FTC Proposed Rule to Ban Most NonCompetes—Good for Physician Compensation?

By Beth anne jaCKson

If, like many (if not most) physicians in the Pittsburgh area, your employment contract contains a noncompete clause, the recent publication by the Federal Trade Commission (“FTC”) of a proposed rule may bring welcome news – or not. The proposed rule would prohibit most non-compete clauses as being anti-competitive under Section 5 of the Federal Trade Commission Act. But there is a potential trade-off for physicians: lower compensation.

The proposed rule makes it an “unfair method of competition” for an employer to enter into, attempt to enter into, maintain, or lead a “worker” to believe that they are subject to, a non-compete clause. In addition, employers must rescind existing non-compete clauses within 60 days of the publication of the final rule and provide paper or digital (text or email) notice to workers within 45 days of rescinding the non-compete clause. The proposed rule contains specific language for such notice that will act as a “safe harbor” for employers. Interestingly, the term “worker” includes independent contractors. An important carve-out to the rule allows noncompete clauses related to the sale of a business (both stock and asset transactions) as long as the seller is selling all of his or her personal ownership in an entity and, in addition, the seller owns at least a 25% interest in the entity. Also, the proposed rule would not ban non-disclosure or nonsolicitation clauses.

The proposed rule contains a lengthy discussion of the rule and its anticipated effects. The specific effects on physicians is discussed extensively, citing several studies focusing on the relationship between the enforceability of non-competes on physician compensation and health care costs. However, the FTC, while purporting to improve competition for workers, minimizes the potential negative effects on physician earnings and earnings growth. For example, the FTC discussed a study published in 2020 that concluded that the use of noncompetes is associated with greater earnings growth for physicians. This study estimated that a physician with a non-compete clause would have 89% earnings growth over ten years, while a physician without one would have 36% earnings growth over the same period. But the FTC gave this “minimal weight” because correlation does not equal causality. It also discounted the correlation because it fails to take into consideration other confounding factors – “e.g., the value of trade secrets or client attraction, productivity gains associated with training, nearness of potential competitors” – and, further, does not factor in the “baseline effect of enforceability.” If such effect is large, it may, the FTC asserted, increase physicians’ compensation.

Enforceability of non-compete clauses can raise concentration in the health care sector which, under antitrust and basic economic principles, increases prices. The FTC estimated that the prohibition of non-competes against physicians would decrease health care spending by $148 billion annually. It acknowledged that the decrease would stem, in part, from a “transfer from physician practices to consumers.” The FTC did not, however, explain how the health care spending decrease could occur without a decrease in physician compensation,