The FTC’s proposed rule banning non-compete agreements has major implications for the health care industry. Rick Dagen, Partner, Axinn Veltrop & Harkrider LLP and former FTC Assistant Director, speaks with Steve Vieux, Senior Counsel, Bartko Zankel Bunzel & Miller and former FTC attorney, and Ann Bittinger, physician employment agreement attorney at Bittinger Law Firm, about what health lawyers need to know about the proposed rule and its potential impact on their clients. They discuss the elements of a non-compete section of a physician employment agreement, the content of the proposed rule, recent DOJ and FTC enforcement, state law preemption issues, enforcement on nonprofit health systems, the AHA’s comment, and what health lawyers should do to prepare for the possible implementation of some version of the proposed rule. From AHLA’s Antitrust Practice Group. Sponsored by Axinn.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
The FTC’s proposed rule banning non-compete agreements has major implications for the health care industry. Rick Dagen, Partner, Axinn Veltrop & Harkrider LLP and former FTC Assistant Director, speaks with Steve Vieux, Senior Counsel, Bartko Zankel Bunzel & Miller and former FTC attorney, and Ann Bittinger, physician employment agreement attorney at Bittinger Law Firm, about what health lawyers need to know about the proposed rule and its potential impact on their clients. They discuss the elements of a non-compete section of a physician employment agreement, the content of the proposed rule, recent DOJ and FTC enforcement, state law preemption issues, enforcement on nonprofit health systems, the AHA’s comment, and what health lawyers should do to prepare for the possible implementation of some version of the proposed rule. From AHLA’s Antitrust Practice Group. Sponsored by Axinn.
To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.
Support for A H L A comes fromen, which brings unmatched depth in the skills needed to address healthcare, collaboration and competition. They are one of the best known antitrust firms in the world with more than 60 full-time competition lawyers. They represent companies across the healthcare universe and help clients avoid antitrust landmines, complete mission critical deals, and protect their interests and litigation and investigations. For my information, visit axon.com.
Speaker 2:Uh, hello everybody. Uh, this is Rick Dagan. Our topic for today is the FTCs proposed rule banning employee non-compete clauses. I'm a partner at the law firm of Axon, Vero, and Har writer. I'm very pleased on behalf of Aon to be sponsoring, uh, this podcast. Um, I've got two people with me, uh, who all introduce themselves in a moment, Anne Bittenger and Steve Year. Um, but, uh, as for myself, I was at the Federal Trade Commission for over 20 years, including as assistant director for the Anti-Competitive Practices Division, and served as council to the Bureau director, uh, bill Bear. Uh, since joining Axon, I've been active in many areas, including the healthcare sector, including representing the University of Pittsburgh Medical Center in Antitrust Matters. Uh, and why don't you take, uh, take it over.
Speaker 3:Hi, this is Anne Biter with the Bittenger Law Firm in Jacksonville, Florida. I'd like to start off by saying I am not an antitrust expert, but what I am an expert on, uh, are non-compete agreements between physicians and their employers. So that's the perspective that I'm gonna be, uh, speaking from today. I've been representing physicians and physician groups for about 25 years now. I chaired the a H L a's Physician Practice Group, and I served on their board of directors. So I, I look forward to sharing that perspective with you all.
Speaker 4:Hi, good afternoon, or good morning. I'm on the West Coast. Um, my name is Steve Yu. I'm an attorney with the law firm of Barco Zekel Bun and Miller in San Francisco. Um, I provide litigation counseling services to clients in various industries in the areas of antitrust privacy and consumer protection, uh, before entering private practice. Um, I actually overlap with Rick at the Federal Trade Commission, where I was a leading attorney in the FTCs Bureau of Competition, um, especially focusing in, um, antitrust investigations, litigation policy initiatives concerning the healthcare sector.
