How the FTC Ban on Non-Compete Clauses Affects Medical Contracts

On April 23, 2024, the Federal Trade Commission voted to ban non-compete clauses against workers, deeming them an unfair method of competition and declaring them unenforceable. The ruling was codified in the Code of Federal Regulations as 16 CFR § 910 and is set to take effect in September 2024. Continue reading to learn how the FTC ruling will affect contracts with medical providers.

UPDATE July 3, 2024
Federal Court Issues Preliminary Injunction Staying Effective Date of FTC Non-Compete Rule

In the case Ryan LLC v. Chamber of Commerce, Judge Ada Brown issued an order granting the Plaintiff’s Motion for Stay of Effective Date and Preliminary Injunction. As a result, the FTC is prevented from implementing or enforcing the Non-Compete Rule until the Court enters a final disposition on the action on or before August 30, 2024. A .pdf of the court’s order can be found here.

Continue reading to learn more about the FTC ruling and how it may affect medical providers.

What is a Non-Compete Clause in a Medical Contract?

A non-compete clause in a medical contract is a provision that typically prohibits healthcare professionals from working for or starting a practice similar to their current employer within a certain geographic area and for a specific duration of time after termination of their current employment.

Non-compete clauses are intended to protect employer business interests – including the employer’s proprietary information, patient relationships, and investment in staff training – by preventing healthcare professionals from leaving a practice and taking valuable knowledge and clients with them.

Key Elements of Non-Compete Clauses in Medical Contracts

A non-compete clause in a medical contract typically includes several elements:

Geographic Restriction

This specifies the geographic area where the healthcare professional is restricted from practicing or working. The scope of the restriction can vary from a specific city or county to an entire state. In some cases, a restriction may be for a certain number of miles from an employer’s place of business. Whether the geographic restriction will be considered reasonable by a court often depends on the practice location. A restriction preventing practice within a 50-mile radius may be considered reasonable in a sparsely-populated rural setting while a 5-mile restriction in a densely-populated city may be considered excessive.

Time Period

This specifies the period of time over which the healthcare professional is prohibited from competing with their current employer. The duration can vary, but is typically 1-2 years. Ideally, the time period should strike a balance between protecting the employer’s business interests and permitting the health care workers to continue their career.

Scope of Restrictions

A non-compete clause also should outline the specific activities being restricted. Often such restrictions prevent providers from working in a medical specialty similar to that practiced while an employee. For example, a non-compete that tried to prevent a gastroenterologist from practicing ophthalmology within a specific region would probably not be enforceable since the employer never introduced the gastroenterologist to patients seeking medical services for eye issues.

Consideration

In most cases, there must be some form of “consideration” paid to the healthcare professional before a non-compete clause will be legally enforceable. In most cases, the consideration involves extra monetary compensation, such as a bonus paid when the agreement is finalized.

Must Protect Business Interests

Restrictive covenants cannot be punitive in nature. Any restrictive covenant should be necessary to protect an employer’s legitimate business interests, should avoid causing undue hardship on an employee, and should not be contrary to public interest. Any restrictive covenant that violates these principles may be nonenforceable as a matter of law.

Impact of the FTC Ban on Non-Compete Clauses in the Health Care Industry

Impact on Business Entities

Non-compete clauses tend to benefit larger business entities by creating an environment that makes it difficult for physicians to leave their current employment. In many cases, physicians who terminate an employment agreement with a restrictive covenant encounter significant detrimental effects on their personal lives including relocation of their families so that they can continue practicing in their chosen specialty. One 2022 study of orthopedic surgeons showed that noncompete agreements have deterred or would deter 71.4% of respondents from accepting another job offer.

Critics also argue that non-compete clauses can lead to a lack of competition, resulting in higher costs. See, for example the lawsuit filed by Dr. Ricardo Vasquez against Indiana University Health alleging that costs for vascular surgery services in the Bloomington, IN area increased after IU Health enforced a non-compete clause against Dr. Vasquez. The Seventh Circuit Court of Appeals overruled the trial court’s dismissal of the matter and allowed the lawsuit to proceed.

Impact on Medical Providers

Physician non-compete agreements can limit medical providers’ career options by restricting their ability to establish a medical practice in their chosen specialty within a certain geographical area. A physician who invested a significant amount of time and resources into building a reputation and a program providing specialty services in a specific area would no longer to be able to benefit from that work.

Impact on Patients

Perhaps the most concerning impact of non-compete clauses is on patients. When restrictive covenants prevent physicians from practicing within a specific area, non-compete agreements may result in a scarcity of healthcare providers — especially in rural or underserved communities where there is a lack of alternative healthcare options and a relative lack of specialty services available for medical care. Patients may then face longer wait times or may have to travel greater distances to receive specialized medical services.

