*Updated on April 23, 2024.
The Federal Trade Commission (“FTC”) has announced their intent to vote on a final rule that would ban most employers from entering into or enforcing noncompetes against workers and would require employers to rescind existing non-competes. The vote is planned during a special Open Commission Meeting on Tuesday, April 23 at 2pm ET. We reviewed the implications of this important proposed rule and its background last year. The proposed rule and fact sheet from last January can be found here. We will be sure to update you on the outcome of this vote and its potentially wide-ranging impact.
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A few weeks ago, we published a detailed article summarizing the Federal Trade Commission’s (“FTC’s”) Proposed Rule that seeks to make it illegal for employers to enter into non-compete clauses with workers. While the FTC process runs its considerably lengthy course, we thought a quick review of restrictive covenants, in general, would be helpful for health care employers as they navigate the months ahead.
Competing Policies
The phrase “restrictive covenants” is the general catch-all term that covers non-competition, non‑solicitation (of both employees and clients/patients alike) and non-disclosure provisions that are often included in employment agreements, ownership agreements and agreements that are ancillary to the employment relationship. Note that the FTC’s Proposed Rule is focused on non-competition clauses—the FTC clarifies as much in the commentary to the Proposed Rule; thus, non-solicitation and non-disclosure clauses will still generally be permissible under the Proposed Rule.
Historically, in the absence of a state law that says otherwise (see State Legislatures section below), courts have disfavored restrictive covenants as restraints of trade. So, for well over one hundred years, the courts have had to balance competing policy interests as the cases have made their way through the judicial system.
On one hand, “restraint of trade” policy considerations tip the scales in favor of employees by tending to strike down overly broad restrictive covenants. But on the other hand, time-honored “freedom of contract” policy considerations tip the scales in favor of employers. That is, since parties are free and clear to enter into a contractual agreement on mutually agreed-to terms, employers (and, for that matter, employees) are entitled to the benefit of their bargain, including restrictive covenant provisions.
Court Decisions
As a result of these competing policy interests, courts have subjected restrictive covenants, especially those in the employment arena, to strict scrutiny. Generally, courts have upheld restrictive covenants in cases where the enforcing party (typically the employer) has identified a legitimate protectable interest and the activity, geographic and temporal (time) restrictions are reasonable under the facts and circumstances of the case. Within those very general parameters, a considerable body of informative, state-specific restrictive covenant case law has developed.
With respect to restrictive covenants in the health care space, they are very common. This is due, in large part, to the considerable investments that health care employers make in their provider workforce—e.g., sign-on bonuses, tuition assistance, relocation assistance, CME benefits, marketing and advertising, practice start-up expenditures, equipment and office space expenses, and so forth. Typically, all of these terms and conditions are contractually agreed to before the start of employment. In that regard, both parties can have a clear understanding of the benefits of their respective bargain and can make an informed decision before moving forward with the relationship.
State Legislatures Have Weighed In
Given the American “checks and balances” democratic system, with its three separate branches of government—executive, judicial and legislative—several states have gone the legislative route and implemented state-specific laws in the area of restrictive covenants.
Although the legislative process can be a bit of a moving target, states that have restrictive covenant laws on the books in the health care space as of November 28, 2022 include the following:
- Alabama
- Arkansas
- California (one of three states with a complete prohibition on non-compete clauses)
- Colorado
- Delaware
- District of Columbia
- Florida
- Illinois
- Indiana
- Iowa
- Kentucky
- Massachusetts
- Nevada
- New Hampshire
- New Mexico
- North Carolina
- North Dakota (one of three states with a complete prohibition on non-compete clauses)
- Oklahoma (one of three states with a complete prohibition on non-compete clauses)
- Oregon
- Rhode Island
- South Dakota
- Tennessee
- Texas
- West Virginia
Note that there are a few states, not included in the list above, that have banned non-compete clauses for low-wage/hourly workers.
In general, the restrictive covenant legislation in these states will supersede older court decisions that pre-date the enactment of the state’s laws.
The Feds Jump into the Fray
As noted above, the federal government, via the FTC’s Proposed Rule, seeks to make it illegal for employers to enter into non-compete clauses with workers. As a reminder, our detailed article covering the Proposed Rule can be found HERE.
A few key reminders on the FTC’s Proposed Rule:
- The comment period (i.e., time frame for companies to submit feedback to the FTC) ends on March 20, 2023;
- Once the comment period ends, the FTC will review the comments and potentially make changes in a Final Rule;
- The time frame for publication of the FTC’s Final Rule is at some point during 2023 or 2024 (this is a “best guess” estimate);
- We anticipate that the FTC could borrow from some of the state laws that are already on the books when it puts the finishing touches on its Final Rule (e.g., narrow the scope of the non-compete ban to low-wage workers only);
- Even after the Final Rule is issued, litigation challenging the validity of the Final Rule is anticipated.
Assuming the Final Rule is passed and survives legal challenges, it will be the law of the land. Employers who operate in states with non-competition laws that are more restrictive than the Final Rule will need to follow their state laws. If, however, a state’s non‑competition laws are less restrictive than the Final Rule, then the employers in those states will have to comply with the Final Rule.
One question that could come up with respect to the FTC’s Proposed Rule in the health care context: Does it apply to restrictive covenants that only deal with competing ownership interests? For example, if a non-employee physician has an ownership interest in an ambulatory surgery center (“ASC”) and the physician, while permitted to practice wherever they so choose, is only restricted from having an ownership interest in another ASC, does the FTC’s Proposed Rule apply to that arrangement?
Unfortunately, there’s not a clear-cut answer to this question as of yet and there are arguments on both sides of the issue. It’s possible that the FTC will issue additional guidance during the rulemaking process.
To hear more discussion on questions like this and the FTC’s Proposed Rule, please consider signing up for our February 14, 2023 webinar HERE.
If you happen to access this article after our February 14 webinar, please reach out to your regular Hall Render attorney or consultant for a copy of the webinar materials and recording.
If you have any questions or would like additional information about this topic, please contact:
- Dana Stutzman at (317) 977-1425 or dstutzman@hallrender.com; or
- Your regular Hall Render attorney or consultant contact.
Special thanks to law clerk Eric Speer for his assistance with this article.
Hall Render blog posts and articles are intended for informational purposes only. For ethical reasons, Hall Render attorneys cannot give legal advice outside of an attorney-client relationship.
