By KIMBERLY J. RUPPEL & CHRISTOPHER J. RYAN
Non-compete provisions are common in healthcare employment agreements. These provisions are designed to prohibit an employed or contracted provider from competing against the contracting entity by working for or starting a competing business within a certain geographic area for a set period of time. As the Michigan Court of Appeals has indicated, “[i]n a medical setting, a restrictive covenant can protect against unfair competition by preventing the loss of patients to departing physicians, protecting an employer’s investment in specialized training of a physician, or protecting an employer’s confidential business information or patient lists.”[1] Today, courts deciding whether a non-compete provision is enforceable do so where it can be shown that it protects an employer’s reasonable competitive business interests, and where the agreement is reasonable as to duration, geographic area, and the type of employment or line of business that it covers. [2]
In January, the Federal Trade Commission proposed new rules regarding employment related non-compete agreements in response to President Biden’s 2021 Executive Order. The Executive Order expressly identified the healthcare sector as one area where limitations on non-competes will be encouraged in order to purportedly build economic momentum and promote mobility of employment.
The new rule proposed by the FTC would impose a near-total ban on non-compete clauses, which are seen by the government to suppress wages, and hamper innovations and new business start-ups. If enacted as a final regulation, it would ostensibly supersede state law on this topic. In other words: no more analysis about whether the terms are “reasonable” in light of the circumstances. The proposed rule applies to all “workers”, defined as anyone who works paid or unpaid for an employer, without regard to level or experience or seniority and treats hourly workers the same as salaried workers. The term “worker” is defined so broadly as to include an independent contractor, extern, intern, volunteer, apprentice or a sole proprietor who provides service to a client or customer.
The proposed rule would prohibit employers from: (1) entering into or attempting to enter into a non-compete clause with a worker; (2) maintaining a non-compete agreement; or (3) representing that a worker is subject to a non-compete clause where the employer has no good faith basis to believe such non-compete is enforceable. Further, the proposed rule provides that any existing non-compete clauses must be rescinded by the final compliance date, and an employer must provide notice to current and former employees that a non-compete clause is no longer in effect or enforceable.
Although the proposed rule is a near-total ban, one exception is that the new rule would not apply to non-compete clauses entered into as part of a transaction to sell a business or substantially all of a business’ operating assets by a business owner holding at least 25% ownership interest. The proposed rule also does not apply to a franchisor-franchisee relationship. It is unclear whether the ban would apply to partnership agreements, although we suspect the FTC would take the position that the ban would apply. Also of note, there appears to be a general consensus that the proposed rule would not apply to nonprofit corporations (like hospitals), because those organizations fall outside the statute’s definition of a “corporation” as an entity organized to carry on business for its own profit or that of its members. We anticipate the FTC will address this issue if and when it issues the final rule.
The proposed rule does not expressly prohibit other types of restrictive covenants, such as non-solicitation agreements, non-disclosure/confidentiality agreements, or agreements designed to protect trade secrets. A narrowly tailored restrictive covenant is one way for an employer to protect sensitive business information or patient lists without using a non-compete. Employers might also be able to use an incentive payment – instead of a penalty clause – to prevent departing employees from competing. However, the proposed rule provides that if such a provision is broad enough to effectively prevent a worker from accepting employment, the provision could run afoul of the proposed rule.
The FTC will review comments to the proposed rule and ultimately issue a final rule, likely later this year. The proposed rule provides that, once final, employers will have 180 days to rescind current non-compete provisions and provide the required notice to workers (unless that time period is revised in the final rule).
We anticipate a vigorous comment period and, ultimately, litigation challenging the broad nature of this proposal, as well as the FTC’s legal authority to enforce it. Stay tuned.
About the authors:
Kimberly Ruppel and Christopher Ryan are Co-Chairs of Dickinson Wright, PLLC’s Healthcare Litigation Task Force.
Kim has over 20 years of experience as a commercial litigator who represents healthcare providers, insurers, and benefit plans in healthcare contract litigations, licensing and regulatory disputes, governmental fraud and abuse investigations, HIPAA compliance, and insurance claims and coverage disputes.
Chris represents businesses, physicians, hospitals, insurance companies, and other healthcare industry stakeholders in a wide range of litigation matters, including licensing investigations, medical staff issues, billing investigations and audits, non-compete and trade secret litigation, and business/shareholder disputes.
[1] St. Clair Med, PC v Borgiel, 270 Mich App 260, 266-267.
[2] M.C.L. 445.774a(1).