In early January 2023, the Federal Trade Commission proposed a new rule banning noncompete clauses in employment contracts. According to the FTC, noncompete clauses “constitute an unfair method of competition and therefore violate Section 5 of the Federal Trade Commission Act.” In explaining the rationale for this new rule, FTC Chair Lina M. Khan said, “The freedom to change jobs is core to economic liberty and to a competitive, thriving economy. Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”
On April 23, the FTC made the rule final, and it is expected to go into effect in 4 months. It was immediately attacked by many industry groups. The U.S. Chamber of Commerce has already sued the FTC over the rule.
"The agency's stubborn insistence on issuing this sweeping rule — despite mountains of contrary legal precedent and evidence about its adverse impacts on the healthcare markets — is further proof that the agency has little regard for its place in our constitutional order," AHA General Counsel Chad Golder said in an April 23 statement.
This proposed ban on noncompete clauses would include healthcare professionals such as physicians, and I have mixed feelings about it. When it was first proposed, some colleagues hailed the new rule: “Although I am professionally and personally fulfilled with my current practice and the community I serve, there are physicians and providers who do not enjoy the same luxuries as me. Noncompete clauses ultimately infringe on physician well-being, which then cascades into suboptimal patient care,” wrote Dr. Jeremy Peterson, a family physician practicing in Minnesota.
He further illustrated the conundrum faced by physicians who are subject to these noncompetes: “If a circumstance arises where I no longer wish to carry on my employment status with my current healthcare organization, I will be faced with a terrible choice. I will have to choose between either: uprooting my family and severing the community bonds I have built within my personal and professional roles; commuting further than the 3.5 miles I currently drive to a clinic outside of my noncompete agreement in a community I have no personal engagement within; or roll the dice and set up a practice in my community and beg for my noncompete clause to not be enforced. I cannot imagine how a fully vested and seasoned family physician could navigate this choice.”
I totally understand this conundrum. In fact, I knew a colleague who was forced to stay in a terrible job because her employer (a private medical practice) had a noncompete clause that would force her to practice hundreds of miles away. These types are noncompetes are truly obnoxious, and those deserve to be banned. Incidentally, when her kids finally finished school, she did in fact leave and practice hundreds of miles away for two years. Once her noncompete clause expired, she came back to that very same hospital and directly and successfully competed with her former employer. So, these sort of egregious noncompetes tend to be counterproductive anyway.
At the same time, as someone who recruits and hires physicians and APPs, I see why a noncompete clause would be beneficial. For a business associate, companies can take back stock or prevent their stock from vesting if they leave for a competitor. For a clinician, however, a considerable amount of resources is expended in hiring and onboarding that individual. There is the cost to recruit them (including substantial signing bonuses sometimes), train them, and fund their working capital before any revenue comes in from their work. If they then leave and go work for a competitor down the street (or in the same hospital), it places a substantial strain on the medical practice.
Another scenario is spending a tremendous amount of resources purchasing a practice from a physician or physician group, and then that physician or group turns around and sets up shop across the street, directly competing with us. That is not to mention any trade secrets that this physician or APP would come to learn and potentially take to the competition. Theoretically, the noncompete clause protects the employer from this risk.
I asked a healthcare executive, who asked to remain anonymous for this article, about the issue of noncompetes: “I think it is a complex topic. We never prohibit people from making a living, [it] just can’t be at the detriment of [our company].” This executive also told me, “I think the bigger issue is how do we prevent competitors from just taking a big group of our docs to sell the same services to an existing client. That is the one I have always struggled with. Clearly, trade secrets, etc. are hard to legally protect in the real world. The noncompete is a more concrete way to protect trade secrets at least for a period of time.”
Steve Lowenthal, MD - a Retired Physician Executive - also made a reasonable point: "It takes a lot of investment to bring a physician into a practice. Once this investment is recouped by the health system, I think it is reasonable to no longer have a noncompete clause. How long would this take? 5 years? 10 years? That is still unclear."
Throughout my entire career, I have always been subject to noncompete clauses. I understood them to be part of the business of healthcare, especially in the era of private practice. Yet, they have always been reasonable, and I would never have agreed to a noncompete clause that would force me to leave an entire metropolitan area if I had to leave a job for whatever reason. In fact, I would actively avoid those practices which were known to include such egregious noncompete clauses (and counsel my colleagues to do the same).
I think there should be a balance. A reasonable noncompete clause, such as not practicing in the same specialty in the same hospital or hospital system for two years, should be allowed. Perhaps the distance requirements, such as not practicing within 10 or 15 miles of every facility in the hospital system, should be banned, as these can force someone to uproot their entire families for a job change. I also like Dr. Lowenthal's suggestion that noncompetes should "sunset" after a certain number of years. And if an employer is at fault and the reason why someone is leaving, then the employee should not be subject to the noncompete clause.
Furthermore, it is not like these clauses are Scripture in an employment contract; they are clearly negotiable. I have had hires negotiate these noncompete clauses with us, and I myself have also negotiated these clauses for my own employment contracts. It also must be said that employers cannot hide behind noncompete clauses to avoid dealing with toxic work environments or poor working conditions. This persistent problem needs to be addressed.
It is still an open question whether this rule will actually go into effect, given the near certainty of litigation that is forthcoming. We will see how that plays out. Yet, this issue is much more nuanced than the FTC Chair Lina Khan makes it out to be, and it is unfortunate that this nuance has been completely lost in this process.
In Defense of the Noncompete Clause