Earlier this year, the Federal Trade Commission (FTC) announced a proposed rule that would bar noncompete provisions in most employment agreements. Among other things, the proposed rule would not only bar noncompete provisions in employment agreements but also prohibit such provisions when a business is sold by someone holding less than a 25% ownership interest. It remains to be seen what version of the rule will go into effect (if any) and whether likely court challenges will prevent its enforcement.
The FTC’s proposal would impose a blanket ban on these provisions. However, most states that permit noncompete provisions require that they be tailored to the employer’s legitimate business interest. Similarly, state laws (including Florida’s noncompete statute) provide factors including duration and geographic area to determine whether a noncompete provision is reasonable and, therefore, enforceable.
Noncompete provisions have been a controversial topic at large and in particular in the healthcare industry. In its summary of the proposed rule, the FTC cited studies about the effect of noncompete provisions on physicians, which are common in states that permit them. In the healthcare context, policymakers face concerns not only about the effect noncompete provisions may have on labor (and healthcare workers’ ability to freely switch employers) but also about the effect such provisions may have on the price and availability of healthcare services for consumers.
The nuances of noncompete provisions for physicians (as opposed to other professionals) aren’t new, and some states expressly limit the enforceability of noncompete provisions for physicians, including with blanket bans. Other states have limited when noncompetes may be enforced against physicians. In 2019, Florida Governor Ron DeSantis signed into law Section 542.336 of the Florida Statutes, which voids noncompete agreements for physicians who practice a “medical specialty” in a county where the same entity or its affiliates employ all physicians in that specialty. Part of the justification for the new law was to provide access to patients, particularly in rural communities or areas where there’s only one provider of certain healthcare services. The law has been upheld by a federal court.
If the FTC’s proposed rule (or something similar to it) were to go into effect, there are still measures employers can take. For example, an employer can likely still enforce restrictive covenants to protect trade secrets and patient lists. Similarly, an employer can likely prevent a physician from soliciting or accepting business from patients to prevent the loss of business if a physician moves to a competing practice. Under the language of the proposed rule, such provisions would likely still be enforceable, subject to state law.
That said, these alternative restrictive covenants may not be as valuable when a business is sold. Often, the buyer of a business wants certainty that the seller won’t set up shop across the street and reduce the value of the sold asset. An unintended consequence of the FTC’s proposed rule may be that sellers are forced to sell businesses, including healthcare practices, at a significant discount because the buyer can no longer rely on the enforceability of a noncompete provision.
The Bottom Line
Again, it remains to be seen whether the FTC’s proposed rule will go into effect, and even without it, noncompete provisions will continue to be controversial, especially with physicians. Employers should carefully review existing employment agreements to confirm whether they’d still have teeth, and buyers of healthcare practices should ensure purchase agreements contain enforceable restrictive covenants, even if some version of the FTC’s proposed rule goes into effect.
Greg Brown and Ryan Leuthauser are shareholders at Tampa law firm Hill Ward Henderson, P.A., and have experience prosecuting and defending restrictive covenants in Florida and elsewhere. Kevin Paule and Sean Mullen are associates at the same office and regularly advise clients on restrictive covenant litigation and business disputes.