FTC's Noncompete Ban: Implications for Physician Practices and Investors
FTC's rule banning noncompete agreements faces legal challenges. Physician practices and investors must prepare for potential implementation, reevaluating contracts and considering alternative strategies.
The Federal Trade Commission (FTC) has issued a final rule banning post-employment noncompete agreements, set to take effect on September 4, 2024. This decision could significantly impact the healthcare sector, particularly physician practices and their investors.
Barbara Sicalides, a partner at Troutman Pepper, notes that the ban is facing legal challenges. On July 3, 2024, the Northern District of Texas issued a preliminary injunction, while on July 23, 2024, the Eastern District of Pennsylvania denied a similar request. These mixed results suggest that a nationwide injunction remains possible.
The rule prohibits employers from restricting employees from taking new jobs or starting businesses post-employment. This ban applies to all noncompete agreements entered into or enforced after the effective date, with limited exceptions for "senior executives."
For physician practices, noncompetes have been crucial for patient retention and recouping investments in training. Emma Trivax, an associate at Troutman Pepper, explains that the rule's definition of "senior executive" is particularly ambiguous in medical settings. While physician partners with policy-making authority might qualify, those with only treatment decision-making power would not.
The rule may also affect buy-sell agreements, common in physician practices. Erin Whaley, a partner at Troutman Pepper, advises that these agreements should be carefully constructed to maximize enforceability under the new rule.
"If the new rule were to go into effect, investors and practices should consider drafting buyout agreements that tie the buyout price to fair market value at the physician's time of departure to maximize enforceability."
While the rule doesn't explicitly prohibit non-solicitation, confidentiality, or training repayment agreements, these could still violate the rule if they functionally restrict employment opportunities. Practices should ensure these agreements are narrowly tailored and reasonably related to actual costs or legitimate business interests.
Given the potential for a new legal landscape, physician practices and their investors should reevaluate existing contracts and prepare alternative strategies. While ongoing legal disputes may delay or prevent the rule's implementation, it's crucial to be prepared for its potential effects on the healthcare sector.
