The FTC Proposes a New Rule – The Potential Extinction of Non-Compete Clauses – Physicians: The Time to Act Is Immediately

On January 5, 2023, the Federal Trade Commission (FTC) published a Notice of Proposed Rulemaking advancing a new rule that would effectively ban employee non-competition clauses with all employees and rescind existing non-compete clauses. All physician employees would be subject to this rule. Thus, if the rule as proposed takes effect, it will have a far-reaching impact on the ability of physician employers to limit the employment of physicians post-employment.

The Proposed Rule

The proposed rule broadly defines non-compete agreements as a contractual term between an employer and employee that precludes the employee from seeking or accepting employment with a person or, in the case of physician employees, competing medical practice for a time span and geographical area, after termination of the employee’s employment.

The proposed rule also provides a functional test for when a contractual term establishes a non-compete clause. Specifically, it provides that a term is a non-compete clause when it has the effect of barring the employee from seeking or accepting employment within a specified geographical location and time interval.

The proposed rule does not specifically prohibit non-disclosure agreements. However, a non-disclosure agreement could be unlawful under the proposed rule if drafted so broadly that it effectively precludes the employee from working in the same field (e.g., medicine) after the conclusion of the employee’s employment.

The Proposed Rule’s Rescission Requirement and Exceptions

The proposed rule would require employers to rescind all non-compete clauses within 180 days of the final rule’s publication. In addition, employers would have to provide written notice in individual communication to all employees who had such clauses within 45 days of rescission.

The proposed rule also explicitly preempts an inconsistent state law. State laws, orders, regulations that provide employees greater protection are not inconsistent with the proposed rule.

The FTC Takes Action Under Current Rules

The FTC’s proposed rule came one day after the filings of complaints against three Michigan companies over what the FTC asserts to be unlawful use of non-compete agreements with employers under FTC’s existing rules. This is the first time the FTC has challenged such agreements between employers and employees and foreshadows that the FTC will act forcefully to address actions it considers anti-competitive.

What Should Physicians Do Now?

The FTC’s proposed rule is not final, so now is the time for physicians to act. The public has until March 20, 2023, to submit comments, after which the FTC will publish a final version of the rule. (Go to Regulations.gov – see Non-Compete Clause Rule (NPRM).

The FTC’s proposed rule may face legal challenges, but the FTC’s recent action demonstrates that it will actively seek to address practices it considers anti-competitive.

Further Thoughts

When could the proposed ban on non-compete clause go into effect?

The FTC could face litigation regarding whether it has the authority to issue such an all-encompassing rule. However, absent a legal challenge that ties the process up in court, the FTC will accept physician comments from the public until March 20, 2023 and, after the comment period closes, move to finalize the rule or adopt an alternative version. If enacted, once the rule is finalized, it would not become effective until 60 days after publication in the Federal Register.

What about patient non-solicitation agreements and non-disclosure agreements?

The proposed rule included that functional test for whether a contractual term initiates a non-compete clause. If these agreements are so broad as to prevent the physician from other employment, it may fall within the ban. The FTC includes two examples:

• Non-disclosure agreement between an employer and physician that is so broad it effectively precludes the physician from working in his field of medicine after the conclusion of the employment agreement.

• A training reimbursement provision where the required payment is not reasonably related to the costs the employers incurred.

What if there are non-compete agreements with current or former employers?

If the rule is passed as proposed, employers will need to rescind these agreements and provide notice to the physicians and former physician employees. As currently proposed, the rescission must occur within 180 days after the proposed rule is published. Note that if you have a non-compete clause tied to a severance or employment agreement, the other terms of the agreement will not be affected.

Conclusion

The banning of physician non-compete clauses is important to physicians. The time is now to share your comments. The deadline is March 20, 2023.

Regulations.gov – Non-Compete Clause Rule (NPRM)