Non-competes (also known as restrictive covenants) in physician and many advanced practice provider employment agreements have been a mainstay in the healthcare industry. Non-compete enforceability is governed by the states despite the Federal Trade Commission’s (FTC) efforts to all but ban them. The FTC is currently scheduled to vote on this issue in April 2024.
In the meantime, Connecticut is the latest state to expand its own version of a ban in the healthcare sector. SB 9, was passed unanimously by the Connecticut Senate, having been passed unanimously by the House and is awaiting the formal signing into law by its governor. Connecticut already had a law in place which limited the scope of physician non-competes to one (1) year post-termination and a fifteen (15) mile radius from the physician’s primary practice site. Furthermore, the covenant is deemed unenforceable if an employment agreement expires without renewal and the employer fails to make a bona fide offer to renew the agreement on similar terms or if the employer terminates the agreement without cause.
Even then, the covenant is only enforceable under a three-pronged analysis considering whether it is:
(i) necessary to protect the employer’s legitimate business interest,
(ii) reasonably limited in geographic time and scope to protect the employer’s legitimate business interest, and
(iii) otherwise consistent with the law and public policy.
SB 9 expands these current limitations such that for covenants entered into or amended on or after October 1, 2023, the physician must agree to “a proposed material change to the compensation terms” at the time of entering into such agreement or change. This new limitation is also applicable to agreements with advanced practice nurses and physician assistants. The law has an exception for group practices with fewer than 35 physicians where the practice is largely owned by physicians; however, that exception does not apply to the limitation on the enforceability against advanced practice nurses and physician assistants. Thus, the new law essentially requires some additional consideration in the form of compensation in exchange for the physician or advanced practice provider entering into the non-compete. Additional consideration is not a new argument or defense in non-compete enforceability disputes; however, in Connecticut the basic contract law principle is now expressly required putting employers in a more challenging position when requiring non-competes.
Although Ohio has no such ban promulgated into law, Ohio courts use a similar three-pronged analysis in determining whether a non-compete is enforceable. Generally, non-compete agreements are enforceable in Ohio so long as they are proven reasonable by the employer.
That standard is outlined in a 1975 case, Raimonde v. Van Vlerah (42 Ohio St.2d 21, 325 N.E.2d 544 (1975)), in which the Ohio Supreme Court held that a non-compete is reasonable if it:
(i) is no greater than necessary to protect the employer’s legitimate interest,
(ii) does not impose an undue hardship on the employee, and
(iii) is not injurious to the public. Non-competes, even without state laws prohibiting or limiting same, are not invincible. Ohio courts may modify a non-compete that is found unreasonable to the extent that it becomes reasonable after conducting this analysis.
Whether the FTC will pass its proposed rule is unknown having received over 27,000 comments in the public comment period. The FTC cites potential benefits to workers and the economy; business owners on the other hand disfavor the rule citing their loss of a powerful tool to protect their enterprise—the very thing that creates jobs. In the meantime, for health care businesses with providers in multiple states, the management of agreements with restrictive covenants is a not a one-size-fits-all approach. Even if the non-compete provision is standard among providers located in one state, the applicability and enforcement of such non-competes may be different. Connecticut’s new law is just one more reminder to consider as you roll out new agreements and renew existing ones, whether your non-compete provision should be reviewed or revised. Contact me if you would like to have a further discussion about your provider employment agreements.
The information in this article is for informational purposes. It is not legal advice. You should contact a licensed attorney before taking any actions or refraining from any actions based on the information provided here.