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The FTC’s Noncompete Ban: How Does It Impact Physicians and Medical Groups?

By Vincent N. Buttaci, Esq. and Ilana P. Char, Esq.

Noncompete provisions have long been staples of physician employment agreements in the State of New Jersey. With the increasing consolidation of physician practices fueled by private equity and hospital-affiliated medical groups, the geographic scope of noncompete provisions affecting physicians has increased exponentially over the past few years. What was once the common ten-mile restriction from a single practice office for a period of one year has morphed into a ten-mile restriction from multiple practice offices throughout the State. Given the reach and size of these large multi-specialty medical groups, it is now common for physician employment agreements to functionally ban a doctor from working across nearly the entire State and across state lines both during the doctor’s employment and for a period of years thereafter.

However, the days of such expansive noncompete provisions may be numbered barring a successful court challenge. On April 23, 2024, the Federal Trade Commission (“FTC”) adopted a Final Rule prohibiting most employers from maintaining or enforcing post-employment noncompete provisions against employees or independent contractors. The Final Rule will become effective 120 days after its publication in the Federal Register. Once effective, it stands to reshape the physician job market and impact how medical practices maintain their workforce, as well as their competitive edge over rival entities.  

To whom does the Final Rule apply?

The Final Rule applies to for-profit businesses in the private sector and, in limited circumstances, to non-profit businesses.[1] In the healthcare context, this would likely mean that a non-profit hospital could continue to enforce and execute noncompete provisions against physicians directly employed by the hospital, as it would not be subject to the Final Rule unless otherwise determined by the FTC. However, hospital-affiliated physician groups would no longer be able to enforce noncompete provisions under the Final Rule if that physician group is a for-profit entity.

What types of non-compete provisions does the Final Rule prohibit?

The Final Rule (1) bans all noncompete provisions executed after the Final Rule’s effective date; and (2) renders existing noncompete provisions unenforceable, except for noncompete provisions entered into by “senior executives.” A “senior executive” is a worker who was in a “policy-making position” who had a total annual compensation of at least $151,164 during the preceding year. Pursuant to the Final Rule, a person is in a “policy-making position” if that person has “final authority to make policy decisions that control significant aspects of a business entity . . . and does not include authority limited to advising or exerting influence over such policy decisions or having final authority to make policy decisions for only a subsidiary or affiliate of a common enterprise.”

Accordingly, after the effective date of the Final Rule, a preexisting noncompete provision cannot be enforced against a physician if the physician (1) does not make at least $151,164 per year and (2) does not have final authority to make policy decisions that control significant aspects of the business entity. Practically, the more ownership interest and management authority a physician has over a practice, the more likely that the physician will still be bound by the noncompete provisions in his or her employment agreement.  

For existing noncompete provisions not entered into by a “senior executive,” the Final Rule requires employers to notify workers in writing that the worker’s noncompete will no longer be legally enforceable.

The Final Rule also makes an exception for noncompete provisions entered into as part of a bona fide sale of a business. Under the Final Rule, noncompete provisions “entered into by a person pursuant to a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets” are enforceable. This applies regardless of the size of ownership interest or size of the transaction. This is a departure from the Proposed Rule, which only allowed an exception for noncompete provisions entered into by business owners, members or partners holding at least a 25% ownership interest in the business. Accordingly, a noncompete provision contained in an asset purchase agreement or equity purchase agreement in the sale of a physician practice would still be enforceable under the Final Rule.

Are other contractual provisions restricting former employees covered in the Final Rule?

The Final Rule prohibits noncompete provisions—not other types of contractual provisions restricting what a worker may do after leaving their job, such as non-disclosure agreements (“NDAs”) and non-solicitation provisions. Further, the Final Rule does not prohibit provisions limiting an employee from seeking concurrent employment or engaging in competing outside activities while actively employed by an employer. By way of example, a provision in a full-time physician employment agreement which requires the doctor to devote all of his or her professional time to the employer practice during the doctor’s employment would remain enforceable.

The Final Rule defines “noncompete provisions” as a contractual term between an employer and a worker that prevents the worker from (1) “seeking or accepting work in the United States;” or (2) “operating a business in the United States.” Existing NDAs and non-solicitation provisions can remain in place, and employers can continue to include them in employment agreements provided they are reasonable. By way of example, an NDA or confidentiality provision in a physician employment agreement that prohibits the doctor from sharing certain confidential and proprietary information of the employer medical practice including business records, financial data, marketing plans, contracts, patient lists, and patient records would remain enforceable under the Final Rule. So too would a non-solicitation provision in a physician employment agreement that prohibits a doctor from directly soliciting the patients of his or her former employer medical practice for a reasonable period of time.

How will legal challenges impact New Jersey medical practices?

Even if the Final Rule is challenged in court, it is possible that New Jersey will enact analogous state law similarly banning noncompete provisions within the State. The Final Rule preempts “inconsistent,” or less restrictive, state law with respect to noncompete provisions. However, the Final Rule does allow states to pass equally as restrictive or more restrictive state laws prohibiting noncompete provisions. This presents the New Jersey legislature with the opportunity to pass its own version of the Final Rule. Notably, the New Jersey Attorney General was one of seventeen state attorneys general that submitted comments in support of the Proposed Rule to the FTC.

It is probable that the Final Rule will face legal challenges and could be stayed pending the outcome of that litigation. However, litigation of the federal rule will not impact an analogous state law. Therefore, an analogous New Jersey noncompete law would remain in effect even if the Final Rule is stayed.

Buttaci Leardi & Werner will continue to monitor the situation and will provide updates as more information becomes available.

[1] The Final Rule applies to for-profit business and to non-profit businesses within the FTC’s jurisdiction. At present, it is unclear the extent to which the FTC has jurisdiction over non-profits. The FTC argues that simply because an entity “claim[s] tax-exempt status in tax filings does not mean that the entity is not carrying on business for profit in practice. Non-profit businesses will have to perform a comprehensive analysis to determine whether they fall within the FTC’s jurisdiction and thus, whether they are subject to the Final Rule.

  • Posted on: Apr 26 2024