Status Check: Non-Compete Agreements in Healthcare

Physicians are often frustrated by government rulings that affect their ability to run their practices and treat their patients. Typically, the agency responsible for stirring the pot is the Centers for Medicare & Medicaid Services. However, another agency recently caught the attention of physicians nationwide—the Federal Trade Commission (FTC).

On April 23, 2024, the FTC issued a final rule banning non-competition agreements. After months on a rollercoaster of litigation and uncertainty, the FTC Final Rule was halted by a federal court in Texas, in the form of a nationwide injunction. Now the question looms: What does this mean for current and future physician non-competes?

The FTC Final Rule shook employers across all industries because non-competes have become a ubiquitous tool used to protect business plans from disruption. Non-compete provisions, stating the worker may not engage in a similar business within a certain area for a certain time period after they have terminated employment from their current job, are often incorporated into employment agreements.

On the one hand, the value of a non-compete is obvious: Employers invest many hours and resources into their workers, so they don’t want that worker to simply set up shop nearby and compete with them directly. On the other hand, non-competes can become burdensome to the worker, forcing them to stay with a company because they don’t have viable options to work elsewhere.

Non-competes have historically had varying degrees of enforcement. Certain states have restricted the area within which a non-compete may be enforceable or the length of time for which a non-compete can be enforced. For professional services like physician services, non-competes can be restricted due to the fact that an overly broad non-compete could endanger a community by cutting off access to adequate medical services.

What Did the FTC Final Rule State?

If enacted as planned on Sept. 4, 2024, almost all existing non-competes would have been invalidated for workers at for-profit entities. The definition of “workers” under the FTC Rule is not limited to employees, but includes other individuals who provide services for healthcare entities, such as independent contractors, interns and volunteers.

As the FTC Final Rule was written, employers were required to provide a notice to all current and former workers who have a non-compete, stating their non-compete would not be enforced. Employers were encouraged to review their worker census and list of terminated workers to determine to whom they were required to give this notice.

Preparations for the FTC Final Rule were uncertain, however, because two legal challenges to the FTC were immediately brought in an attempt to block the FTC Final Rule from being enacted: In one lawsuit, a court in Texas granted a preliminary injunction to the plaintiffs only, which prevented the FTC Rule from being enacted with respect to those specific businesses. In the other lawsuit, a court in Pennsylvania ruled the opposite—denying a stay of the FTC Rule from being enacted.

The Texas court promised a full ruling before Aug. 30, 2024. On Aug. 20, 2024, that ruling was issued, and a nationwide injunction against the enactment of the FTC Final Rule was imposed. The court’s reasoning for imposing the nationwide injunction was that the FTC had “exceeded its statutory authority in implementing the rule.” As a result of this ruling, employers may set aside the requirements of the FTC Final Rule for the time being.

Current Status of Non-Compete Agreements

The injunction blocking the FTC Final Rule essentially returns the power to each state to enforce existing non-compete laws at the state level. Non-compete agreements that are reasonably tailored to comply with applicable state law will continue to be enforced. As a result, employers should engage an attorney to review their current agreements with workers to determine if the non-compete provisions comply with applicable state law.

States may have restrictions on the duration of the non-compete as well as the area the non-compete covers. Depending on the nature of the business the non-compete restricts, additional restrictions may apply. Non-competes with healthcare practitioners are, in some states, expressly prohibited. California and Minnesota are examples of states that have largely banned non-competes already. Other states, like Illinois, have codified restrictions on non-competes that apply based on earnings thresholds of the worker.

Finally, some states have codified non-compete restrictions that apply specifically to the healthcare industry. For example, in Pennsylvania, a new law set to go into effect on Jan. 1, 2025, deems non-competes with healthcare practitioners void, unenforceable and contrary to public policy, with few exceptions.

Even if a state has not codified an express restriction on non-competes, case law may inform whether any particular restrictions will be applied to a non-compete that involves healthcare services. Because of the importance of healthcare services to communities, some states will limit non-competes so citizens of that state can access affordable healthcare services.

Conclusion

The injunction imposed on the FTC Final Rule prevents its implementation for the time being. However, it is expected that the present litigation will continue. Appeals may affect the injunction, so it is important to work with an attorney to monitor any developments. In the meantime, employers should review their agreements for compliance with state law.

Finally, this time is a great opportunity for both employers and workers to review their agreements to determine if there is anything additional that can be done to protect their interests.

Emily A. Johnson, JD

Emily A. Johnson, JD, is a nationally recognized attorney, author and speaker with McDonald Hopkins LLC. Email her at [email protected].