FTC proposed rule on non-compete clauses: What are the implications for dermatologists?

By Natalie Lorenz, JD, Ben Tesdahl, JD, and Robert M. Portman, JD, MPP, January 1, 2024

Every month, DermWorld covers legal issues in “Legally Speaking.” This month’s authors are health care attorneys with Powers Pyles Sutter & Verville PC in Washington, D.C. Portman is also outside general counsel for the AAD and AADA.

Physician non-compete clauses have become a highly contested topic in recent years. When included in employer-employee contractual agreements, these clauses can restrict physicians from starting or joining a competing medical practice within certain distance or timeframe parameters. With the Federal Trade Commission (FTC) looking into non-competes, AAD members should be aware of the current landscape and consider how non-competes are being used in their practices.

State law on non-competes

Non-competes have historically been governed and enforced by state law. In states that allow non-competes, enforcement depends on the facts and circumstances of the arrangement and if the non-compete is “reasonable” in both duration and geographic scope. Physician non-competes are completely void in some states, including in Colorado, Delaware, Massachusetts, New Hampshire, and Rhode Island. Other states, like California, ban all non-competes (including those applying to physicians) with a few narrow exceptions.

Federal scrutiny of non-competes

On July 9, 2021, President Biden issued an Executive Order in which he encouraged the FTC to exercise its statutory rulemaking authority under the Federal Trade Commission Act to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.”

On Jan. 5, 2023, the FTC proposed a new rule that if implemented would ban employers from using non-compete clauses on a federal level. Specifically, the FTC’s proposed rule would make it illegal and unenforceable for an employer to:

• Enter into or attempt to enter into a non-compete with an employee or contractor;

• Maintain a non-compete with an employee or contractor;

• Represent to an employee or contractor that the individual is subject to a non-compete.

The rule would apply to employees and all independent contractors. It is also retroactive, meaning that employers would have to end existing non-competes and inform individuals that the conditions are no longer in effect. In the proposed rule, the FTC alleges that non-competes are “a widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting a new business.” Note that the proposed rule would not cover non-solicitation provisions in contracts.

Following the federal trend against non-competes, on May 30, 2023, the General Counsel of the National Labor Relations Board (NLRB) issued a memorandum offering her opinion that non-competes used in employment agreements violate the National Labor Relations Act (NLRA) “except in limited circumstances.” The General Counsel did not offer concrete examples but recognized “there may be circumstances in which a narrowly tailored non-compete agreement’s infringement on employee rights is justified by special circumstances.”

Arguments in favor of federal regulation of non-competes

Medical societies and their physician members fall on both sides of this issue, with members being both medical practice owners and physician employees/contractors.

The American Medical Association (AMA) has previously expressed that non-competes can restrict competition, disrupt continuity of care, and may limit access to care. In its Code of Medical Ethics Opinion 11.2.3.1, the AMA states that physicians should not enter into covenants that:

1. Unreasonably restrict the right of a physician to practice medicine for a specified period or in a specified geographic area on termination of a contractual relationship; and

2. Do not make reasonable accommodation for patients’ choice of physician.

In comments submitted to the FTC, the Society for Cardiovascular Angiography and Interventions (SCAI) argued that non-competes prevent physicians from practicing medicine in their communities when they want or have to change jobs and as a result limit patients’ access to their physicians, and ultimately impacting public health as a whole. SCAI cited a recent study (doi: 10.52965/001c.38404) conducted on the impact of non-compete clauses on surgeons in Louisiana, in which physicians surveyed strongly believed non-compete clauses negatively impacted patients, including forcing patients to drive long distances to maintain continuity of care (64.4%) and forcing surgeons to abandon their patients if they seek new employment (76.7%).

Case law also supports claims that non-competes can disrupt continuity of care. In Statesville Medical Group v. Dickey, a non-compete agreement against an endocrinologist would have prevented him from providing endocrinology services in his community, forcing existing patients to travel an additional 40 miles to see the nearest physician. The court ruled against enforcing the non-compete agreement because that distance would have impacted “the availability of a doctor at all times for an emergency.”

Arguments against federal regulation of non-competes

Other commenters to the proposed rule argued that the FTC must make an exception for non-competes with physicians, who are highly skilled and compensated unlike other workers who may also face non-competes.

The American Hospital Association (AHA) submitted comments in favor of non-competes arguing that they boost physician earnings while protecting investments by employers to recruit and retain them. Similarly, a medical practice might argue that non-competes are voluntarily entered into and allow the practice to provide training, advertising, and other benefits to physicians, while reducing disruptive departures. The AHA also argued against a federal rule regulating non-competes, reasoning that the matter should be left to the states, as discussed above. The AHA argued that ultimately the FTC does not have the statutory authority to issue a rule that would invalidate both existing and future non-compete agreements across the entire United States economy.

Although the AMA previously cautioned against non-competes, in comments to the FTC, the AMA concluded that it does not support the proposed rule for several reasons. The AMA argued that the application and enforcement of non-compete agreements has typically been a matter left up to the states and the rule would preempt non-compete jurisprudence. Further, the AMA expressed concerns that the proposed rule would not equally apply to non-profit hospitals and other organizations that have been granted 501(c)(3) status under the Internal Revenue Code.

Implications looking ahead

The proposed rule was open for public comment through April 19, 2023, and the FTC received almost 27,000 comments. The FTC will review the comments and may make changes in a final rule based on the comments and on the FTC’s further analysis of this issue. If the proposed rule becomes effective as written, it will likely require dermatology practices to rescind any existing non-compete clauses with workers and provide notice to any former worker covered by a non-compete that it is no longer valid or enforceable. Physicians should also note that even if the FTC does not finalize its proposed rule, state law on non-competes still applies, and should be considered when structuring employment agreements. As discussed above, because of the arguments that the proposed rule exceeds the FTC’s authority, if it is finalized, the law will likely face challenges in federal court.

Given the increased federal scrutiny of non-competes, dermatology practice leaders should use this opportunity to determine how best to protect their organization’s interests — possibly by considering what new agreements or incentives can be used in place of non-competes, or how to more narrowly tailor non-competes. Dermatologists currently bound by a non-compete should be aware of the proposed rule and should monitor future developments in this area.

This article is provided for informational and educational purposes and is not intended to provide legal advice and should not be relied upon as such. Readers should consult with their personal attorneys for legal advice regarding the subject matter of this article.

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