The future of the Federal Trade Commission’s (the “FTC”) final rule banning non-compete agreements between employers and employees (the “Final Rule”) remains in doubt after a series of legal challenges that will, minimally, delay the implementation of the Final Rule; but could ultimately result in the Final Rule being struck down altogether. Unless and until the Final Rule goes into effect, there is no nationwide standard governing the enforcement of non-competes. Rather, the enforcement of non-competes continues to be governed by state law. Nevertheless, the FTC’s position on non-competes could have the ancillary effect of influencing how state judges evaluate the enforceability of such restrictive covenants under existing state law.
An in-depth, state-by-state discussion of non-competes is beyond the scope of this article. However, to the extent a particular state permits non-compete agreements, the onus is typically on the employer to demonstrate that it has legitimate (or protectable) business interest in enforcing the non-compete beyond the desire to simply avoid competition. In the context of healthcare, interests that have been found to justify enforcement include, among other things, protection of the practice’s confidential information, protection of the practice’s patient relationships/goodwill, and the practice’s investment in the employee’s recruitment, education and specialized training.
In addition to the foregoing, a medical practice must show that the non-compete restrictions are reasonably limited to a time and geographic area necessary to protect said interests. With respect to the duration of the non-compete, the court may consider (i) how long it will take the practice to recruit, hire and train a replacement provider and (ii) the amount of time required for the practice to prove to its patients that the practice is able to continue to meet their clinical needs. In evaluating the reasonableness of the geographic scope of the non-compete, the courts may consider the number of patients existing in the restricted area, the practice’s efforts to market its business within said area, as well as the area serviced by the departing provider during the term of his/her employment.
Finally, courts may look at whether the activities prohibited by the non-compete are related to those provided by the former employee on behalf of the practice. For example, if a former employee provided office-based internal medicine services on behalf of the employer, it is unlikely that a court would prohibit the former employee from providing hospitalist services. As such, it is critical that the prohibited activities are limited to the services provided by the former employee on behalf of the practice.
It is important to understand that there is no “one-size-fits-all” non-compete and that reasonableness will be evaluated on a case-by-case basis. With state courts already skeptical of non-competes, especially in the healthcare space, medical practices would be well advised to take a more calculated and tailored approach to establishing their non-competes in light of the proposed Final Rule. Additionally, medical practices may want to consider offering their employees the right to “buy-out” of the non-compete. If you are interested in learning more, please contact Frier Levitt to speak with an attorney today.
