Written by Ingrid Aguirre
Update (April 23, 2024): On April 23, 3034 the Federal Trade Commission issued a final rule to generally ban non-compete clauses for most workers. According to the FTC, the final rule will become effective 120 days after publication in the Federal Register.
On January 5, 2023, the Federal Trade Commission (FTC) indicated that it would be proposing a rule to ban non-compete clauses.
Non-compete clauses are industry agnostic and cover a wide gamut of professions. The purpose of a non-compete is to protect the employer’s interest when hiring new employees. The non-compete inhibits an employee from opening a competing business or joining a competing firm within a certain geographical distance and for a certain period. The FTC argues that, in addition to inhibiting competition, non-compete clauses also lower wages for workers who are subject to them as well as workers who are not. The FTC has provisioned an exception to this ban, which would be applicable in the sale of a business where the person subject to a non-compete has an ownership interest of at least 25%.
Within the healthcare industry, physician non-competes are common and often accompany an employment agreement. Whether large health systems or smaller physician groups, many providers are subject to non-competes when employed by these entities. For example, if a physician owner hires two other providers to operate out of her practice, those two physicians may be subject to non-compete agreements. In hiring and training the two new providers, the physician owner may use her eminence in the marketplace, time, patient contacts, and resources to establish the two new providers in the market. Without a non-compete, those two new physicians would be able to join any competing practice nearby to the detriment of their first employer. This problem may become cyclical. The practice that hired those physicians would also be subject to the same risk and, without non-compete agreements, may see those same physicians leave to another competing practice around the corner. VMG Health has been engaged in various situations to determine the value of buying out a non-compete for either litigated matters or transactional matters.
It is important to note, however, that as health systems expand and more physicians are employed by those health systems, it becomes more difficult for physicians to practice out of the geographic limitations set forth by the non-compete if they do choose to leave their employer.
Following this announcement by the FTC, some states have begun moving legislature regarding non-competes. Recently, in January 2024, New York Governor Kathy Hochul vetoed a similar proposal to ban non-competes. Delaware Supreme Court recently ruled in favor of holding non-competes in place in a ruling regarding a financial services company. For example, in California, Oklahoma and North Dakota, non-competes are either not enforceable or outright banned.
The American Medical Association (AMA) echoed the limitations of non-competes noted by the FTC. The AMA supports any policy that would “prohibit covenants not-to-compete for all physicians in clinical practice.”1 The case could also be made for the removal of non-compete agreements due to the current provider shortage around the country.
In drafting non-compete agreements, employers may consider a liquidated damages provision in anticipation of damages. This provision could speak to a reasonable buy-out requirement for a physician seeking to leave and compete nearby. Given the complexities of valuing the buy-out of a non-compete, it is important to engage an expert who understands certain key components: the term of the non-compete, enforceability of the non-compete, the market and competitive landscape, and the financial impact of potential competition.
Across its client base, VMG Health has been engaged to quantify any damages resulting from a client’s workforce leaving for a competitor or to form their own business entity to then compete with their prior employer in the same geographical area. In situations like these, VMG Health has been engaged to determine the value of a non-compete for a litigated matter or for transactional purposes.
It is important to note that the enforceability of physician non-compete agreements can vary depending on the specific language of the agreement, the jurisdiction in which the case is heard, and the facts and circumstances of the case. If you are facing a legal issue related to a physician non-compete agreement, it is imperative to seek legal advice from a qualified attorney and valuation expert who can provide you with personalized guidance based on your situation.