Speaker 2:Thank you. And in Steve, uh, we're gonna try to have a conversation here today, uh, for the benefit of our listeners. Um, before we begin, just posing an obligatory disclaimer that the views that each of us express our own and not those of any of our clients or our firm's clients. So with that, uh, the plan is to kind of walk through the FTCs proposed rule. Uh, what exactly are covenants not to compete, how we got here, the rule making process, and some takeaways. Um, so just for some background, on January 5th, the FTC proposed a, uh, rule that would broadly and categorically prohibit non-competes and rescind existing non-competes between employers and employees. Uh, the proposal was adopted on a three to one vote. Uh, three Democrats, one Republican dissent, uh, Christine Wilson. Uh, of note, uh, Christine has now resigned, uh, in protest of this and other actions, um, by the, uh, by Chairman Kahn of the FTC and the Democratic majority. Um, at a general level, the f TC estimates this may impact this rule, proposed rule may impact as many as one in five workers and increased workers, uh, earnings by between 250 and 300 billion per year. In terms of the healthcare sector, the FTC estimates 148 billion in savings on healthcare spending. Um, the definition of the non-compete clause in the FTCs rulemaking is any contractual term between an employer and a worker that prevents the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker's employment with the employer. It also includes any provision, however, labeled that has the same functional effect, such as a non-disclosure agreement that is so broad that it effectively prevents the worker from working in the same industry after leaving the employer. And we'll talk about that as we proceed. Um, and, uh, just to kind of level set everyone, can you tell us a little more from a practical perspective, what a covenant to compete, not to compete is, and, uh, how prevalent that is and how often you see it?
Speaker 3:Oh, you know, I spend my days, um, reviewing physician employment agreements day in and day out, and, um, it is rare that I see a employment agreement that does not have a non-compete in it. Um, certainly certain states where they're prohibited, like California, I would be shocked if I saw one. But in the states where they are legal, just about every employment agreement has some sort of a non-compete in it. And by, by non-compete, I mean an explicit provision in an employment agreement. Uh, sometimes they're in a separate document, but typically if they're separate, um, we might have issues of, um, contract consideration. Um, so, you know, usually it's typically housed in the employment agreement and it prohibits the physician from competing with his or her employer, usually based on three elements, geography, time and services. As to geography, um, there are many flavors of ice cream in this ice cream shop. Um, oftentimes, perhaps most of the time we drop a pin at one or more locations that are pertinent to the physician services. So we might drop a pin on a, their primary practice location, and that might be capitalized in a defined term, and the prohibited area might be five miles from each practice location. Um, there are some health systems that, um, drop that pin on each and every practice location within that health system. So you can imagine if you're, um, working for a system that has primary care in a five county area, like a few systems here in Jacksonville, Florida, do, um, you are commuting over an hour, you're probably moving, you're probably moving three counties away. Okay. Um, big disruption to family to practice, and patients are absolutely not gonna follow you. Um, sometimes it's counties, so I might see, um, you know, the five counties listed. I might see zip codes. Um, but typically there's some definition as to the geography switching over to time. Um, I almost always see two years, uh, I'm gonna speak here today a little bit about Florida's statute on non-competes in particular. Um, they're basically presumed, uh, enforceable, uh, if they're up to two years, but not exceeding two years. So in Florida, typically I see two year non-competes. Often we see one, but I always tell people, you know, once your relationship with your physician, between the physician and the patient is broken, patients usually find a new physician. And so whether it's six months or two years, it probably doesn't matter. So, for example, when I'm negotiating these for a physician who's joining a, a group or a system, I don't usually negotiate the time, cuz frankly, a physician can't sit out for a year and the, the patients would've found somebody else anyway. And then finally, as to the services, um, boy, this can be really broad, and I think as you can imagine, I, you know, I mentioned as to the broadness as to geography in some cases. And, and now as to the broadness of services because, um, drafters of these have have thrown such a broad net, um, and made'em so, so broad. Um, I think that's why the bad taste is in the mouth here, um, in the healthcare community about this. But usually it's as to services as broad as practicing medicine. So physician cannot practice medicine within five miles of her practice location, uh, for two years would be a typical, uh, prohibition. And, um, it can be as broad as any activity competitive with the employer. Um, but most of the time it's usually what their specialty is. So an endocrinologist would be, endocrinologist cannot practice endocrinology wi within the 3 22 0 2 zip code for two years, something to that effect. Um, and then because nothing can be simple as to competitive activity, right? It's very frequent in this day and age that we'll see carve outs for private practice. And, um, keep in mind that I speak from an era of consolidation for the last dozen or so years in healthcare where so many physicians sold their practices and brought their patient populations with them to a big health system and are now employed by big health systems. Um, the health systems just don't want the physicians jumping ship and go into the competitor health system, um, across town or maybe across the street or, or, you know, across the freeway. Um, so we often see exceptions for physicians in private practice, especially if they'll still pay rent in the medical office building and admit their patients to the health system. So they usually have to maintain medical staff privileges. But that is what my typical two to three page non-compete looks like in a 20 page physician employment agreement.
