Originally published in Utah Physician Magazine June/July 2024
One of the most important considerations for physician employment contracts is the existence and enforceability of any post-employment restrictive covenants. Most physician employment contracts include post-employment covenants that (a) limit the solicitation of patients and co-workers for a year after termination; (b) protect against the unauthorized use or disclosure of proprietary information; and, most importantly, (c) preclude competition within a limited geographic area for a year.
The enforceability of such covenants is generally governed by state law. 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 goodwill, 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 of the employer’s clinic.
Although the validity of noncompete covenants is generally a matter of state law, on April 23, 2024, the Federal Trade Commission announced its final rule on noncompete covenants (“Noncompete Rule”). The Noncompete Rule prohibits employers from entering into noncompete covenants with employees or independent contractors. The Noncompete Rule takes effect 120 days after its publication in the Federal Register. As of this date, the FTC has not published the Noncompete Rule, so it will not take effect for at least another 120 days.
Furthermore, multiple lawsuits have been filed against the FTC to challenge the Noncompete
Rule on the grounds that the FTC lacks the authority to issue such a rule. It is possible that the effective date of the Noncompete Rule will be postponed during the time it is being challenged. Without exhaustively analyzing the arguments against the validity of the Noncompete Rule, it is safe to say that it is controversial and could very possibly be struck down by the federal courts, especially the Supreme Court, which has strongly criticized aggressive rule-making by federal agencies. The FTC’s Noncompete Rule appears to be a prime example of aggressive rule-making by a federal agency.
If the Noncompete Rule comes into effect, it will make it illegal to enter into a noncompete agreement with any employee, and it will also make it illegal to attempt to enforce an existing noncompete agreement unless the employee in question is a “senior executive,” meaning an employee who (a) is in a policy-making position for the business and (b) earns over $151,164 in annual compensation. With respect to physicians, the Noncompete Rule would completely preclude future noncompete agreements and would preclude the enforcement of existing noncompete agreements in the vast majority of cases.
Even if the Noncompete Rule becomes effective, the other variations of post-employment restrictions would still be valid, including nonsolicitation covenants and covenants that protect proprietary information. These other types of post-employment covenants would continue to be governed by state law.
Non-solicitation covenants bar former employees from soliciting their former employer’s customers or employees for a limited period of time. The limited period of time is usually one year in Utah, but it is not unusual to see covenants that extend for as much as two years after the termination of employment.
Usually, the covenant merely bars the former employee from “soliciting” or “requesting” the business of the former employer’s customers or “soliciting” or “offering” employment to the former employer’s employees. But sometimes, these covenants can bar the former employee from “accepting” the business of the former employer’s customers or “doing business” with the former employer’s customers. With regard to soliciting former co-workers, such non-solicitation covenants sometimes bar the former employee not just from “offering” a job to a former co-worker but from actually “hiring” a former co-worker.
Non-solicitation covenants that bar former employees from accepting the business of the former employer’s customers would be problematic in the medical field because of the public policy that patients should be able to see the physician of their choice. However, non-solicitation covenants that bar former co-workers’ employment for a limited time would probably be valid.
Finally, post-employment covenants against the unauthorized use or disclosure of the former employer’s proprietary information are typically enforceable. Such covenants need not be limited to any particular period of time but can remain in effect with respect to any information that continues to be valuable to and kept confidential by the former employer. Such proprietary information typically includes, for physicians, patient lists and contact information, business plans, unique and proprietary business practices, financial information, and so forth. Of course, medical information must also be kept confidential under both state and federal law.
The FTC Noncompete Rule purports to completely ban post-employment noncompete covenants. If it comes into effect, it would effectively eliminate the use of such covenants in physician agreements. Nevertheless, such agreements could continue to include nonsolicitation covenants and covenants that protect proprietary information.
Scott A. Hagen
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).
