Non-Compete Employee Worker Jail Trapped from Hiring Accepting New Job Words 3d Illustration

A Physician Non-Compete is Unenforceable If There Is No Legitimate Business Interest

Physicians frequently are required to sign non-compete agreements.  The enforceability hinges on several factors or elements, as discussed previously in our Primer on Physician Non-Competes.  The hospital or association must prove that it has a legitimate business interest to protect via the non-compete.  Absent that proof, the non-compete is not enforceable.

Read on to learn more about the requirement of a “legitimate business interest.”

 

What Is a Legitimate Business Interest that is Protected By a Physician Non-Compete?

To stand up in court, an enforceable non-compete must protect a legitimate business interest of the employer.  Usually, that “business interest” is confidential information used by the physician and anything relating to relationships with patients.  Patients are the true asset of a medical practice since they are the primary source of revenue for the practice.  Therefore, the “legitimate business interest” is any connection to those patients and potential patients.

When a physician finally completes the many years of required education, he or she is an unknown quantity.  If the physician starts from scratch and builds a medical practice, it takes years to build a reputation in the community, to spread the word that this practice is where patients should seek their medical services.  An established practice does not want a physician to depart and set up his or her own practice down the street, reaping rewards that the practice spent many thousands of dollars and countless hours to build.  That is the purpose of the non-compete, to protect that interest.

A legitimate business interest usually falls into three categories:

  1. Confidential Information: This includes trade secrets, business plans, and client or patient information.  For physicians, this can mean anything from patient health information to healthcare product designs and innovations to practice management and marketing strategies.
  2. Specialized Training: If the hospital provided unique, valuable training that you would not get elsewhere, the hospital has an interest to protect its investment.
  3. Customer or Patient Relationships and Goodwill: A hospital’s main interest is protecting its patient base.  If patients associate their care more with the hospital than with an individual doctor, this likely is a protectable interest.  Also, the hospital’s image throughout the community is an important interest to protect.

If a hospital or healthcare entity uses the same language in all non-competes but only enforces it for some departing physicians, it shows that the business interests or goodwill aren’t crucial enough to protect.  This selective enforcement can be evidence against the hospital’s claim of a legitimate interest.

If a non-compete aims to protect these interests, it must be narrowly tailored.  Broad restrictions that limit a physician’s ability to work without clearly protecting these interests are often unenforceable.  And the hospital or clinic has a legal duty to take steps to protect its business interests.

 

When Does a Legitimate Business Interest Affect Physicians Trying to Leave a Practice?

A legitimate business interest affects physicians trying to leave a practice when it directly involves any of the three categories mentioned above: protecting patient relationships or goodwill, trade secrets, or confidential information.  For example, I had a client who sought my advice on whether joining an association that provides medical care for uninsured low-income individuals would violate his standing non-compete agreement.  This association, focused on serving the uninsured and underprivileged, did not compete with his former hospital, which catered primarily to insured patients.

In this scenario, the hospital has no legitimate business interest to stop the physician because there is no overlap in patient bases or direct competition.  The hospital cannot claim a loss of business or goodwill since the association serves a different demographic and does not threaten the hospital’s patient base or revenue stream.

This case highlights the importance of understanding the specifics of any non-compete agreement and the true business interests it claims to protect.  Non-competes should be evaluated on whether they genuinely safeguard the employer’s confidential information, investment in specialized training and goodwill, or patient relationships.  If the non-compete restricts a physician’s ability to work in an entirely different segment of the healthcare market or patient base, it is likely unenforceable.  Therefore, physicians should consult legal experts to interpret their non-competes and ensure that  their rights and career mobility are not unfairly restricted.

 

How Does the New FTC Non-Compete Ruling Impact Physicians?

The Federal Trade Commission has issued a final rule banning non-compete agreements nationwide, with limited exceptions for senior executives.  The new rule aims to enhance competition, protect workers, and stimulate innovation.

The FTC’s new ruling on non-competes has significant implications for physicians.  The ruling aims to limit the enforceability of non-compete agreements that unfairly restricts mobility and career growth.  Until the FTC’s final rule goes into effect, non-competes, particularly those that are broad and not narrowly tailored to protect legitimate business interests, should be scrutinized because they may be unenforceable.

It is important to note that the Final Rule was published in the Federal Register on May 7, 2024, and will become effective on September 4, 2024.  The Final Rule differentiates between non-compete agreements signed before the effective date (“existing agreements”) and those established after (“new agreements”).  The rule broadly prohibits employers from entering into new agreements with workers.  Non-competes will be banned entirely.  The rule invalidates existing agreements after the effective date except those signed by senior executives.

The FTC new rule will free physicians from the chains of non-compete restrictions.  Any existing non-compete agreements that physicians have signed will become unenforceable after the rule’s effective date.  The rule will provide physicians:

    • Job Mobility: Physicians will have greater freedom to change employers or start their own practice.
    • Competition: Greater competition among healthcare providers is expected, which may lead to improved patient care and innovation.
    • Employment Negotiations: Physicians entering new employment contracts will not face non-compete restrictions, giving them more leverage in negotiations.

The new FTC ruling signifies a shift towards greater freedom for professionals, allowing them to move between practices without fear of legal repercussions.  With a thorough understanding of the rule, physicians can ensure they are well-positioned to benefit from these changes once the rule becomes effective.

Note that at least one large corporation has filed suit in federal court to prevent the FTC’s final rule from going into effect, and the national Chamber of Commerce has stated that it, too, will file a lawsuit.  It remains to be seen whether physicians and other workers will reap the benefits of the new rule banning non-competes.

 

Contact an Expert.

Physician non-competes must protect a hospital or associations’ legitimate business interest to be enforceable.  If your move doesn’t threaten the hospital’s patient base, specialized training, or confidential information, the non-compete might unenforceable.  If you want to know whether or not your non-compete is enforceable or you have questions about the FTC’s new rule, feel free to contact Gardner Employment Law.

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