Originally published in Utah Physician Magazine
Earlier this year, I wrote an article for this publication on the topic of the rules that govern noncompetition agreements as applied to physicians, and in particular, the potential impact of a new rule that had been issued by the Federal Trade Commission, which was expected to take effect on September 4, 2024.
That proposed FTC rule would have outlawed virtually all post-employment noncompetition agreements for any employee, let alone physicians. However, it was very controversial because it was an administrative rule on an issue that most observers would agree should be the subject of legislation, not administrative rulemaking. For that reason, the FTC rule was attacked in several court cases, most notably in Texas, and the court in Texas issued a nationwide injunction against the FTC rule in late August. As a result, the FTC rule is no longer at issue, and the enforceability of noncompetition agreements would seem to be a matter of state law that may vary from state to state.
In my article from earlier this year, I gave the following explanation of Utah law on physician noncompetition agreements:
In Utah, post-employment noncompete covenants are enforceable if they are narrowly drafted to protect a legitimate business interest of the employer. Utah courts have identified three legitimate business interests: (1) the employer’s proprietary information; (2) the employer’s good will, meaning customer relationships; and (3) an extraordinary investment in training and education. A noncompete covenant is narrowly drafted if it lasts no more than one year after termination and has a geographic or market-based limitation that effectively limits the scope of the noncompete to be co-extensive with the employer’s legitimate business interest.
In addition, it is generally accepted that for physicians there is an element of public policy that comes into play. That is, the covenant should not have the effect of unduly limiting the access of patients to effective medical care from the physician of their choice. In practice, this means that a noncompete covenant might not be enforceable against a physician if it means patients who want to continue to see that physician will have to travel a significant distance or against a physician who practices in a specialty that is scarce in the community. The vast majority of physician noncompete covenants apply only within a relatively modest radius from the employer’s clinic.
The proposed FTC rule has now been enjoined and will not affect these rules that govern noncompetition agreements in Utah.
However, although the FTC rule at least for now will not come into effect, another federal agency, the National Labor Relations Board, has recently addressed the topic of noncompetition agreements in ways that could affect the use of these restrictions nearly to the same extent as the proposed FTC rule.
The National Labor Relations Board is the federal agency responsible for interpreting and enforcing the National Labor Relations Act, which protects the rights of workers to engage in concerted activity regarding the terms and conditions of their employment, whether that means actually forming or joining a union or simply talking with each other and with their employer regarding employment matters.
In 2023, the General Counsel to the Board issued a memorandum stating her official position that overbroad non-competition agreements violate the National Labor Relations Act because:
Employees know that they will have greater difficulty replacing their lost income if they are discharged for exercising their statutory rights to organize and act together to improve working conditions; employees’ bargaining power is undermined in the context of lockouts, strikes, and other labor disputes; and, an employer’s former employees are unlikely to reunite at a competitor’s workplace, and, thus be unable to leverage their prior relationships – and the communication and solidarity engendered thereby – to encourage each other to exercise their rights to improve working conditions in their new workplace.
Based on this official position, the NLRB has begun to charge employers who use noncompetition agreements with “unfair labor practices” (violations of the National Labor Relations Act) based on their use of noncompetition agreements, and in at least one case so far, an administrative law judge working for the NLRB has ruled that the employer in that case violated the NLRA by requiring employees to sign overbroad noncompetition agreements as a condition of employment.
The upshot of these NLRB actions is that the NLRB is taking a strong position against brought noncompetition agreements that prohibit employees from competing against their employer for a time after the termination of their employment relationship.
Physicians, and employers of physicians, should keep a few factors in mind when considering the impact of these NLRB actions.
First, the NLRB appears to be attacking only “overbroad” noncompetition agreements, not all post-employment restrictive covenants. The NLRB appears to classify as “overbroad” only those noncompete agreements that prevent employees who quit or are terminated from immediate re-employment in the same approximate geographic area. Thus, narrowly drafted non-solicitation agreements that temporarily bar former employees from doing business with their prior employer’s actual clients but allow those former employees to work for other employers in the same area, do not violate the NLRA.
This particular type of restriction will not work with physicians because of the public policy (discussed above) that supports the right of patients to be treated by the physician of their choice. Thus, a non-solicitation agreement that bars a physician from treating (as opposed to soliciting for treatment) the patients from the physician’s previous employment would very likely be unenforceable for that reason, even though it would not violate the NLRA. But a restriction that temporarily bars only the solicitation of patients, would not be overbroad under the NLRA or contrary to public policy.
Furthermore, a physician noncompete that imposes only a temporary (one year) restriction on competing employment within a narrow geographic area, such that a physician could be re-employed within 5 or 10 miles, is likely not overbroad under the NLRA.
Second, the NLRA does not provide any protection to supervisors or managers; it only protects employees. Thus, these NLRB rules would apply only to physician employees; they would not apply to shareholder physicians. Shareholder physicians can be subjected to noncompetition agreements without regard to the impact of the NLRA.
Noncompetition provisions are very common in physician employment agreements. Although the proposed FTC rule that would have completely banned noncompetes is now enjoined from becoming law, these NLRB actions complicate the use of noncompetes almost to the same extent and continue a strong trend against the use of such restrictions. Both physicians and employers of physicians should carefully review any noncompete restriction with legal counsel to ensure the restriction complies not only with state law but also with these potential limitations imposed by the National Labor Relations Act.
About the Author
Scott A. Hagen, JD, is the Chair of the Firm’s Healthcare Law Section and the former Chair of the Employment and Labor Section. His practice includes labor relations, employment litigation, employee benefits (ERISA) litigation, and client representation before administrative agencies. Mr. Hagen has represented management in collective bargaining, labor arbitrations, unfair labor practice charges, representation elections, collective bargaining, and more. He has also been selected for inclusion in the Mountain States Super Lawyers (2007–2020, 2022–2023) Employment & Labor category and listed as one of the Mountain States Super Lawyers Top 100. He has been voted by his peers throughout the state as one of Utah’s “Legal Elite,” as published in Utah Business Magazine (2005–2021)