Speaker 2:Thank you, Anne. Um, so we've talked a bit about, a little bit about what a covenant not to compete is. Um, this is different, Steve, isn't it, than the, uh, what's been going on at DOJ recently in terms of their enforcement actions?
Speaker 4:Yes, that's correct. Uh, thanks Rick. Yeah, the DOJ enforcement actions, those deal, we don't try, often calls are often called, um, cases dealing with non-solicitation agreements or so-called no poach agreements. Um, those involve agreements between different companies, different employers, um, not to hire certain employees, not to compete, um, in a sense in the labor market, um, for valued employees. So those are very different than what we're talking about here. What we're talking about here is actions by one firm, one employer, um, to prevent, um, its employees future, um, former employees from eventually going to a competing, um, employer, um, to help that employer compete against them. Um, the cases that the doj, uh, has handled, uh, more recently in the past with great fanfare, the criminal cases, uh, cause can remember the DOJ and ftc, they share antitrust of authority. However, the DO OJ has criminal jurisdiction, whereas the FTC only has civil jurisdiction. But the goj criminal cases, um, have dealt with agreements, uh, among competing employers. The these non-solicitation agreements, these non potent agreements, um, and many of them have been in the healthcare arena. Uh, for example, the DO DOJ antitrust division secured the first criminal conv conviction, um, in this area, um, in November in district court, in federal district court in NE in Nevada, this past fall against a healthcare staffing company called V D A L L C. Uh, but basically that company pled guilty to agreeing with, uh, competing employers, um, other staffing companies, um, to agreeing among each other to allocate, allocate, um, certain nurse employees amongst each other, and also to fix wages that they would p pay, um, these nurses. Um, this is on the heels of the DOJs unsuccessful, uh, cases, more recent unsuccessful cases alleging the same conduct in other, um, federal district courts, one of which was against the diocese provider, um, DaVita.
Speaker 2:Thanks. So, um, that was kind of, uh, we've kind of gone through the background now. Um, somewhat, I'd like to go back to the proposed rule. Um, so there are certain provisions we talked about, what it does cover. Um, one of the exceptions is that it does not cover, um, sale of a business under certain circumstances where, uh, person involved in the sale owns more than 25%, uh, provisions in the notice, again, which is subject to change. We'll talk about that. Uh, if you have an existing, it's not just perspective. If you have an existing covenant not to compete, it needs to be withdrawn, uh, rescinded within a hundred and day, 180 days after the final rule is published. They also have to give notice to your employees that they can't be subject to, uh, covenant not to compete. Um, procedurally before the, um, before the rule would go final, there's a comment period, um, required by law. Originally it was 60 days, uh, just this week after numerous requests for an extension. The commission a couple days ago, granted an extension till, uh, April 19th for comments. Um, the comments I looked yesterday were over close to 9,000 comments and counting. There are hundreds seemingly coming in every day. Um, February 22nd, uh, just a little while ago, there was a comment from the American Hospital Association, which, um, uh, we may have time to discuss a little later, uh, significant, uh, 18 page, uh, comment into the commission. There are comments coming in from individuals, organizations, economists, lawyers. So it's worth, uh, worth taking a look through those if you have time. Um, Steve, going back to you, um, can you give us some background as to, um, what led up to the issuance of this proposal? What's been going on, for example, in the Biden administration, et cetera?