State-Specific Regulations on Non-Compete Clauses in Medical Contracts

Prior to the announcement of the FTC ruling, various states had already passed laws to limit or ban the use of non-compete clauses in medical contracts.

• Indiana passed a law in 2023 forbidding non-competition agreements between employers and primary care physicians. This law was implemented to ensure that patients have access to primary care services and to prevent healthcare providers from having a monopoly on primary care in certain areas.
• Iowa passed a law prohibiting health care employment agencies from enforcing non-compete clauses, prohibiting “finder’s fees” if healthcare facilities subsequently hire agency workers, and declaring any contract violating this requirement as “unenforceable in court.”
• Colorado has declared that many restrictive employment agreements are void as a matter of law.
• Massachusetts law renders non-compete clauses for physicians “void and unenforceable.”
• North Dakota law states that “A contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void …”
• California law states that “any contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
• This infographic from 2019 shows the extent of state restrictions on restrictive employment agreements.

The state interest in limiting or banning non-compete agreements recognizes how these clauses can create barriers to competition, limit patient choice, and potentially affect the overall quality and accessibility of healthcare services.

The FTC Ban on Non-Compete Clauses

FTC Headquarters in Washington DC

Background

Section 5 of the FTC Act, authorizes the Federal Trade Commission to prevent businesses from using “unfair methods of competition.” In 2023, the FTC announced its proposed rule to add restrictive employment agreements to its list of unfair method of competition. Significant public comment followed during which approximately 26,000 comments were received (many from physicians). According to the FTC, a vast majority of those comments supported a total ban on non-competes.

During a live broadcast of a FTC meeting on April 23, 2024, the final rule was presented. It will take effect 120 days after publication in the Federal Register on May 7, 2024 – which would make the rule effective beginning September 4, 2024.

What does the FTC Ban on Non-Compete Clauses Encompass?

The final FTC ruling can be found at the FTC web site here.

The FTC defines a non-compete clause as a “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment … operating a business in the United States after the conclusion of the employment ….” The FTC uses an expansive definition of the term “worker,” including “a natural person” who works or who previously worked as an employee, independent contractor, sole proprietor, volunteer, or who “provides a service to a person.”

The ruling declares as an “ unfair method of competition any attempt to enter into a non-compete clause, enforce a non-compete clause, or to represent that a worker is subject to a non-compete clause

A limited exception is made for “senior executives” in that existing non-compete agreements may be enforced if they were entered into before the effective date of the rule. Senior executives are those who are in “policy-making positions” within an organization. A vast majority of medical providers will not fit within the senior executive exception since they do not have policy-making authority with their employers.

The FTC ruling also has notice requirements, meaning that workers must be given a “clear and conspicuous notice to workers bound by existing non-compete clause that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. Model language for the notice is contained within the rule.

Exceptions to the FTC Ban on Non-Compete Clauses

There are certain exceptions where a non-compete agreements may still be enforceable.

Sale of a Practice

If a healthcare provider engages in a sale of a practice, a non-compete agreement may be included in the sale contract to protect the buyer’s investment.

Nonprofit/Tax-Exempt Entities

The FTC acknowledges that it may not have jurisdiction over not-for-profit entities, so the ban may not apply to nonprofit hospitals or other tax-exempt organizations. However the FTC also stated that some entities claiming tax-exempt nonprofit status may still “fall under the Commission’s jurisdiction.” Specifically, it stated that “some portion of the 58% of hospitals that claim tax-exempt status as nonprofits and the 19% of hospitals that are identified as State or local government hospitals in the data cited by AHA likely fall under the Commission’s jurisdiction and the final rule’s purview.”

Some Types of Restrictive Covenants

The FTC’s ruling does not apply to other types of restrictive covenants, such as non-solicitation agreements, non-disclosure agreements, or confidentiality agreements. These agreements can still be used to protect legitimate business interests, as long as they do not function as a non-compete clause.

Arguments In Favor of the FTC Ruling

FTC Chair Lina Khan

When commenting on the ruling, FTC Chair Lina M. Khan stated that “the freedom to change jobs is core to economic liberty and to a competitive, thriving economy” and that “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.”

Additionally, the FTC estimates that banning noncompetes will result in up to $194 billion in reduced spending on physician services over the next decade, a 2.7% increase in new business formation each year, an increase in innovation with an estimated 17,000-29,000 additional patents filed each year, and up to $488 billion in increased wages for workers over the next decade.

