Nearly one in five workers in the United States is bound by a noncompete agreement,1 preventing them from finding a new job or starting a business in their field when they leave their employer.2 Noncompete agreements are even more popular in the health-care industry. The American Medical Association reports that noncompete agreements affect between 37% and 45% of physicians.3 Additionally, as private equity grows its presence in the health-care sector, these agreements are becoming even more prevalent.
However, physicians should be aware of the legal restrictions that may apply to limit the ability to enforce noncompetes in their jurisdiction. At the federal level, too, antitrust enforcers are beginning to crack down on employers that restrict their workers’ ability to change jobs.
First, a Definition
A “noncompete clause” refers to 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 or operating a business in the United States after the conclusion of the employment. A noncompete clause can be in contained in employment contracts, employee handbooks, company policies or an oral agreement.
State Law Restrictions on Noncompetes
Historically, noncompetes have been governed at the state level, but the specifics of the law vary widely between states. Almost all states have some form of restriction on noncompete agreements, even if only to require only that the restrictions be “reasonable” or agreed to in writing. Currently, four states (California, Minnesota, North Dakota and Oklahoma) ban the use of noncompetes entirely, and 33 states plus the District of Columbia enforce stricter limitations on their use.
Typically, even in “full ban” states, certain exceptions will apply. For example, in California, noncompete agreements can be enforced in the case of the sale or dissolution of a business.4 Some states may set a minimum income threshold to determine which employees may be subject to noncompetes or require companies to meet certain procedural hurdles, such as providing employees advance notice of noncompete provisions in their contracts.
State bans specific to the health-care sector are common, and several state legislatures have introduced and/or passed bills in 2024 that could further restrict the use of noncompetes in the health-care industry. In Illinois, for example, SB2737 (called the “Freedom to Work Act”) was passed by the state legislature, providing that any covenant not to compete cannot be enforced in the state with respect to licensed professionals who provide mental health services to veterans and first responders.5
Similarly, Pennsylvania appears poised to ban any new noncompete agreements between a health-care practitioner and an employer under the “Fair Contracting for Health Care Practitioners Act.”6 New noncompete agreements between a health-care practitioner and an employer would become void and unenforceable if the bill becomes law, and existing noncompetes would become void upon renewal of the healthcare practitioner’s license, registration or certification.
Federal Restrictions
On the federal level, on April 23, 2024, the Federal Trade Commission (FTC) released a final rule (the “Final Rule”) banning most noncompetition clauses in employer-employee contracts as unfair methods of competition.7 The Final Rule was published in the Federal Register on May 7, 2024. The health-care industry has been particularly interested in the Final Rule — the FTC stated that it received comments from “thousands of health-care workers” in the process. While the Final Rule is broad, it has several exceptions that may be particularly applicable to health-care providers, as discussed below.
As issued, the Final Rule would generally prohibit employers from:
1. Entering or attempting to enter a non-compete clause,
2. Enforcing or attempting to enforce a non-compete clause, or
3. Representing that a worker is subject to a non-compete clause.
The Final Rule does not categorically prohibit other types of restrictive covenants, such as non-disclosure agreements or non-solicitation agreements. However, it does note that such agreements could fall within the Final Rule’s ambit if they are “so broad or onerous” to have “the same functional effect” as a noncompete clause. The Final Rule also does not apply to noncompete provisions during the term of a worker’s employment, such as prohibitions on moonlighting for other healthcare organizations while a current employee.
Exceptions
No. 1: Senior executives with existing noncompetes
The Final Rule does not apply to senior executives who entered a non-compete clause before the effective date of the Final Rule; however, employers are prohibited from entering new noncompetes with senior executives after the effective date. Currently, the effective date is scheduled for Sept. 4, 2024, but that effective date is likely to be affected by legal challenges.8
A “senior executive” is a worker who was in a “policy-making position” and earned total compensation of at least $151,164 in the preceding year or year before termination. A “policy-making position” means an entity’s president, chief executive officer or equivalent, or other officer or person with the final authority to make policy decisions that control significant aspects of a business entity or common enterprise.
No. 2: Noncompetes pursuant to the purchase and sale of a business
The Final Rule also contains an exception for noncompetes pursuant to a bona fide sale of a business entity, the person’s ownership in a business entity, or all or substantially all of a business entity’s operating assets. A noncompete entered by physicians as part of the sale of their business to a private equity company, for example, would not be covered under the Final Rule. The Final Rule does not contain a percentage ownership threshold.
The FTC “decline[d] to specifically delineate each kind of sales transaction which is not a bona fide sale under the exception”; however, it stated that the FTC “considers a bona fide sale to be one that is made between two independent parties at arm’s length, and in which the seller has a reasonable opportunity to negotiate the terms of the sale.”
No. 3: Noncompetes for employees of nonprofit or tax-exempt entities
The FTC does not have jurisdiction over nonprofit and tax-exempt entities; as such, nonprofit and tax-exempt hospitals and other health-care entities may potentially fall outside the FTC’s Final Rule. However, the FTC has specifically noted that “merely claiming tax-exempt status in tax filings is not dispositive” of the FTC’s jurisdiction.
The FTC gave examples of enforcing jurisdiction over a “physician-hospital organization” that “engaged in business on behalf of for-profit physician members,” as well as an “independent physician association” that “contract[ed] with payors, on behalf of its [for-profit] physician members, for the provision of physician services for a fee.”
Conclusion
Noncompete agreements are commonplace, particularly for physician employees, but the degree to which existing agreements are enforceable is a complex question that is currently undergoing rapid change. OM
References
1. As used herein, a noncompete agreement refers to an agreement between an employer and employee that places restrictions on an employee’s future employment. Agreements between employers not to compete to hire employees is per se unlawful and can result in criminal penalties.
2. Economic Innovation Group, State Noncompete Law Tracker (May 22, 2024), available at https://eig.org/state-noncompete-map/.
3. American Medical Association, AMA backs effort to ban many physician noncompete provisions. June 13, 2023. https://tinyurl.com/4e52jk9x
4. Cal. Bus. & Professions Code §§ 16601, 16602.5
5. IL SB2737, Ill. 103d Gen. Assembly (2024.Aavailable at https://www.billtrack50.com/billdetail/1674562.
6. PA HB1633, Pa. 2023-24 Reg. Session (2024). Available at https://www.billtrack50.com/billdetail/1641182
7. Federal Trade Commission, Non-Compete Clause Rule, available at https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf (“FTC Non-Compete Clause Rule”).
8. On August 20, 2024, a judge in Texas district court issued an injunction banning the rule from taking effect; it is likely the FTC will appeal the decision to the Fifith Circuit. In the meantime, the FC will have to challenge noncompetes via case-by-case enforcement action.