Speaker 4:Okay. Well, starting with the Biden administration, but this even goes beyond, um, even before the Biden administration, but more recently, the Biden administration. Um, as part of its economic agenda, there's been a renewed focus on competition and antitrust. They even have, I'm in the White House as part of the Economic council, uh, a staffer focusing on competition issues. And Le Liaison is in between the different agencies, um, that have some, um, you know, role in competition and antitrust issues. Um, and, you know, this co this competition antitrust agenda, um, as part of their broader economic agenda in terms of, you know, improving the economy and, you know, what they would believe, you know, making a fairer marketplace, uh, for consumers and workers. Um, as you know, we've seen it in big tech as it relates to consolidation in big tech. We've seen it in agriculture, um, in, um, issues dealing with transportation, air, plant planes, but also they, part of their agenda is labor market competition. Um, and that, of course, the le the concern there is dealing with the quote unquote buying powers, uh, buying power of employers, especially larger employers and heavily concentrated industries. Um, and this ties into, uh, certainly the political agenda of folks on both sides of the aisle. Uh, you know, in America we're dealing, or in the world we're dealing with rising wage inequality. And of course, you know, in the proposed rulemaking, they cite to this data. Um, but, you know, they would cite to data showing that, um, you know, wages, there could be some, uh, uh, there could be an effect on wages increasing a salary of certain, um, employees. If you, um, got rid of many of these, um, non-compete agreements, especially as it relates to not folks like Anne's clients, sort of folks that Anne's clients are concerned of, but especially when you look at NA competes dealing with lower wage and unskilled workers, um, which a lot of like the class actions, you know, we look or attorney general state attorney general actions, you know, the Jimmy John's case, for example, dealing with fast food workers. Uh, and part of this focus on labor competition, not only has it dealt with non compete, as I mentioned before, is also concern about agreements between, um, employers, between companies as it relates to not poaching, um, employees from each other or even agreeing on a wage fixing, which is treated just as you would treat a naked price fixing or market allocation or bid rigging agreement. That's why the doj, um, Dave engaged with criminal actions during that area. But, um, there's been a focus on those types of issues in terms of labor market, labor market competition. Um, also the F T C recently we a memorandum of understanding with the National Labor Relations Board, um, which they'll be sharing information, um, cooperating on initiatives, uh, dealing with increasing labor market concentration, um, certain employment contract terms such as NDAs, noncompetes, what we're discussing today, and labor developments in the quote unquote gig, um, sector. And that recently, um, I also want to point out that the ftc, um, has actually recently engaged in, um, enforcement actions concerning specifically Noncompetes. Um, and the interesting thing about this pair of enforcement actions is that one deals with, um, you know, what I mentioned before, you know, more lower wage unskilled workers. The other, um, pair of enforcement actions deal with what would be highly specialized, um, workers. Um, one case deals with security guards in Michigan. Uh, just recently the FTC took action against Prudential, a Michigan based security guard company and its own owners, alleging that the company uses non-competes against its workers security guards employees that was coercive, um, and unfair. And that resulted in an order in which the company had to cancel its non-compete agreements and also give notification, um, to workers and former workers that those noncompetes were void will void. Similarly, at the same time, concurrently the FTC engaged in actions against Owens, Illinois and the rda, well, if I'm not pronouncing that right,<laugh> against the use of non-competes by these firms. Um, and these firms are, are active in the highly concentrated glass manufacturer, or what the FTC would describe as highly concentrated glass manufacturing sector. This dealt with noncompetes, um, entered into and imposed on highly specialized and skilled, uh, workers. And similarly, the FTC reached a consent order, which canceled these noncompetes, um, and other parts of the relief, uh, required that, uh, the companies give notice to their workers that those noncompetes are unenforceable and are now void. So the FTC has been very active in this area, uh, even beyond noncompetes or, um, the, what the DOJ is doing with wage fixing or non-solicitation agreements. Um, even in mergers, the FTC is looking at labor issues, for example, recently, um, as part of its agreement with, um, seven 11, with part of its a agreements to allow 7-Eleven to proceed with its acquisi acquisition of marathons. Um, Speedway, um, locations of the F T C required that seven 11, um, not enforce the noncore noncompete agreements against any franchisees or employers working or doing business with an asset that was di divested as part of that merger. Um, the FTC similarly, um, early last year in order to let DaVita the kidney dialysis provider to let it proceed if its acquisition of, um, dialysis clinics from the University of Utah, um, the commission required that the dialysis that Dr. DaVita, um, excuse me, be prohibited from enforcing or entering into non acre, uh, non-compete agreements with, um, university of Utah, um, physicians employed, e employed at the University of Utah Clinics. So this is part of a larger, uh, policy initiative that the FTC and the DOJ and even the White House, um, is engaging on in terms of what they would perceive as assisting American workers.
