The Executive Suite: The non-compete ban and healthcare

The Federal Trade Commission (the “FTC”) has banned existing and future non-competition provisions (as distinguished from non-solicitation provisions) for all workers, except that pre-Effective Date (defined below) non-competes for workers who are “Senior Executives” are exempt (the “Ban”). Aside from earning at least $151,164 per annum, a worker must be in a “policy making position” to constitute a Senior Executive. The ban will, absent a judicially imposed stay, become effective within 120 days from 4/23/24 (the “Effective Date”).

The Ban will not apply to non-competes that: arise from a business sale (including partner buyouts and mergers and acquisitions), under certain conditions, or are imposed by a non-profit entity. Although not covered by the Non-Compete Ban, non-solicitation provisions that effectively prevent a worker from securing employment with or forming their business are prohibited by the Ban. Healthcare related businesses, including medical practices and healthcare facilities, will be materially and adversely impacted by the Ban.

We anticipate that the Ban will be a hotbed for litigation. In fact, there are already two pending court challenges that, aside from delaying the implementation of the Ban, may result in a court’s partially/fully striking the Ban or cause the FTC to materially modify its terms. Additionally, some of the terms of the ban, including the definition of “Senior Executive,” the “business sale” exception and the enforceability of non-solicits will be prone to legal challenge.

Compliance with the Ban entails, among other things, an affected entity’s amending its relevant agreements with its workers/owners to remove banned provisions, as well as the provision of notice to affected workers. Also, an affected entity that desires to subject its “Senior Executives” to a non-compete must execute or modify its contracts with such executives before the Effective Date.

Because a non-compete, through both deterrence and compulsion, serves as an anchor for one of the most valuable assets of healthcare entities (i.e., their goodwill), the Ban will render for-profit healthcare entities susceptible to unfair competitive practices by opportunistic employees and competitors. A once-loyal employee of a healthcare entity, who is now a freshly minted free agent due to the Ban, may decide to explore whether the “grass is greener on the other side” by joining/establishing their own competitor organization, after years of cultivation/investment by their former employer. This could result in the exodus of the former employer’s patients/clients, referral sources, workers and other strategic contacts, as they follow that employee to their new place of business, which may be the next door to their former employer.

While non-solicit and confidentiality provisions will continue to have utility for healthcare entities, they do not suffice to stem the ensuing loss of goodwill because of their practical shortcomings. Specifically, a healthcare entity’s patients/clients, referral sources, workers and other strategic contacts may follow the departing employee of their own volition, without any affirmative act by the departing employee. Additionally, it may be difficult, if not impossible, for a healthcare entity to prove unlawful solicitation, absent evidence of solicitation, which may not be obtainable absent expensive and protracted litigation. By the time a healthcare entity secures such evidence, the solicitation will have occurred and the damage will have been done. At that juncture, the benefit of any litigation would be limited to financial damages, as a judge would not be able to reverse the effects of the solicitation by requiring that the solicited person discontinue their relationship with the departing employee or restore their relationship with the former employer. The same issues apply to confidentiality provisions and trade secrets laws.

Ironically, the Ban may actually enable unfair competition in the healthcare industry, largely to the detriment of non-corporate healthcare enterprises. In recent years, corporate medicine, comprised of healthcare system-owned and private equity-owned medical practices, has proliferated in the US. Corporate medical practices have access to funding and enjoy reimbursement rates that are otherwise not available to traditional, physician-owned practices. This enables corporate medical practices to outbid their physician-owned counterparts in a poaching war for goodwill laden employees, as they entice away such employees with offers of higher compensation and better benefits and lawfully siphon off their competitor’s goodwill. Historically, the existence of a non-compete in a target-employee’s employment agreement might have deterred a competitor from aggressively poaching the target-employee.Now, there is no such deterrent.

Even without poaching, the Ban will now avail free-agent employees of the ability to leverage unreasonable (and unfeasible) financial concessions from their employers on the threat of becoming or joining a competitor. Unlike their corporate medicine counterparts, physician-owned practices are less likely to survive the attrition of valuable employees or afford to match the more lucrative terms offered by their corporate medicine counterparts to retain their employees.

To mitigate the potential effects of the Ban, healthcare entities should consider implementing prophylactic measures, such as:

bolstering their IT infrastructure to detect and protect against exfiltration of proprietary information,
entering into or bolstering existing non-solicitation and confidentiality provisions and preparing to combat improper poaching by competitors through the use of pre-litigation cease and desist demands by legal counsel, and
conducting litigation searches on their prospects to determine their litigation history vis-à-vis restrictive covenants.