On April 23, 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. How will the FTC ruling will affect emergency physician contracts?
What is a non-compete clause?
A non-compete clause is a form of a restrictive covenant that typically prohibits health care 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 health care professionals from leaving a practice and taking valuable knowledge and clients with them.
Key Elements of Restrictive Covenants in Medical Contracts
A non-compete clause in a medical contract typically includes several elements:
Geographic Restrictions – delineating a specific geographic area within which the health care professional is restricted from practicing or working.
Time Period – the amount of time over which the health care professional is prohibited from competing with their current employer, typically 1-2 years.
Scope of Restrictions – outlining the specific activities being restricted. Often restricts providers from engaging in a medical specialty similar to that practiced while an employee. A scope that prevented an emergency physician from starting up a bakery or from practicing ICU medicine within a restricted area would likely not be upheld since the emergency physician didn’t engage in those duties with the employer.
Consideration – something of reasonable value must generally be given to the physician to make a noncompete clause legally enforceable.
Must Protect Employer’s Business Interests – 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. If the restrictive covenant does not reasonably protect an employer’s interests, it will likely be invalidated.
State-Specific Regulations on Non-Compete Clauses in Medical Contracts
Even before the FTC ruling, various states had recognized that noncompete clauses prevent physicians from practicing within a specific area and may result in a scarcity of health care providers — especially in rural or underserved communities. As a result, many states already passed laws to limit or ban the use of non-compete clauses in medical contracts. Below are a few examples.
- 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 health care 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 …”
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 health care services.
What does the FTC ban on non-compete clauses encompass?
The final FTC ruling can be found at the FTC web site here and takes effect on September 4, 2024.
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 employees, independent contractors, sole proprietors, volunteers, or anyone else 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” although 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 requires that workers be given a “clear and conspicuous notice” 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.
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
- 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. The courts will ultimately decide whether to stay enforcement of the FTC ruling while the litigation proceeds.
How the ban may affect Emergency Physicians
In most cases, if the FTC ruling is upheld, health care 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.
Emergency physicians already have a compelling argument against enforcement of non-compete agreements. Employers have no legitimate business interest in preventing emergency physicians from working for competing systems. Unlike their relationship 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 clause against 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 nonprofit hospital systems and therefore noncompetes with workers at those facilities may 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.”
The ban on non-compete clauses does NOT apply to workers who are currently working for 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 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 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 health care 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.
