To Ban or Not to Ban Noncompete Clauses?

The Federal Trade Commission has proposed a new rule to ban restrictive covenants, also known as a non-compete clause. While the terms can be negotiated before signing, most all physician contracts include this, which prevents physicians from working within a certain mile radius of the business for X number of years after they leave a job.

According to the Wall Street Journal, noncompetes even ensnare janitors, baristas, schoolteachers, and entry-level workers, not just senior employees like physicians.

How will this impact the labor market?

The FTC's proposed policy on physician contracts and noncompete clauses will have no immediate impact on hospitals. The FTC's new guidance is unlikely to change the way most hospitals' CMGs (corporate management groups) operate their physician recruitment and retention programs, but it does change how some hospitals approach their relationships with physicians.

This is because any current restrictive covenant would be rescinded and unenforceable. The FTC's decision is based on its view that noncompete agreements can be harmful for several reasons:

• They lower wages for employees across the board, for those under noncompete clauses and for those who are not.
• They prevent innovation, collaboration, and novel entrepreneurship.
• They decrease competition for workers.
• They do not reward the most gifted workers.
• They prevent physicians from leaving jobs.

The FTC believes these agreements can limit the ability of consumers to receive medical services from qualified professionals who might otherwise provide them with better care or lower prices than those offered by existing practices in the area, and this could lead to some patients not receiving necessary medical treatment at all because there aren't enough doctors available locally who meet their needs (for example, if there aren't enough pediatricians available nearby).

2020 saw the lowest percentage (49.1%) of physicians working in private practice, with the rest working for hospitals or corporate entities. The COVID-19 pandemic exacerbated this, seeing roughly 48,000 doctors leave private practice. That’s nearly half of the physician workforce that would be suddenly free of any restrictive covenant.

What are the Potential Consequences?

If the FTC passes the ban on noncompete clauses, it could have a significant impact on both workers and employers. According to the Federal Trade Commission, noncompete clauses can be harmful to workers and competition by suppressing wages, limiting job mobility, and blocking entrepreneurs from starting new businesses.

However, if the ban is implemented, it could have negative consequences for businesses who rely on noncompete agreements to protect their intellectual property, trade secrets, and other confidential information. Such businesses may be less likely to invest in employee training and may face increased competition from former employees who are no longer bound by noncompete agreements. 

In the case of physicians, this may mean little to no student loan forgiveness packages, less sponsored CME credits/time, and overall worse benefit packages. 

The FTC's proposed rule could face legal challenges, as it may exceed the agency's legal rulemaking authority under the Federal Trade Commission Act and invade the state provenance of contract law. The U.S. Chamber of Commerce has already considered filing a lawsuit if the proposal is adopted.

Overall, the potential negative consequences of the FTC's proposed ban on noncompete clauses are complex and multifaceted, and it is unclear how the rule would be enforced and implemented if it is ultimately passed.

The Federal Trade Commission (FTC) is an independent agency of the United States government and is responsible for enforcing antitrust laws. The FTC was created by Congress in 1914 to protect consumers, prevent business monopolies, and promote competition. The new policy applies to contracts between physicians and hospitals, health systems, or other entities that employ them as independent contractors.

Click here for more information about antitrust laws and how the FTC governs to support free enterprise and consumers.