In January 2023, the FTC announced and released a notice of proposed rulemaking that would prohibit employers of physicians from using non-compete clauses and rescind existing non-competes. The proposed rules would make it unenforceable, and indeed, illegal, for employers to (i) maintain a non-compete with an employee or independent contractor; (ii) enter into or attempt to enter into a non-compete with an employee or independent contractor; or (iii) represent to an employee or independent contractor that they are subject to a non-compete. It is important to note, however, that the ban would not apply to restrictive covenants stemming from corporate transactions. Non-solicitation agreements, confidentiality agreements, and restrictive covenants stemming from equity or asset sale transactions would not be restricted. What will the new rules mean for doctors both as physicians and business owners selling their practice?
Physicians are often subject to unique non-compete provisions in employment agreements. Because of the personal nature of the relationship between a doctor and their patient, as well as the interests in maintaining continuity of care, many states have statutes specifically limiting employment based non-compete agreements for physicians. In rural and other geographic areas with limited healthcare resources, non-compete agreements can be problematic and severely limit options and access to healthcare for patients. In Texas, physician non-competition agreements are only enforceable provided, among other things, they contain a buyout option at a reasonable price for the physician [1] and allow for continued care.
For physician practice owners, it is important to note most limitations would apply solely to restrictions on the practice of medicine. Therefore, in the context of a transaction, a non-compete agreement may still restrict management services or strategic competition, especially as a term of a business transaction. These transactions typically include three specific non-compete provisions: (1) in the employment agreement; (2) in the purchase agreement; and (3) in the company agreement, if the deal includes the physician obtaining equity in the management company.
Restrictions arising from transactions typically last longer (e.g., 5 years) and have a broader scope than a non-compete agreement for an employee or contractor. For transactions involving ownership interests, the restrictions may apply during ownership and for a fixed period of time afterwards.
The comment period for the proposed rules closed in April 2023, and Bloomberg Law has reported a rumored April 2024 publication date for the new rules. In the meantime, the FTC filed a lawsuit against USAP and Welsh Carson, potentially causing further ambiguity in the provider roll-up market. While the new rules are not yet published, it is important to take the proposed rules into consideration in employment agreements and in the drafting of restrictive covenants for business transactions.
[1] Tex. Bus. & Com. Code Ann. § 15.50(b)