Policymakers consider changes to non-compete rules

February 27, 2020

"The widely varying enforceability of non-compete clauses or restrictive covenants requires physicians to pay special attention to contract provisions related to compensation as well as competition," writes the AACU's Ross E. Weber.

Based on a partnership with Urology Times, articles from the American Association of Clinical Urologists (AACU) provide updates on legislative processes and issues affecting urologists. We welcome your comments and suggestions. Contact the AACU government affairs office at 847-517-1050 or info@aacuweb.org for more information.

As the physician work force consolidates into hospital and large independent practice settings, laws and regulations that govern professional contracting become increasingly relevant for the individual urologist. One area attracting considerable attention from state legislators and federal regulators is whether a contract may limit the circumstances under which individuals may employ their skill or trade once the contract ends.

The widely varying enforceability of non-compete clauses or restrictive covenants requires physicians to pay special attention to contract provisions related to compensation as well as competition.

Restrictive covenants such as non-compete and/or non-solicitation agreements are generally governed by the laws of the state where the agreement was made. Three states prohibit non-compete clauses in nearly all situations, including those involving health care professionals: California, Oklahoma, and North Dakota. Many more states prohibit their use for lower wage positions.

"For physicians," according to David J. Clark, an employment law specialist with Epstein Becker Green, "there can be an additional level of complexity in the analysis of such covenants, because many states, in light of the unique position the medical profession holds in the public interest, apply special rules to covenants that restrict medical practice."

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A Massachusetts law dating back to 1977 prohibits any non-compete clause that restricts "the right of a physician to practice medicine in a particular locale and/or for a defined period of time." Clark reports that lawmakers in Delaware and Colorado followed suit in the early 1980s, and Rhode Island joined the club in 2016. Texas law, meanwhile, allows physician non-competes as long as the departing physician may: treat a patient through a current illness; access a list of recent patients and related medical records; or buy out the contract at a reasonable price.

During legislative sessions spanning 2019 and 2020, at least nine state legislatures considered outright prohibitions on non-compete clauses for health care providers or limits on their enforceability. In those states where lawmakers seek to simply limit the applicability of restrictive covenants, most nullify any agreement that would impose a restriction based on distance or geographic area (especially if rural).

Still others reject any clause that would prohibit a health care practitioner from treating a prior patient. While most proposals apply to any entity that contracts with a health care provider, one measure in Missouri would apply only to agreements between a nonprofit health system and a provider.

Two bills progressing through the Indiana General Assembly are indicative of those being considered nationwide. Senate Bill 243 simply states that employment contracts may not contain a non-compete agreement. House Bill 1115, however, establishes several requirements for an enforceable non-compete agreement, including:

• Employer must notify patients seen by the departing physician during the 2-year period preceding the termination of employment or expiration of the contract.

• Employer must provide current or last known contact and location information to a patient seen or treated by the departed physician.

• Physician must be given an option to purchase a complete release from the terms of an enforceable non-compete agreement at a reasonable price.

• Medical records must be provided to the departing physician in a widely acceptable format.

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The federal government is likewise interested in non-compete clauses as it relates to antitrust enforcement. Indeed, both the Federal Trade Commission and Department of Justice Antitrust Division recently examined whether there is sufficient legal basis to issue rules that would restrict the use of non-compete clauses in employer-employee contracts. A bipartisan group of U.S. senators demonstrated support for FTC engagement, stating in a comment letter that "the FTC should act to limit the use of non-compete clauses. Reducing the use of non-competes would allow workers to get better jobs, boost wages, increase entrepreneurship, and spur innovation."

On the other hand, during a Jan. 9, 2020 FTC workshop, some panelists pointed to physician practice groups as an example where non-compete clauses may benefit the economy. A study found a 17% increase in revenue per hour and increased physician wages in practices utilizing non-compete agreements.

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Policymakers at the state and federal levels are taking action to balance legitimate justifications for restrictive covenants, including partnership arrangements, with a strong desire to apply free market principles in employment matters. As such, it is vitally important that physicians track these activities that may impact how or where they will practice medicine as consolidation drives more and more providers to employment.

As Washington state urologist Jeffrey Evans, MD, notes, “If an employed physician is not satisfied, or finds a better opportunity, they should not be forced to leave their home (state) to find better employment."

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