Death of the Noncompete?

Last week the FTC announced a proposed rule banning non-compete agreements. You can read the announcement here and the actual rule here. The rule would, if enacted, not just ban all non-competes going forward but nullify previous agreements as well. Non-competes are ubiquitous in medicine and a big factor locking doctors into their jobs, typically by preventing them from practicing in the same geographic region for a period of time after leaving their employer. And, for example, whenever a large organization like an academic medical center or a private equity company buys a practice or otherwise dominates a region, these non-competes form an effective moat against competition by preventing doctors from reorganizing after fleeing.

In some areas/fields, noncompetes are universal and have been functionally unavoidable. Many employers rely on lock-in to mitigate their bad culture and sleazy practices; shifting that power dynamic would I think change things very quickly.

It’s intuitive and straightforward how such a rule would affect employed physicians: you can just quit and hang up your shingle elsewhere. And yes, that means a clinician could join an academic practice for a few years, build up a patient panel, get more comfortable in their skin as an attending physician, and then leave and use that experience as a springboard to a new practice. This is, of course, part of the fear that led to non-competes in the first place. Employers put money into new hires between training, onboarding, early decreased efficiency, marketing, etc. Perhaps in a world without non-competes, employers will be less inclined to invest in their employees; that’s the typical business counterargument. The counter-counterargument also holds water: perhaps, if employers don’t invest in their employees, then their employees will leave. Value shouldn’t be a one-way street.

Too good to be true?

Several immediate reactions have been common. One, that somehow doctors will be exempted because woe is us. Two, that companies will use the magic of lawyers to get around the intent of the law. Three, that practice owners/shareholders (think partners in a large private practice) will be exempted because they are business owners and not employees. Four, that this will be litigated into oblivion.

The announcement had this to say:

Companies use noncompetes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives. In many cases, employers use their outsized bargaining power to coerce workers into signing these contracts. Noncompetes harm competition in U.S. labor markets by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.

So the FTC specifically includes doctors when they think of who this rule will affect.

The language of the rule itself also addresses a few of these concerns:

(1) Non-compete clause means a contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person, or operating a business, after the conclusion of the worker’s employment with the employer.

(2) Functional test for whether a contractual term is a non-compete clause. The term non-compete clause includes a contractual term that is a de facto non-compete clause because it has the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment with the employer.

So, in theory, clever machinations to functionally bind workers without the use of naughty catchphrases would still be against the law. How easy it would be to prove a functional non-compete in court, how expensive and stressful that process would be for an individual worker, and how aggressive companies will be in toeing the line remains to be seen. How desirable/how effective of a deterrent such schemes would be for employers depends on those answers.

There is an exception for business owners:

The requirements of this Part 910 shall not apply to a non-compete clause that is entered into by a person who is selling a business entity or otherwise disposing of all of the person’s ownership interest in the business entity, or by a person who is selling all or substantially all of a business entity’s operating assets, when the person restricted by the non-compete clause is a substantial owner of, or substantial member or substantial partner in, the business entity at the time the person enters into the non-compete clause.

The FTC defines “Substantial owner, substantial member, and substantial partner” to “mean an owner, member, or partner holding at least a 25 percent ownership interest in a business entity.”

By that language, the ban would still apply to a physician owner in a practice of 5 or more people. Your average radiologist whose group sold to private equity, could, after the contract period, turn around and start working for other groups locally. They could, even, start a new group.

Well?

How is this likely to play out? I have no idea. In reviewing the media coverage, the overall consensus points towards the final rule being similar to the proposal, it not being stopped by congress (democrat-controlled senate), and then being litigated immediately. How long it takes to work its way through the courts and its eventual fate I don’t know. I’m sure plenty of lawyer and journalist ink will be spilled when the time comes to predict the outcome, but that is far outside my circle of competency.

For Radiology:

In radiology, the ability to do teleradiology work has taken some of the bite out of noncompetes, but this would still be a massive change for physicians in general. In particular, if the carve-out for owners/shareholders were to stay a similar size, the proposed rule provides a window into how a post-PE world might look for practices struggling after the sale.

No one has poured through every contract out there, but one of the common post-sale questions for the past few years has been: how can we get out of this? Common refrains: the things we were promised haven’t been provided, we can’t recruit, our rads are being poached to help elsewhere in the organizational umbrella, we can’t earn enough with the cut to make this sustainable. What recourse do the doctors who sold a practice have if things aren’t working out post-sale?

If this rule were to come to pass, there would be a light at the end of the tunnel. A failing group post-sale could run out the clock and conceivably form a new group to compete with the shell entity they’d leave behind (though presumably companies would still mitigate competition through non-solicitation agreements, for example). RadPartners and friends would still be buying the profits from your work and the goodwill of your relationships for several years, but the lack of a noncompete would make it impossible for them to guarantee their long-term stranglehold if/when their management fails. They’d have real skin in the game.

In practice, that could easily just hasten a lot more hospital-employed radiologists as institutions look to bring in rads and secure imaging services in this uncertain world. There are certainly groups out there that would rather work for the hospital they’ve been staffing for decades than the PE company they sold to. But even that trend could be temporary if a group of employed rads could then leave and form a group.

Boom.

The dynamism that such a rule enables is the real deal. The bargaining table permutations are infinite, and that’s exactly why the FTC wants to ban noncompetes.