What healthcare professionals need to know
Imagine you are one of the only practicing pediatric neurologists in the area. In 2011, you signed an employment contract with a practice that contained a non-compete agreement. In 2024, that organization no longer exists. It was acquired by a new organization and it’s not a good fit. Time to leave, right?
Wrong. Your new employer tells you the non-compete you signed in 2011 still restricts you from practicing in any related field within a 70-mile radius. You have two choices – (1) stay in your current situation, or (2) pick up your practice and move 71 miles away to continue your career.
Similar scenarios inspired the Non-Compete Clause Final Rule under 16 C.F.R. § 910 which the Federal Trade Commission (“FTC”) published on April 23, 2024. The Final Rule provided that “it is an unfair method of competition—and therefore a violation of Section 5 of the Federal Trade Commission Act—for persons to enforce or enter into non-compete clauses (“non-competes”) with workers on or after the Final Rule’s effective date.”
Federal Court Sets Aside Rule…For Now
On August 20, 2024, after numerous legal challenges to the Rule, the U.S. District Court for the Northern District of Texas set aside the Rule on a nationwide basis. Now that there is a nationwide judicial ruling, the Rule will not go into effect on its original effective date of September 4, and the status quo regarding non-competes in Kentucky remains. However, since this is not a final decision, it is still helpful to review the Rule and what it may mean for anyone subject to these types of agreements.
Today, 35-45% of healthcare workers are contracted under non-compete clauses. Noncompetes grew in popularity with the expansion of hospital systems which have subsumed private practices into those systems. Many hospitals and physician associations are non-profit tax-exempt entities, and precedent suggests that those entities are not subject to the FTC’s jurisdiction under Section 5. However, a tax-exempt entity can still be subject to the FTC’s jurisdiction based on the source of its income and who that income benefits.
Non-Competes: Why or Why Not?
The FTC found, through studies and comments on the proposed ban, that non-competes are coercive, trap physicians in jobs, and force them to unfairly bear the economic harm of limited or no employment mobility. Most non-competes are unilaterally imposed, meaning the losses for an employee that result from having to comply with a non-compete, both in terms of income and patient relationships, are far greater than the threat of competition they might pose for their employers.
This imbalance can negatively affect workers’ earnings, job quality, and even patient care. The FTC found that non-competes limit patient access to care, including emergency care, and negatively affect the quality of care. Non-competes can also lead to retaliation by the healthcare professionals bound by them who speak out against poor working conditions, corporate interference with clinical judgment, or dysfunctional practice operations.
Not surprisingly, hospital associations are advocates for non-competes, stating they actually improve patient care. They argue non-competes make in-practice referrals more likely, increase revenue and wages, and provide patients with more integrated care.
The Final Rule
The Final Rule would effectively ban employers and other entities from taking any action, legal or otherwise, to enforce existing non-compete clauses or require any worker or executive to enter a non-compete. The Rule defines the term “worker” to include employees and independent contractors. In addition, the employer could not “represent” to any person that a worker is subject to a non-compete clause.
The Final Rule would also require an employer to provide clear and conspicuous notice to workers subject to a prohibited non-compete that the clause will not be, and cannot be, enforced. This includes giving notice to former workers that are still under a non-compete. As with most regulatory schemes, the Final Rule contains exceptions, such as senior executives with existing non-competes, the bona fide sale of a business, and causes of action to enforce non-competes that arise.
The ultimate impact of the Final Rule on the availability and quality of patient care remains to be seen if and when it is enacted. Physicians would have the freedom to leave their current practice arrangements for more appealing opportunities without having to leave the communities in which they have established personal and patient relationships and goodwill. On the other hand, hospitals and practice groups could see increased physician turnover and higher overhead associated with hiring and retaining practitioners, including in underserved areas that need them. If quality patient care happens when both the treating physician and the entity they work for thrive, whether the FTC’s non-compete ban would support this crucial synergism is yet to be determined.