Disclaimer: This article reflects personal views based on information available at the time it was prepared. It does not represent and should not be relied on as legal, human resources, or other professional advice.
New Federal Trade Commission Ban on Non-Compete Agreements
On April 23, 2024, the Federal Trade Commission (“FTC”) finalized a previously proposed rule to ban most worker non-compete agreements in the United States. This new “Non-Compete Clause Final Rule” is to take effect September 4, 2024 and provides that it is a violation of Federal antitrust law to: (i) enter into a non-compete agreement with a worker on or after the effective date of the Non-Compete Clause Final Rule; and (ii) with respect to “existing” non-compete agreements that were entered into prior to the effective date of the Non-Compete Clause Final Rule, enforce the non-compete agreement against workers who are not senior executives.
Under the Non-Compete Clause Final Rule as finalized, an existing non-compete agreement can still be enforced against senior executives if enforcement is permissible under the applicable state law. However, FTC estimates that only 0.75% of workers nationwide meet the definition of “senior executives.” For the purpose of the Non-Compete Clause Final Rule, the definition of senior executives is a two-pronged test that includes (i) a wage prong; and (ii) an authority prong. To be a senior executive, a worker must: (i) be highly paid (in excess of $151,164 per year); and (ii) exercise the highest level of authority in an organization. For our purposes, we note that physicians and other healthcare providers are likely to pass the wage prong of the test but to fail the authority prong of the test.
On July 3, 2024, the United States District Court for the Northern District of Texas ordered a preliminary injunction and stay (the “Injunction”) for the effective date of the Non-Compete Clause Final Rule as applied to the plaintiffs in the case, with a commitment to issue a permanent ruling by August 30, 2024. Hence, there is possibility that the Non-Compete Clause Final Rule will never take effect, and could be null and void. Regardless, we believe a discussion of the impact of a non-compete ban on physician and other clinician compensation is timely and necessary, for reasons discussed below.
Evolving Prevalence and Enforcement
Separate from the arguments related to the Injunction, it has been argued that the reach of FTC’s rulemaking authority – and thus of the Non-Compete Clause Final Rule – does not extend to tax exempt hospitals and other healthcare provider organizations and that this will insulate healthcare from some of the rule’s effects. However, the current reality of medical practice means that the questions regarding FTC’s reach may not be relevant to the overall impact of the Non-Compete Clause Final Rule. Many provider employment and service agreements are with medical practices or hospital-physician organizations that are not tax-exempt and would not be outside of FTC’s reach. Moreover, even tax-exempt organizations will still be subject to the reach of changing state laws, which are trending toward equally or more restrictive bans on non-compete agreements than the Non-Compete Clause Final Rule, particularly with respect to physicians and/or other healthcare providers. All of this suggests that the prevalence of non-compete agreements for physicians and other healthcare providers may be declining whether or not FTC’s Non-Compete Clause Final Rule takes effect.
This is significant because covenants not to compete have been prevalent features of healthcare provider employment and service contracts for several decades. FTC estimates that up to 45% of all physicians have non-compete agreements and that, for physicians of certain specialties such as cardiology, the percentage subject to non-compete agreements is near 70%.[1] A non-compete agreement (also known as a covenant not to compete or a non-compete clause) is a contract or clause in a contract that prohibits an employee or contractor from entering into competition with their employer or client for the duration of a specified period of time after their employment or service contract ends. A non-compete agreement may be one of several restrictive covenants in an employment or service agreement. Others may include confidentiality agreements that prevent a departing employee or contractor from sharing certain information, and non-solicitation agreements that prohibit a departing employee or contractor from attempting to draw other employees or contractors away from their former employer or client. The Non-Compete Clause Final Rule bans only non-compete agreements, but defines the non-compete agreements so as to include other restrictive covenants that are broad enough to effectively function as non-compete agreements.
Independent of the FTC’s Non-Compete Clause Final Rule, several states have recently restricted or banned non-compete agreements in the context of employment and service contracts. Colorado and California are two examples. In both states, attempted enforcement of a non-compete agreement in violation of the state ban may result in legal penalties against the party seeking enforcement, including an obligation to pay the worker’s attorney fees. This may have a chilling effect on the creation and/or enforcement of non-compete agreements in those states.
