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Advocates Split on the Benefit of Banning Non-Compete Clauses!

The Federal Trade Commission (“FTC”) unilaterally issued a Proposed Rule to ban non-compete clauses in employment contracts. See blog. The first question is: Does the FTC have the legal authority to ban non-compete clauses? As a member of the American Society of Medical Association Counsel (“ASMAC”), the president, Greg Pepe, sent out an informal questionnaire to solicit comments by health care attorneys and heads of medical societies.

Greg said, “The respondents were split 50%/50% between medical society attorney members and private practice attorneys who are members.  In general, the most common threads were as follows:

  1. The most common comment was that non-compete provisions in physician employment contracts impede the physician/patient relationship.  This comment came up over and over in a number of ways.
  2. A few comments pointed out that rural areas were disproportionately harmed by non-competes, with physicians having to move away to comply.
  3. Hospital-based physician groups need non-competes to protect their arrangements.
  4. Exemptions for non-profits is a loophole that eviscerates the effort.
  5. ASMAC should be mindful of the divergent interests of its members and their client when considering this kind of commentary.

Very few people offered specific examples of the ways non-competes in physician contracts harmed physicians.  If your organization takes steps to comment please keep ASMAC advised.”

I decided that ASMAC’s findings, even if informal, were important enough to post here on my blog. So, thank you, Greg, for heading this up.

I would like to pay particular attention to #4. Because, a week or so ago, I presented on RACMoniter the story about the FTC banning non-compete clauses, but failed to acknowledge the exemptions for non-profits, which is a HUGE exception. There are 6093 hospitals in the U.S. 1228 of the 6093 hospitals are for profit. The vast majority of hospitals are either government run or non-profit. If you notice above, the “anti-banning comment of non-competes” came from hospital-based physician groups (#3). That makes sense.

Most people, when asked, touts that non-compete agreements impede physician-patient relationships. Personally, as an attorney, non-compete agreements represent requiring me not being able to work at another law firm if I decided Practus, LLP, did not work out. Similarly, if I had attended med school and was working at a hospital in Angier, NC, which was in close proximity to my home, and received a better offer at a nearby hospital, why should I be impeded from working? Obviously, families need to have an income, and what if the physician was the sole breadwinner? The non-compete agreement could really adversely affect a family.

Non-compete agreements, also called restrictive covenants, are an increasingly common requirement for employment in many sectors, including health care. Sometimes non-compete agreements appear as a clause within a contract. Other times, they are separate contracts in and of themselves. Though common, the terms of non-compete agreements vary greatly.

Most people, even physicians, when presented with a contract, “fake” review the contract, and sign without digesting – or even reading – the material. Many don’t even know that a non-compete clause exists in their contracts. Until it’s too late.

Will the FTC’s Proposed Rule become permanent? So far, there have been 4.91k comments. One anonymous person posted: “I am completely in favor of forbidding noncompete agreements.” A woman posted: “I am a veterinarian and have worked close to 40 years. I have been an associate and a practice owner. I see no justification for non-competes and in fact feel it harms the entire profession. Non-competes are pervasive and notoriously difficult to fight. For many years now I have worked for corporations and have watched colleagues both attempt to negotiate non-competes and bear the brunt of legal battles if they attempt to challenge the non-compete. Should you really have to move your entire family to acquire a job? How do I harm a company by working for their competitor?”

A guy wrote: “These should’ve been banned a long time ago. Job mobility is important if we “really” believe in our economic system. Ban NDAs.”

A physician wrote: “As a physician I have suffered significant financial and personal hardship relating to a non-compete agreement. As a result of a non-compete I had to move across the country (twice). I suffered significant loss of income as a result of this not withstanding the expense of relocating twice within a year. My self and my family also suffered significant psycho-social ramifications and de-stabilization. I now also face another non-compete agreement that will essentially render me unable to leave my next position without tremendous harm to my life-long earning potential, credibly rendering me an indentured servant. The presence of a non-compete also removes any leverage an employee such as myself might have to negotiate agains unacceptable working or wage conditions.”

Unlike the commenters from ASMAC, which was split 50-50, it appears that many comments support banning non-compete agreements, but, remember, the not-for-profit exception!! The comment period is open through Mar 10, 2023.

Non-Compete Clauses Banned, According to Proposed Rule

Non-compete clauses have dominated the health care field for years. Generally, noncompete clauses place restrictions on a person’s ability to work in three different ways:

  1. geographical restrictions,
  2. time restrictions, and
  3. line of business restrictions

On January 5, 2023, the Federal Trade Commission (“FTC”) released a notice of proposed rule-making to prohibit employers from imposing noncompete clauses on workers. Noncompete agreements block people from working for competing, potential employers or starting a competing business, after their employment ends.

Data show that non-compete clauses affect about one and five American workers, approximately 30 million people. However, non-compete clauses are predominantly in healthcare. By far, doctors employed by hospitals sign more non-compete agreements than any other profession. The theory behind eliminating non-compete agreements is that non-compete causes prevent employees from accepting better opportunities that offer higher pay or better working conditions.

Non-compete clauses are common and have been a contentious issue for decades. Some theorize that non-competes disrupt the physician-patient relationship and remove physicians who are already in short supply from the workforce.

I say, eliminating noncompete agreements may evolve healthcare.

As written, the federal rule will supersede state laws that currently govern noncompete and would apply retroactively, invalidating existing agreements.

This proposed rule comes with criticism and legal obstacles that will surely be tested. So for all of you who jumped up and down for the new proposed rule, expect litigation because as much as eliminating noncompete clause is awesome for physicians, hospitals will be adversely affected.

Many people have complained that the rule is over broad and vague. Challenges include whether the FTC has the authority to issue the non-compete rule under Section 5 of the FTC Act, the primary section the FTC cites as providing its rulemaking authority. Section 5 gives the FTC authority to police both “unfair methods of competition” and “unfair or deceptive acts or practices” affecting commerce. Although Section 18 of the FTC Act contains an explicit grant of rulemaking authority to the FTC for unfair or deceptive acts or practices, the statutory authority for the FTC’s ability to make rules for unfair methods of competition is less clear. Even if the federal courts conclude that the FTC had the authority to make a rule under the FTC Act, there will be challenges to the legality of the non-compete rule itself. The FTC claims that the non-compete rule is based on a finding that non-compete clauses constitute an “unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.”

To address these problems, the FTC’s proposed rule would generally prohibit employers from using noncompete clauses. Specifically, the FTC’s new rule would make it illegal for an employer to: enter into or attempt to enter into a noncompete with a worker; maintain a noncompete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a noncompete.

The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would also require employers to rescind existing noncompetes and actively inform workers that they are no longer in effect.

The agency estimates that the new rule could boost wages by nearly $300 billion a year and expand career opportunities for about 30 million Americans.

The commission invites the public to submit comments. The FTC will review the comments and may make changes, in the final rule, based on the comments and on the FTC’s further analysis of the issue. Comments are due 60 days after the federal register publishes the proposed rule. You have until March 6 to comment.