Speaker 2:It's interesting you just described a fair number of kind of case by case, um, enforcement actions by the ftc, which is the traditional manner in which the FTC has addressed unfair methods of competition, which is where this rule is based in prohibiting unfair methods of competition. This rule, though, is very broad, goes well outside of the way. The commission has, uh, traditionally addressed these sorts of things as witnessed by what you just went through, um, and tried to take on basically the entire, uh, entire economy in terms of these, um, these covenants not to compete. And it kind of reminds me, I think what Anne, you just said in terms of Florida, um, there's certainly arguments, uh, have been around for a long time as to the pro-competitive benefits, and there obviously can be anti-competitive benefits, but certainly states, California on one hand, Steve, you mentioned earlier, prohibits them. Totally. Um, Ann, could you talk a little more about, uh, Florida statute?
Speaker 3:Absolutely. Florida has a really interesting combination of, um, statutory and, um, case law in this area. And I wanna start with case law. Um, I represent physicians for the most part. So I am often citing the Tamala case. And it's, uh, physician named Tamala in a little town called Lake City, um, out, out we, uh, west of here of, of Jacksonville. And Dr. Tamala was working for Florida Hematology and Oncology, and he left and he opened an office, basically right across the street. And what Dr. Tamala did that was fascinating and that the Florida Appeals Court upheld was that he refused to see any patients who were seen previously by Florida Hematology and Oncology. So we see here a factual example of the distinction between perhaps pirating or poaching, pirating and poaching or competing, right? A li a little bit different there. Um, that did not absolutely get blessed by the Supreme Court of Florida, but they didn't strike it down either. Um, and what's interesting in Florida, be in light of that case law, um, is going back to the our statute, which, um, says that, um, enforcement of contracts that restrict or prohibit competition, uh, so long as the contracts are reasonable in time area and line of business is not prohibited. So you can't be, uh, more clearly in the face of the proposed rule. Then section 4 52 0.335 Florida statutes right now, there's an obligation on the person seeking enforcement to plead, improve the existence of one or more legitimate business interests. And then just like a, a tennis match in a, in a Florida retirement community. Um, then the person in PO opposing enforcement has the burden of establishing, um, that it was over broad, over long or otherwise unenforceable. And the statute actually gives the court the right to modify it. And if the judge thinks five miles is too big, um, has the, the capacity to bring it back down to two miles. So it's a really fascinating sort of, um, um, good housekeeping seal of approval, if you will, on non-competes in the state of Florida. Um, and this has been around for decades, so it'll be interesting to see, um, uh, you know, after the proposed rule came out, I had so many clients call me and say, is my non-compete gone<laugh>? And I said, let's talk about how rules are proposed and promulgated. Um, and even, you know, as I'm getting contracts now that I'm reviewing, um, people are saying, oh, well don't worry about the non-compete that's gonna go away. And I say, ho hold on. How long do you plan to work in Florida, uh, for the next two years? Cuz I think it might be a little while that this kind of thing gets locked up in litigation. But you know, about 40 states have similar either case law, statutory, or both blessings on non-competes. So it will be very interesting to watch. I I think there's gonna be a lot of work for litigators out of all of this.
