The FTC issued a Notice of Proposed Rulemaking (NPRM) that could change the landscape for employer-employee relationships nationwide, specifically in the biopharma industry.
Norman Maddeaux/Flickr/Creative Commons
On Jan. 4th, the U.S. Federal Trade Commission issued a Notice of Proposed Rulemaking (NPRM) that could change the landscape for employer-employee relationships nationwide. If passed, the rule would ban the future use of all non-compete agreements and require employers to rescind existing non-compete agreements.
The rule also includes “de facto” non-compete clauses, meaning contracts that function as non-compete agreements but are not labeled as such.
While this would affect every industry, the effect it could have on biopharma and biotech companies is unique. This is due to the technologically advanced and secretive nature of the research and information gathered and its value to other companies, specifically those that are not the leaders in their fields of research.
If that information is shared prematurely, these companies risk losing the time, money and resources they put in if they are surpassed in the race to regulators.
The Current Landscape
Gregory Bombard is a legal expert and trial lawyer at Greenberg Traurig.
He told BioSpace that most states impose a “reasonableness test,” meaning the provisions of the agreement must be “reasonable” in the eyes of the court compared to the information the employer is trying to protect. Most often, these agreements will last anywhere from six months to two years, he said.
In three states– California, North Dakota and Oklahoma–non-compete laws are completely prohibited. In these states, biotechs are forced to use other methods to keep their trade secrets disclosed, like non-disclosure agreements (NDAs).
If passed, the FTC’s rule would supersede state laws, making even these types of agreements illegal for employers to enforce.
The FTC’s Case Against Non-Competes
The FTC argued in its proposal that noncompetes violate section five of the FTC Act, as they hurt workers and “constitute an unfair method of competition.”
Specifically, the agency called non-competes “a widespread and often exploitative practice that suppresses wages, hampers innovation and blocks entrepreneurs from starting new businesses.”
The agency estimated that if the rule is passed into law, Americans’ wages could increase by “nearly $300 billion per year and expand career opportunities for about 30 million Americans.”
Lina M. Khan, the chairperson of the FTC, echoed this sentiment.
In the FTC’s proposal, she wrote: “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy…Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”
The rule would “promote greater dynamism, innovation and healthy competition,” she said.
Some may argue that it is an employee’s choice whether to enter into a non-compete agreement, but the FTC disagrees. In many cases, employers use their influence and power to coerce employees into signing the agreements, regardless of whether it’s in the employee’s best interest.
Elizabeth Wilkins, director of the FTC’s Office of Policy Planning, said in the proposal that the rule “would ensure that employers can’t exploit their outsized bargaining power to limit workers’ opportunities and stifle competition.”
The Other Side
The proposed rule has one exception: mergers and acquisitions. The proposal states that the rule doesn’t affect non-compete agreements that are entered into in the context of a sale of a business, meaning the myriad biopharma companies that merge every year could still include non-compete clauses in their contracts with employees.
Still, the agency has its eye on the biopharma industry, in particular. As part of its argument that non-competes harm consumers, the agency stated, “In markets with fewer new entrants and greater concentration, consumers can face higher prices—as seen in the health care sector.”
In a poll BioSpace ran one week following the FTC’s proposal, 90 percent of respondents said they support a ban on non-competes in biotech.
Still, others in the biopharma community, specifically those who manage a large number of employees, will likely voice their discontent. The FTC invited the public to submit comments on the rule in its proposal, and the comment period is open until March 10–60 days after the proposal was released.
FTC Commissioner Christine S. Wilson was the only dissenting opinion in the 3-1 vote to publish the proposal. In a statement defending her vote, Wilson cited a lack of evidence to support the rule and said the FTC does not have the authority to enforce it.
Wilson also criticized her fellow commissioners. She wrote, “With all due respect to the majority, I am dubious that three unelected technocrats have somehow hit upon the right way to think about non-competes, and that all the preceding legal minds to examine this issue have gotten it wrong. The current rulemaking record does not convince me otherwise.”
What Comes Next
Throughout his legal career, Bombard has kept a close watch on non-compete laws, as many of his clients are large companies that want to protect themselves against the unlawful sharing of confidential information.
He said there’s a reason the FTC is narrowing in on non-competes–they’ve been ordered to do so by Pres. Biden.
One day after the FTC released the proposal, Biden voiced his approval of the decision on Twitter.
“For decades, I’ve fought for the notion that if your employer wants to keep you, they need to make it worth your while with good pay and benefits,” Biden said. “Consistent with my executive order, today’s FTC announcement to limit non-compete agreements is a huge win for workers.”
Bombard said that this issue–the protection of information–is more important now than ever.
“It is easier than it ever has been in history for an employee or business partner to take confidential information,” Bombard said. “This is because we have cloud accounts, we have camera phones, we have USB drives, we have all of these different tools that can be used very easily to download and take information.”
“We don’t know whether the FTC will modify the rule or what will happen after the comment period,” Bombard said. “But the one thing we know for sure is that the FTC is very focused in the area and has expressed an interest in passing this rule as opposed to other alternatives.”
