Senate Hearing on Noncompete Agreements Gets Contentious

Sen. John Kennedy (R-La.) was having none of it when a Florida orthopedic surgeon testified Tuesday about his difficulties getting a new job due to a restrictive noncompete agreement he had signed. The agreement was with the private equity firm that had bought out the group practice for which he worked.

“I think the private equity group came in and offered you and your partners a huge sum of money — in the millions — and you took it, and I think later you regretted it and you wanted out of the deal,” said Kennedy, the ranking member of the Subcommittee on Economic Policy of the Senate Banking, Housing, and Urban Affairs Committee, during a hearing on banning noncompete agreement.

“I think that violates freedom of contract [law], and I will bet that you wouldn’t be willing to give back the millions of dollars you took away from the sale in order to get back the freedom to practice,” he added. Noncompete agreements prevent employees from leaving and getting jobs with the competition in the same geographic area, or starting their own business to compete with their former employer.

R. James Toussaint, MD, now an orthopedic surgeon at the University of Florida, in Gainesville, said that he did sign the agreement for the practice to be bought out — which included the noncompete clause — but only because he was compelled to by the other members of the practice. Toussaint, who was speaking for himself and not the university, added that as part of a legal settlement to get out of the agreement, he gave back the money that the private equity firm had paid him.

“You might have disagreed with your partners, but they outvoted you,” Kennedy said. “You could have left the practice then, but you chose not to.”

Toussaint said that had he left the practice then, “I would have had to leave the state.”

During his opening testimony, Toussaint said that the noncompete clause was extremely broad. “Per the noncompete clause, I would be restricted from practicing orthopedic surgery within 25 miles of any facility in which the [private equity] group was currently providing medical services, any facility in which the group had previously provided medical services, any facility in which the group had targeted for expansion within the entire state of Florida, and any facility the group was in discussions with related to a potential acquisition. This noncompete was valid for 2 years, and of course, the group was located in multiple states.”

Unlike Kennedy, the subcommittee’s Democratic senators were sympathetic to Toussaint’s situation. “You have given us a perfect example of how those noncompetes end up hurting communities — in your case, hurting patients [and] others that you serve,” said subcommittee chair Sen. Elizabeth Warren (D-Mass.). “I just want to underscore [that patient] communities are served now by the more than 37% of physicians across this country who are currently bound by noncompetes …These are whole communities that could lose access to the physicians that have served them so well.”

Sen. Chris Van Hollen (D-Md.) asked Toussaint about how noncompete agreements affect patient care.

“Patients follow their physician; they don’t follow the company name or the clinic’s brand,” Toussaint said. “I was one of two subspecialist orthopedic surgeons in a area of northern Florida where 850,000 people needed to be served. If I was driven away and the other surgeon … left — and by the way, this other surgeon was nearing retirement — we would have had 850,000 people without a subspecialist to treat them. They would have to travel hours away to get their care.”

Heidi Shierholz, PhD, president of the Economic Policy Institute, testified that “noncompete agreements are ubiquitous. Most studies find that roughly one in five workers are subject to a noncompete, and without a ban, that share would almost surely keep rising.” The Federal Trade Commission’s (FTC) recently issued final rule banning noncompete agreement “is estimated to reduce healthcare costs by at least $74 billion over the next 10 years.”

“It is also worth noting that employers do not actually need noncompetes to protect trade secrets. Intellectual property law provides businesses with significant legal protections for trade secrets, and employers are also able to use tailored nondisclosure” agreements to do so, she added.

Warren praised the FTC for issuing the rule. “With this rule, the FTC is doing exactly what Congress authorized it to do: prohibiting unfair methods of competition,” she said in her opening statement. “This rule is incredibly popular; more than 90% of the comments that the FTC received on the rule were favorable, and it’s no wonder. FTC analysis shows that it will increase workers’ pay by an average of about $500 a year. It will cut healthcare costs by tens of billions of dollars over the next decade, [and] the rule will unleash innovation and economic growth.”

The Chamber of Commerce sued to block the rule shortly after it was issued, but Warren said she didn’t think the lawsuit would get very far. “I think the authorizing statute for the FTC makes it pretty clear they can do this.”

Sen. Tina Smith (D-Minn.) also said she was “very glad” to see the new rule, noting that the stories told by the witnesses “really demonstrated that with these noncompetes, you would lose not only your livelihood, but even your identity, because you’re sort of trapped in this agreement” whose implications are not understood by many employees.

The hearing was relatively brief, lasting a little over an hour. Aside from Warren, Kennedy, Smith, and Van Hollen, no other senators attended.

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