Some states have enacted (and others have pending proposals for) special and more stringent restrictions for enforcement of non-compete agreements against physicians and other types of healthcare providers. Florida, for example, prohibits non-compete agreements between a specialty physician and an entity that employs or contracts with all physicians who practice in the specialty within the same county. Under the Florida law, all non-compete agreements remain void and unenforceable for three years after a new employer of the medical specialty enters the market. [2] Florida also has pending proposals before the state legislature to more broadly ban non-compete clauses in physician contracts.
State Law Variations
The permissible scope and enforcement of non-compete agreements is governed by state statutes, case law, and, for physicians, medical practice rules, and therefore varies by state. However, although the specific details of state laws and court interpretations vary, the general principles from state to state are similar. To be enforceable, non-compete agreements generally must: (i) be of reasonable scope; (ii) be of reasonable duration; (iii) protect a legitimate business interest; (iv) be supported by proper consideration; and (v) not be negated by “unclean hands” such as fraud, illegal activity, or contractual breach.
In the states that continue to permit non-compete agreements, exactly what constitutes a permissible scope, duration, legitimate business interest, “consideration” and criteria for unclean hands varies, but is generally narrowly construed to protect only reasonable business interests such as trade secrets or significant investments in worker training or business development. Based on extensive data and arguments that were published and disseminated with the Non-Compete Clause Final Rule, these justifications may become harder to establish for healthcare workers going forward.
In addition, if the Non-Compete Clause Final Rule takes effect, then in cases when state law against enforcement of non-compete agreements is more restrictive than the new FTC Non-Compete Clause Final Rule, the more restrictive state law may prevail over the Non-Complete Clause Final Rule. In cases when state law allowances for non-compete agreements are less restrictive than the FTC Non-Compete Clause Final Rule, state law may be pre-empted, and the relevant provisions of the Non-Compete Clause Final Rule may prevail. The expected result in any case is that the risk of entering into non-compete agreements with workers, including healthcare professionals, will increase, and the likelihood of positive return on litigation investment to enforce a non-compete agreement will decrease except in the case of workers in the highest policy making positions.
Given the trends in state law – and that non-compete clauses are contractual provisions that must generally be enforced under state contract law – the use of non-compete agreements to bind healthcare providers may significantly decline regardless of whether the FTC’s Non-Compete Clause Final Rule is permanently enjoined
Looking Ahead – Potential Effects on Provider Relations and Compensation
- More physician mobility within markets and less physician relocation between markets.
- Declining prevalence of non-compete agreements will allow most healthcare practitioners to more easily move between positions within the same market. The impacts of these mobility changes may be varied, depending on the market, and may affect both compensation and organizational recruiting costs. The impacts on wages and compensation survey data could be significant, but are still uncertain and therefore something to watch. We will monitor these changes for follow up articles in the near future.
- Exploration of alternatives to non-compete agreements to better meet organizational objectives and protect business interests.
- Some parties are exploring alternatives to non-compete agreements to better meet business objectives, including deferred compensation agreements that have contingent deferred compensation based on certain retention periods (i.e., incentives that are positive incentives not to leave for another employer), and certain ownership opportunities that require sale transactions for exits. The latter may be influenced by the assumption that the Non-Compete Clause Final Rule and many state bans do not apply to non-compete agreements that are associated with sale of a business interest.
The totality of effects on provider relations and compensation are still to be determined but may include changes in the prevalence of market shortages; wages of newly recruited and retained providers (increases in some cases, decreases in others); and deferred compensation structures as well as ownership and leadership opportunities for certain highly paid physicians. Changes in market dynamics will be something to watch, and tailored solutions will almost certainly be needed for employer organizations of varying sizes, jurisdictions and service offerings.
For more information, please contact Andrea Ferrari at AFerrari@AskPHC.com, Allison Carty at ACarty@AskPHC.com, or Daniel Guo at DGuo@AskPHC.com.
[1] Kurt Lavetti, Carol Simon, & William D. White, The Impacts of Restricting Mobility of Skilled Service Workers: Evidence from Physicians, 55 J. Hum. Res. 1025, 1042 (2020).
[2] Sec. 542.336 Fla. Stat.
