FTC’s Non-Compete Agreement Rulemaking Puts Medtech Innovation and Patient Access to New Treatments at Risk

On January 19, 2023, the Federal Trade Commission (FTC) – a bipartisan federal agency whose actions I’m always following – published a proposed rule in the Federal Register that would, among other things, prohibit employers from imposing non-compete agreements on their employees.  Although not specific to medtech companies, the FTC’s proposed rule could have unintended, negative consequences for the medtech industry and the patients we serve, including impeding medtech innovation and reducing competition, resulting in diminished quality and increased cost of the healthcare available to patients.

Given the stakes for the medtech industry and patients, AdvaMed and its members swiftly prepared and submitted formal comments to the proposed rule on March 16, 2023.  Some of the key takeaways from AdvaMed’s comment submission include:

• The continued ability of medical device companies to make rapid, significant, and sometimes transformational advances in healthcare technology depends upon their continued substantial investments in innovation, research, and development, as well as their ability to protect and recoup their investments in these activities and their employees through fair competition. Protecting the value of their intellectual property, trade secrets, and other confidential business information via non-compete agreements is critical to achieving these goals and essential to fair competition in this innovation-driven industry. Non-compete agreements safeguard innovation and competition within the medtech industry and innovation and advancements in medical technology drive better health outcomes.
• For the medtech industry to continue delivering lifesaving/life-enhancing technologies to patients, companies must be able to freely share their confidential business information within the company during the design, development, and commercialization processes without fear that the employees and consultants critical to these initiatives will walk out the door and take the information to a competitor. This free sharing of information and ideas is critical to fostering the collaboration needed to invent new technologies and timely deliver them to patients. Non-compete agreements allow innovator companies to protect their knowledge assets from knowledge spillovers, limiting the risk that their confidential business information will be obtained and misappropriated by competitors.
  • Counter to the FTC’s arguments, non-disclosure agreements (NDAs) and/or trade secret laws alone cannot adequately protect the medtech industry from the risk and harm of trade secret misappropriation. For example, NDAs are intended, among other things, to prevent disclosure of non-public discoveries or research findings. However, they do not protect a company when a former employee reveals valuable information, perhaps unintentionally, such as, knowledge of what does not work or what paths to avoid when an employee is conducting research and development for their new employer. Further, remedies for violations of NDAs come too late to avoid serious harm to a company. Thus, numerous courts have recognized that monetary damages cannot adequately compensate a manufacturer for the actual and future damages resulting from misappropriation of confidential business information.
  • The FTC’s proposed rule would likely result in reducing competition in the medtech industry because most companies could not afford millions of dollars in litigation costs or the loss of their entire investment in research and development, significantly curtailing advancements in lifesaving technologies available to patients. This is a considerable burden for a company of any size to bear, but it is particularly threatening to the small- and medium-sized enterprises that make up the majority of medtech innovators in the United States.
• Without non-compete agreements:
  • Medtech companies would likely be forced to limit the number of people involved in the research and development process because they would not be able to otherwise protect their intellectual property, stifling the collaboration and diversity of thought necessary for ideas to come to life and reach patients.
  • Medtech companies may be forced to limit the number of people with access to expensive, sophisticated training to protect their investments in new technologies, potentially reducing sophisticated operating room training on new medical technologies and techniques.
  • Medtech companies could have a reduced ability to obtain capital, compromising the ability to bring innovative products to patients and caregivers, and reducing competition.
• FTC’s rule sweeps too broadly by banning essentially all non-compete provisions. Any promulgated final rule should take a tailored approach and consider what confidential business information is appropriate to protect through a reasonably construed non-compete restriction.

My AdvaMed legal colleague, Ida Nassar, recently convened a broad and diverse group of medtech innovators, lawyers, and executives to develop AdvaMed’s recommendations and comments to the FTC, described above. 

In conclusion, the FTC’s proposed rule to ban reasonable, appropriately used non-compete agreements eliminates the only reliable mechanism for medtech innovators – the same ones that stood on the front lines of the fight against COVID-19 – to protect their confidential business information and investments in innovation and talent, such that they can continue bringing lifesaving technologies to patients as quickly and effectively as possible.  I hope that the final rule will take a more nuanced approach to regulating non-compete agreements and recognize that certain confidential business information needs to be protected.  Anything less jeopardizes patient health, innovation, and competition.