02/27/2023

Health Care Non-Competes Face Uncertain Future

By: Dan Zinsmaster, Dinsmore & Shohl 

Last summer, President Joe Biden signed a wide-ranging executive order entitled “Promoting Competition in the American Economy.” One key element of the executive order was to address non-compete covenants that the White House characterized as stifling competition between companies. The executive order encouraged the Federal Trade Commission (FTC) to draft rules to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”[i]  In a statement released contemporaneous with the executive order, the White House stated more bluntly that the President was encouraging the FTC to “ban or limit non-compete agreements.”

In the wake of President Biden’s executive order, on January 5, 2023, the FTC issued a proposed rule which would prohibit employers from enforcing non-compete agreements against former employees, contractors, and other workers. The proposed rule defines “non-compete clause” broadly as “a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment.”[ii] Additionally, the proposed rule would bar broad non-disclosure agreements that “effectively precludes the worker from working in the same field” after separation.

Notably, the FTC’s proposed rule does not prohibit agreements restricting outside work by employees during the term of their work for the employer. The rule also provides an exception for enforcement of non-compete agreements related to the sale of a business (or sale of such person’s ownership interest in a business) when the person restricted by the agreement is a “substantial owner [owning at least 25 percent of] … the business entity at the time the person enters into the non-compete clause.”

In addition to prohibiting enforcement of non-compete agreements, the FTC’s proposed rule would impose an obligation on employers to notify all employees subject to non-compete agreements that such contract provisions are no longer in effect and may not be enforced.

The next steps for the FTC’s proposed rule will be completion of a 60-day comment period, after which the FTC will publish a final rule that will go into effect 180 days after publication. As with other recent federal agency rulemaking, this regulation is very likely to face legal challenges that may further delay or prevent enforcement.

At the state level, the Ohio General Assembly considered legislation last year which would have prohibited any employer of physicians – including doctors of podiatric medicine and surgery – from entering into certain non-compete restrictions that would apply following the physician’s employment as a condition of employment. Similar to the FTC’s proposed rule, non-compete agreements during the term of the physician’s employment would have remained permissible. While the proposed legislation did not become law, it shows the issue is garnering the attention of lawmakers at every level of government.

Non-compete covenants are very common in health care and historically viewed by hospitals and medical practices as an important way of protecting their legitimate business interests. Employed providers routinely have non-compete agreements, so much so that even the American Medical Association (AMA) issued a position paper in 2020 cautioning that physicians should be wary of signing unreasonably strict covenants. The AMA has gone so far as to suggest that physicians in training should not sign non-compete agreements at all.

Despite the threats to non-competes in provider employment agreements, non-compete provisions remain enforceable in Ohio for the time being. Even so, because the future existence and viability of non-compete covenants in health care settings is murky at best, employers and providers should be mindful of potential changes in state and federal law when looking to negotiate future employment and independent contractor agreements.