May 3, 2024
By: Alexander Lebedinski, Esq.Most if not all Physician Employment Agreements and Employment Agreements with mid-level professionals include a number of restrictive covena nts, including a covenant not to compete with the employer, a covenant not to solicit employer’s employees, patients and referral sources, and confidentiality provisions. The non-competes prohibit certain activities (e.g., engaging in the profession of medicine, working for a specific hospital or health system, etc.) in a defined geographic area for a period of time after termination of employment; often, they are drafted to apply in the event of termination of employment by employer for cause or by employee without cause, although some non-competes apply in the event of termination of employment for any reason. Non-solicitation and confidentiality provisions typically apply indefinitely after termination of employment and regardless of the cause of termination. In Michigan, covenants not to compete that protect an employer’s reasonable competitive business interests and prohibit employees from engaging in employment or a line of business after termination of employment are governed by statute and, in general, are enforceable if they are reasonable.1
On April 23, 2024, the Federal Trade Commission issued a Non-Compete Clause Rule (“Rule”) that would preempt the Michigan statute and, with limited exceptions, would render existing non-competes unenforceable and prohibit new non-competes with workers, including those in the healthcare industry. 2 In addition, the Rule would ban overly broad non-solicitation, confidentiality and certain other provisions if they have the functional effect of a non-compete. The Rule would require employers to provide each affected worker with notice that their existing non-compete clauses are no longer enforceable. There are already court challenges to the Rule throughout the U.S., so it remains to be seen if, when and to what extent it will go into effect. However, unless there is a court action that invalidates the Rule or postpones its effective date, the Rule will become effective 120 days after it is published in the Federal Register (which is expected on May 7, 2024). This article prov ides a summary of the main aspects of the Rule, and recommends steps that healthcare providers, employers and workers both, should take to prepare.
1. Non-Compete Clauses
As in all federal regulations, definitions are important. For purposes of the Rule, a “non-compete clause” is a term or condition of employment (which could be a contractual term or a workplace policy) that prohibits a worker, penalizes a worker for, or functions to prevent a worker from, seeking or accepting employment or operating a business after the conclusion of employment.3 A “worker” is broadly defined to include any natural person who is an employee, independent contractor, intern or volunteer, among others, whether paid or unpaid.4
An example of a term that “prohibits a worker” would be a contractual provision in a Physician Employment Agreement stating that, for two years after termination of employment, a physician may not work for a competing medical practice within five miles of the medical practice’s location. Pursuant to the term “penalizes,” the Rule would also apply to terms and conditions that impose adverse financial consequences on a worker, such as requiring to pay a penalty or to forfeit the promised compensation or benefits, including those under severance or separation agreements, as a result of seeking or accepting other work or starting a business after their employment ends.5
Importantly, the Rule would only apply to post-termination non-competes, and would not apply to exclusivity, non-competes and other restrictions that apply during the term of employment, and those types of provisions would be governed by the agreement and other applicable law. Also, the Rule would not apply to non-competes between business entities, but likely would apply to a worker (e.g. a physician who provides medical director services) who agrees to be bound by the provisions of an agreement (e.g., a Medical Director Agreement) between the business entities that contains a non-compete clause.
2. Confidentiality and Non-solicitation Provisions
Although the Rule does not outright ban non-solicitatio n and confidentiality provisions or agreements, it applies a fact-specific approach to determine if these types of provisions or agreements would be too broad and unenforceable as a functional equivalent of a non-compete. For example, the FTC indicated that a confidentiality provision would not be a non-compete where the prohibitions on disclosure do not apply to information that arises from the worker’s general training, knowledge, skill or experience, gained on the job or otherwise, or is readily ascertainable to other employers or the general public. On the other hand, a confidentiality provision could be deemed a non-compete where it covers such a large scope of information that it functions to prevent a worker from seeking or accepting other work or starting a business after the worker leaves a job, for example where it bars a worker from disclosing, in a future job, any information that is “usable in” or “relates to” the industry in which they work. 6
FTC also indicated that non-solicitation agreements are generally not non-compete clauses because, while they restrict who a worker may contact after leaving the job, they do not by their terms or necessarily in their effect prevent a worker from seeking or accepting other work or starting a business. However, a nonsolicitation agreement could satisfy the definition of non-compete clause where it functions to prevent a worker from looking for or accepting other work or starting a business after their employment ends.7
3. Exceptions
A. Senior Executives. The FTC adopts a different approach for “senior executives”: the existing noncompetes (i.e., non-competes entered before the Rule’s effective date) can remain in force, but the new non-competes would be banned. For purposes of the Rule, a “senior executive” is a worker who earns more than $151,164 annually (which amount will adjust from time to time), and is in a “policy-making position,” which is defined narrowly to include a business entity’s president, CEO or any other officer who has the final authority to make policy decisions that control significant aspects of the business entity. 8
B. Sale of Business. The Rule does not affect the enforceability of a non-compete clause that is entered into by a person (e.g., a business owner) pursuant to a bona fide sale of a business entity, a sale of the person’s ownership interest in a business entity, or a sale of all or substantially all of the entity’s operating assets.9 FTC notes that a bona fide sale is one made in good faith as opposed to, for example, a transaction whose sole purpose is to evade the Ru le, and in general is made between two independent parties at arm’s length and in which the seller has a reasonable opportunity to negotiate the terms of the sale.10
C. Existing Causes of Action. The Rule also provides an exception where a cause of action related to a non-compete clause accrued prior to the effective date of the Rule.11 This would include, for example, a situation where an employer alleges that a worker accepted employment in breach of a non-compete if the alleged breach occurred or litigation to enforce a covenant not to compete commenced prior to the Rule effective date.
