Non-Compete Agreements Remain a Valuable Business Asset

On April 23, 2024, the Federal Trade Commission ("FTC") announced a new rule abolishing non-compete agreements for almost all workers in the United States, effective September 4, 2024. This rule was expected to have a significant impact on the healthcare industry, particularly for many physicians who were bound by non-compete agreements. However, on August 20, 2024, a Federal Court in the Northern District of Texas issued a nationwide injunction on the FTC's non-compete ban. The Court found that the ban was overly broad and prevented employers from using non-competes in specific cases where they could be necessary.

While the FTC is expected to appeal the Federal Court's decision, non-compete agreements remain legal and enforceable under the same terms as before the FTC rule was announced. The use of non-compete agreements has been extensive in the healthcare system, affecting up to 45 percent of primary care physicians.[1] Given these developments and the pervasiveness of non-compete agreements, employers may want to review their existing arrangements.

A valid non-compete agreement has value while protecting an employer's investment in developing confidential information, training employees, and establishing business relationships entrusted to key employees. Well-drafted non-compete agreements seek to prevent competitors from gaining access to the information and resources that might provide them with an unfair competitive advantage. Non-compete agreements can prevent employees from disclosing trade secrets, client lists, and other proprietary data when their employment ends.

Moreover, a legally enforceable non-compete agreement should satisfy these four requirements:

1. Consideration: Non-compete agreements must be supported by sufficient consideration. Specifically, the employee must receive something of value in exchange for agreeing to the restrictions. Adequate consideration can include offering initial employment, a promotion, or additional compensation.

2. Reasonableness: Non-compete agreements must be reasonable in terms of both their scope and duration. This means the restrictions should not be any broader than necessary to safeguard the employer's legitimate business interests. Trade secrets, proprietary information, and customer relationships are examples of legitimate business interests. However, a non-compete agreement's duration and scope must be reasonable, and exceedingly broad or long restrictions may be unenforceable.

3. Public Policy: Non-compete agreements must not violate public policy. For example, a non-compete agreement may be unenforceable if it unreasonably limits an employee's ability to seek new employment or is against the public interest.

4. Notice: Non-compete agreements must be clear and conspicuous, and employees must be given reasonable notice of the restrictions before entering into them.

Given these four considerations, a non-compete agreement with reasonable terms is likely enforceable. Furthermore, employers must ensure that their non-compete agreement complies with applicable state law. In addition to any relevant state laws, the FTC still has the option to challenge non-compete agreements on a case-by-case basis.

When well-crafted and enforceable, non-compete agreements can enhance a medical practice's valuation. They can reduce business risks and protect revenue and projected cash flow, influencing how a medical practice is valued. Therefore, achieving the right balance in drafting these agreements is crucial to maximizing value and maintaining the medical practice's attractiveness in the market.

[1] The American Medical Association, https://www.ama-assn.org/press-center/press-releases/ama-urge-end-noncompete-covenants-many-physician-contracts, accessed on October 2, 2024.