FTC's proposed rule aims to limit noncompetition agreements, viewing them as unfair competition methods.
Noncompetition agreements restrict employees from competing with former employers post-employment, with conditions on duration and geography.
Approximately 15 states and Washington, DC, have enacted laws limiting noncompetition agreements in employment contracts.
The US Chamber of Commerce's legal challenge suggests a lengthy process before a final ruling on the FTC's proposal.

Q: I recall a discussion from my pharmacy school days about a provision sometimes encountered in employment contracts known as a noncompetition clause. Recently, I read somewhere that a move is afoot to impose limitations on using such provisions in employment contracts. What is going on with that?

Response: Noncompetition agreements, commonly called noncompetes, were addressed quite some time ago in an early column of the series in this publication.¹ As noted then, these contractual provisions “are a great example of tension between the freedom to enter into a contract and the potential impact to restrain trade.”¹ The US Federal Trade Commission (FTC) has recently distributed a proposed rule that would limit the ability of “many employers nationwide…from entering into any noncompete agreements with all workers.”²Further, approximately 15 states plus Washington, DC, have enacted laws to impose some limitations on use of these agreements in employment contracts.²

About the Author

Joseph L. Fink III, JD, DSc (Hon), BSPharm, FAPhA, is professor emeritus of pharmacy law and policy as well as former Kentucky Pharmacists Association Professor of Leadership at the University of Kentucky College of Pharmacy in Lexington.

Noncompetition agreements are “generally defined as contractual agreements between employers and employees that restrict employees from competing with their former employers for a certain period and within a certain geographic area after the termination of employment.”² A long-standing concept within the law of contracts, a noncompetition provision will be enforceable if it generally includes the following attributes²:

Both sides of the contract must provide consideration; for example, the employee must receive something of value in exchange for agreeing to an employment contract bearing this provision.
The provision must be reasonable concerning duration and geographic area of applicability.
The agreement must not be contrary to public policy (eg, unreasonably restricting the employee’s ability to seek new employment).
The provision must be clear and conspicuous within the employment contract.

The FTC is tying the new proposal to its view that these competition agreements constitute an unfair method of competition. Asserting its federal authority, the FTC’s proposal would preempt inconsistent law at the state level. For purposes of this initiative, the FTC defines a noncompetition clause 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.” Furthermore, for purposes of this regulation, the term worker would include “an employee, independent contractor, extern, intern, volunteer, apprentice, or sole proprietor who provides a service to a client or customer.”^2-4

Disclaimer

The information in this column is intended for educational use and to stimulate professional discussion among colleagues. It should not be construed as legal advice. There is no way such a brief discussion of an issue or topic for educational or discussion purposes can adequately and fully address the multifaceted and often complex issues that arise in the course of professional practice. It is always the best advice for a pharmacist to seek counsel from an attorney who can become thoroughly familiar with the intricacies of a specific situation and render advice in accordance with the full information.

Submit Questions: jfink@uky.edu

When the New York State Legislature considered legislative proposals similar to the FTC’s plan, it included a statement that noncompetition provisions in contracts can negatively affect the labor market and consumers in certain industries. The legislator who proposed the bill stated that such provisions “unnecessarily restrict employees’ career mobility.”³

Proposed regulatory changes such as this can take quite some time to arrive at their final version. That is likely to be particularly true in this instance because of opposition from groups of employers whose employment contracts with employees would be subject to the new rule. The US Chamber of Commerce has mounted a legal challenge to this FTC initiative, so a final ruling from the federal courts about the applicability of the proposed rule is likely years away.⁴