4. Nonprofit Organizations
Based on its own commentary, FTC lacks jurisdiction over a corporation not organized to carry on business for its own profit or that of its members.12 As such, the Rule may not apply to a charitable, nonprofit organization if there is adequate nexus between the organization’s activities and its public purposes, and its net proceeds are properly devoted to recognized public, rather than private, interests. On the other hand, FTC references a prior action in which it exercised jurisdiction over a physician-hospital organization that claimed tax-exempt status as a nonprofit, and which consisted of a non-profit hospital and over 100 private physicians, because the organization engaged in business on behalf of its for-profit physician members.13
With this in mind, a case by case analysis would be required to determine if a hospital or a hospitalaffiliated organization (e.g., an entity that employs physicians who provide services exclusively at a specific hospital or health system) that is organized as charitable, nonprofit organization would be exempt from compliance with the Rule, and whether the non-compete clauses of the workers employed or engaged by such an organization would be affected by the Rule.
5. Notice Requirements
For each existing non-compete clause that would become unenforceable under the Rule, employers must provide a clear and conspicuous notice to the worker by the Rule effective date that the worker’s noncompete clause will not be, and cannot legally be, enforced against the worker.14 The Rule provides model language for these notices and describes how the notice should be delivered to the workers. Importantly, the Rule requires providing this notice not only to the current workers, but also to former workers who may still be subject to a soon to be unenforceable non-compete clause, regardless of whether the employment was terminated by employer or employee, or with or without cause.
Recommendations
While it is possible that the Rule will not go into effect, medical practices, healthcare facilities, physicians and other healthcare providers should monitor developments that may affect the Rule and prepare to comply with the applicable requirements by the Rule effective date. We recommend the following:
1. For employers who are subject to the Rule:
a. Identify all current and former workers who are parties to employment, independent contractor or other agreements (including non-disclosure, separation, and severance agreements) or policies that include non-compete clauses or other restrictive covenants, and be prepared to provide the required notices to the affected non-senior executive workers.
b. Review and be prepared to amend non-solicitation and confidentiality provisions in existing agreements to make sure they are not overly broad, are reasonably necessary to protect legitimate business interests, and are not a functional equivalent of a non-compete clause.
c. Review and be prepared to amend internal policies and forms of agreements that include non-compete clauses or other restrictive covenants.
d. Review agreements with “senior executives,” and consider amending them to include a noncompete clause prior to the Rule effective date.
e. If a former worker is in breach of a non-compete clause, consider providing a notice of breach to that worker and whether to initiate an enforcement action.
f. Consider whether the Rule applies to your organization if it is organized as a charitable, nonprofit organization.
2. For physicians, mid-level professionals and other workers:
a. Review your agreements with the current and former employers and others for non-compete clauses and other restrictive covenants.
b. Remember that the Rule would not ban or prohibit the exclusivity and non-competition requirements that apply during the term of your employment or the properly structured nonsolicitation or confidentiality provisions and agreements.
c. Although the Rule would not ban enforcement of your existing non-compete clause if you are already in breach, the Rule and the FTC commentary could be used as persuasive authority as to why your non-compete clause may be unreasonable and unenforceable under the Michigan statute.
d. If the Rule becomes effective and your employer is subject to the Rule, expect to receive a notice from the employer that your non-compete clause will not be, and cannot legally be, enforced against you. If you do not receive this notice, consider seeking legal advice.
THIS ARTICLE IS FOR EDUCATIONAL PURPOSES ONLY AND SHOULD NOT BE INTERPRETED OR RELIED UPON AS LEGAL ADVICE. EACH ARRANGEMENT IS UNIQUE AND SHOULD BE REVIEWED WITH THE ASSISTANCE OF COMPETENT PROFESSIONALS.
Alexander Lebedinski is a Chair of the Healthcare Law section at Giarmarco, Mullins & Horton, P.C., a fullservice law firm in Troy, Michigan (www.gmhlaw.com). He concentrates his practice in the areas of Healthcare Law and Business Transactions. He represents physicians, physician group practices, physician organizations, ASCs and other healthcare providers in the areas of federal and state healthcare regulatory compliance, including Stark Act prohibitions on self-referral, the Anti-Kickback Statute and HIPAA, as well as on a wide variety of business, employment and corporate law matters. He can be reached at 248-4577058 or alebedinski@gmhlaw.com.
1 MCL §445.774a
2 https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf
3 Rule, 16 C.F.R. §910.1
4 Id
5 Rule, pages 75 - 77
6 Rule, pages 77 - 81
7 Rule, page 81
8 Rule, 16 C.F.R. §§910.1, 910.2(a)(2)
9 Rule, 16 C.F.R. §910.3(a)
10 Rule, page 342
11 Rule, 16 C.F.R. §910.3(b)
12 Rule, pages 51 - 54
13 Rule, page 53
14 Rule, 16 C.F.R. §910.2(b)