In brief:
In the last couple years, Virginia has passed new legislation to protect “low wage employees” (those making a below-average wage). (Virginia Code § 40.1-28.7:8.) But Virginia employers continue to impose unfair non-competition covenants on professionals and higher-wage earners. Their only recourse is to remain shackled to an unwanted position or, when resigning or even when terminated, to uproot their families and leave their homes in Western Virginia altogether in order to go to find another position. The United States Federal Trade Commission has just announced a proposed rule to ban non-competition agreements altogether, including existing ones, for all employees. This would be a federal regulation that would cover all states, including Virginia.
This would be a boost to attract and retain area professionals, as the best would be able to stay in the community to work, rather than having to leave due to restrictions on local competition by their current employers. The best professionals improve as their careers evolve, innovating and striving for increased responsibility and compensation. Competition among employers in the local community insures that they can seek new positions without having to move elsewhere, which noncompetes force them to do. Long-term professional stability in the same location will improve both the quality of their service and their long-term relationships with the local customers and clients who depend on them. States that ban noncompetes already often attract particularly innovative professionals away from states that do not, such as the Commonwealth.
The proposed rule would make it “an unfair method of competition” to force new workers to enter into non-competes. The regulation would even require employers to rescind (remove) covered non-compete clauses from existing contracts! The rule broadly defines “workers” to cover both employees and independent contractors “without limitation,” so it would not discriminate on the basis of wages as Virginia’s law currently does. In short, it would finally offer some overdue protection to hard-working professionals and people who have developed valuable skills, restoring free-market competition for their value, and encouraging them to remain in their homes rather than remain in unsatisfying positions or flee the area to comply with restrictive covenants. While the definition of “worker” is broad, the rule will only govern employers whom the FTC has the power to regulate. Certain classes of companies are exempt from FTC jurisdiction, such as regulated banks, savings and loan institutions, federal credit unions, non-profits, common carriers, and air carriers.
You can read it here, on the FTC website:
https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking (Jan. 13, 2023)
This rule has not yet been approved; it is in the public comment stage. If passes as is, it will supersede state law. If you have an interest, the FTC takes public comments here. https://www.regulations.gov/docket/FTC-2023-0007/document
What is the problem with non-competes?
By their very nature, non-competition agreements restrict competition. For the people served by the companies or professionals affected, these restrictions suppress the incentives for motivating higher performance and, therefore, services to customers, clients, or patients.
Non-competes are rarely justifiable, because other laws already restrict the harmful disclosure of trade secrets, and companies can enter reasonable non-disclosure agreements to protect intellectual property, which are often valid and frequently enforced. So there are, in practice, very few situations where a non-competition agreement that restricts someone from working for a competitor in their chosen field legitimately serves the public interest or the economy. And in most cases, they punish hard-working individuals who have earned opportunities to improve their situation or support their families. In practice, non-competes are usually lazy and arbitrary restrictions on individual careers, imposed by mediocre managers or HR departments who would rather force employee loyalty than earn it. Fighting those restrictions is one of our most enjoyable pursuits at Munro Byrd P.C. Our firm helps people or new employers who need to defeat the unfair application or enforcement of noncompetition agreements in Virginia.
How do non-competes hurt Western Virginians?
Noncompete clauses are almost always an unfair and one-sided restriction on the options and upward mobility of professionals and employees. They suppress innovation and competition in services, and hurt both the local economy and its residents. As an example, consider these restrictions on the thousands of specialist physicians working for one of the three or four major health systems in Western Virginia (typically with only one or two such employers present in a given city). In order to prevent doctors from leaving one system to work for another—even in cases where the hospital fires the physician—these health systems force all incoming employee physicians to sign a noncompete that effectively forces any separated doctor to leave the market area altogether, or go unemployed, rather than working for a competitor. Doctors have endured long and expensive training in specialties. Physicians cannot simply start a new career in a different specialty, let alone a completely new career, in order to remain here. In the small city markets throughout Western Virginia, working for a competing health system is their only other option for an alternative position within commuting distance. In our experience, many of them also have spouses who work for the same hospital system. So, they cannot leave the job, or if they do want to leave (or are terminated or downsized), they must abandon the area altogether to pursue their chosen professions.
So, in the case of doctors, noncompetes suppress innovative lateral moves, shackle them to employers who have little incentive to innovate or improve to retain them, and discourage other specialists from moving to such smaller markets in the first place. To avoid noncompetes, some medical personnel may choose shorter-term contract (locum tenens) work for multiple employers, which prevents their development of a dedicated patient base and reliable availability and relationship with patients who need that trust and familiarity. And when such restrictions are applied to a doctor leaving such a system, they force good doctors and their families to move out of the area in order or commute for hours to find new employment. This not only punishes the physicians themselves, but reduces the quality of health care, and tramples the interests of patients. Patients are supposed to be the priority, and it is no secret that patients are fiercely loyal to good doctors, and continuity in their care by those particular doctors is often crucial in the case of certain serious health conditions. When non-competes drive good doctors (and their families) away, hundreds or thousands of local Western Virginia patients lose—as does the economy those professionals support with higher taxes and local investment.
How would a ban help professionals working for covered employers, and Western Virginians generally?
Banning non-competes of such professionals would incentivize their employers to compete with each other to retain their best and brightest. In the case of physicians (assuming their health system is not an exempt non-profit), this would motivate better quality service through rewards of performance, as well as those professionals remaining in the local market as a long-term home, with the freedom to form smaller practices or make lateral moves. While this may sometimes require higher pay as incentives, our experience with physicians has been that their primary complaints about their systems have to do with structural obstacles to innovation and patient service, not compensation. They need the option to depart mediocre positions, myopic administrators, or broken systems that inhibit their delivery of care, in order to start their own competing practices, make lateral moves, and to pursue new structures that satisfy their priorities of better patient service. This requires the flexibility to move to or found new institutions that are willing to innovate. Putting such powers back in the hands of productive professionals will greatly improve their services to Virginians, while permitting our most productive professionals to remain in their communities, while succeeding on their own merits.