Arguments Against the FTC Ruling

Employers, business entities, and hospital associations generally oppose the FTC ruling, arguing that the FTC has no legal authority to regulate competition in this manner

The Chamber of Commerce has already announced plans to file a legal action challenging the FTC’s ruling. Neil Bradley, the Chamber’s Chief Policy Officer was quoted as saying that the rule “opens up a Pandora’s box where this commission or future commissions could be literally micromanaging every aspect of the economy.”

Chad Golder, AHA general counsel and secretary for the American Hospital Association has been a vocal critic of the FTC ruling. He has called the FTC’s ruling “bad law, bad policy, and a clear sign of an agency run amok” noting that “[t]hree unelected officials (referring to the three FTC commissioners who voted in favor of the ruling) should not be permitted to regulate the entire United States economy and stretch their authority far beyond what Congress granted it–including by claiming the power to regulate certain tax-exempt, non-profit organizations.”

The AHA also sent a letter to Lina Khan outlining its objections to the FTC Ruling (.pdf here).

Litigation Involving the FTC Ban on Noncompete Clauses

Two lawsuits challenging the FTC’s new rule have already been filed.

• Chamber Of Commerce Of The United States Of America et al. v. Federal Trade Commission et al., Case No. 6:24cv148, filed in the District Court for the Eastern District of Texas (.pdf of Complaint here)
• Ryan, LLC v. FTC, Case No. 3:24cv986, filed in the District Court for the Northern District of Texas

Both lawsuits seek to have the FTC ruling invalidated and will likely be consolidated into one case.

How the FTC Ban on Non-Compete Clauses Affects Medical Contracts

In most cases, if the FTC’s noncompete ban is upheld, healthcare providers will not be subject to contractual noncompete clauses.

Until at least September 4, 2024, the FTC’s ruling has no effect. Litigation in the case may cause the courts to stay enforcement of the rule until litigation is settled. In states that already limit noncompete clauses (see this map), the current laws remain unchanged.

Hospital-based providers such as anesthesiologists, pathologists, radiologists, and emergency physicians already have a compelling argument against enforcement of non-compete agreements. Employers have no legitimate business interest in preventing hospital-based physicians from working for competing systems. For example, unlike patient relationships with specialists or primary care providers, patients don’t go to hospital emergency departments to see a specific emergency physician. Instead, patients go to emergency departments to receive emergency medical care from any available provider. Consider the case of Duneland Emergency Physicans v. Brunk where the Indiana Court of Appeals ruled that a noncompete provision in a contract with an emergency physician was unenforceable because the emergency physician group “failed to show a protectable business interest” in enforcing it. The Court noted that there was no evidence that patients of one hospital went to the emergency department of the competing hospital simply because Dr. Brunk went to work there.

Because the Federal Trade Commission may lack jurisdiction over tax-exempt and nonprofit organizations, the FTC’s rule may not apply to those types of organizations and therefore noncompetes with workers at those facilities still be enforceable. However, the FTC has stated an intention to investigate whether nonprofit organizations may fall under the FTC’s jurisdiction and may therefore be subject to “the Final Rule’s purview.” If the FTC’s rule is not applied to nonprofit organizations, but is applied to for profit companies, it could create an unfair advantage for the nonprofit organizations.

The ban on non-compete clauses does NOT apply to workers who are currently employed by an employer. In other words, the FTC ban does not affect contractual provisions preventing an employee from moonlighting. The language in the rule specifically references incidents that occur “after the conclusion of the employment.”

The FTC ban also will probably not affect other types of contractual restrictive covenants – provided that those provisions do not function as de facto noncompete agreements. The final rule does not render non-solicitation clauses, confidentiality agreements, or trade secret covenants unenforceable. However, the FTC noted that non-solicitation covenants “can satisfy the definition of non-compete … where they function to prevent a worker from seeking or accepting other work or starting a business after their employment ends.” For example, if a non-solicitation covenant prevented a worker from treating any patient of the previous employer after termination of an employment contract, it could be viewed as having the effect of a non-compete agreement. If a restrictive covenant “functions to prevent” workers from seeking or accepting other work or starting a business after their employment ends, it would be treated as a functional non-compete.

If the FTC ban is upheld, “for-profit” employers will find other ways to disincentivize workers from leaving or from working in competing practices. Look for deferred compensation or end-of-year bonuses that evaporate if a worker leaves or joins a competing practice. Staffing companies may also increase the use of “reverse restrictive covenants” with health systems in which hospitals are subject to a contractual penalty if they hire any healthcare workers who previously worked with a staffing company.

Once the rule is effective, the FTC has set up an e-mail address where market participants can report information on any suspected violations of the rule: noncompete@ftc.gov

Watch for additional legal action on this matter before the dust settles.

Need help with a restrictive covenant or with other physician contract issues? Contact me. I’d be happy to try to help you.