Speaker 2:Yeah, certainly not only the, um, state statutes, but the common law has been mm-hmm.<affirmative> has addressed a lot of, um, covenants not to compete as reasonable. So it's, uh, it is gonna be interesting as it plays out, as you were talking about the Florida statute, um, putting the burden to some degree on the, um, entity enforcing the agreement. Mm-hmm.<affirmative> right now, as I mentioned before, there's a categorical prohibition. The commission's notice does state that they want to get comments on whether there should be a rebuttable presumption, which would, if they go that, uh, direction, sounds like it would be similar to what the Florida statute is, it would put a burden on the, um, uh, entity to prove, uh, either by clear and convincing evidence or some other standard they're interested in that too, um, to prove that it is, um, efficient in some sense or won't harm competition. Um, but that, uh, that is one of the numerous, uh, things that they are, um, seeking, uh, comment on. Uh, Steve, you, um, could you discuss other issues for which, um, the, uh, the F FTC is either currently seeking comments or what, what might come out of this in terms of, uh, other kind of, uh, carve outs?
Speaker 4:Okay. Yeah. I mean, one thing to note so far, and again, a reminder, um, this is just the proposal we're making. We start the very early stages, but so far there's only one exception one carve out. And that's for, um, the bus, that's the business ownership exemption. Basically Noncompetes that somebody who, uh, that, that, um, restrict, um, a person who has a substantial ownership interest in a business in a context of that sale of that business, or, um, a sale of that business assets. Um, those noncompetes will not come under this rule. Um, so those compte agreements, um, will not be voided by this rule. And they d and the ftc, you know, defines substantial ownership interests as 25% ownership interest. Um, so, you know, that makes sense. You don't want somebody with that kind of interest, okay. They sell, um, their interests, sell the business to somebody else, and then immediately the next day, um, they set up shops somewhere else and make that, um, asset they just sold decrease in value substantially. Um, but that's the only exception so far. However, what was interesting is that the FT C specifically act asked for, um, public comments, um, as it relates to whether, uh, senior executives are highly skilled, um, employees should also be carved out, non compete as it relates to those employees, um, should be carved out from this rule. Uh, but I think in a way, recognizing certainly the arguments and even just recognizing in, in a way, perhaps some of the legitimate justifications in terms of protecting trade secrets in terms of encouraging and investments and training, um, that some, um, employers may have, um, in, in, um, putting, placing NAE in, um, their employment agreements. Um, and that leads to another issue. You know, at the end we'll talk a little bit about guidance and takeaways going forward. Um, of course, you know, a lot of lawyers are advising clients, you know, how to get ready for this rule cause it is coming<laugh>, you know, there's bipartisan support generally, um, for action in this area. Um, but, you know, folks will talk, folks should of course, focus, look at their con, look at their contracts, look at their employment agreements, fix those up, um, get rid of noncompetes when they're not necessary. Uh, make sure other types of agreements like NDAs, um, you know, uh, agreements dealing liquidated damages, make sure that they're not too broad to be considered to fall under this rule to be considered a notte. But I think folks are taking advantage of this period, and if they take advantage of the public comment process and submit, um, especially in healthcare. And I know a h a, um, Rick just mentioned that, um, they've, they've, they've advocated, um, for their members in this area, but, you know, also work with folks in the government relations area to submit public comments. Um, cuz there is a opportunity at this stage and the FTC is listening, seems open to it, um, to, you know, having an influence on how this rule define a rule, uh, shapes out.
Speaker 2:So one of the things that has been of interest to, uh, to people is the FTC jurisdictional limitations. Um, the ftc, uh, Steve, you and I are aware that, um, the F T C cannot, um, in four section five against a number of, there are number of limitations, but one of them is nonprofits. Um, and so, um, what, uh, I'm interested to hear you're and Ann's view on what the implications of that is gonna be in terms of this rule.
Speaker 4:Yeah, yeah, that's a good question. Especially relevant, you know, to our audience,<laugh>, um, you know, the folks, uh, Rudy, um, at advising nonprofit health systems at hospitals, um, you know, the ftc Yeah, the ftc you probably are asking question, well, the FT F seen the FTC try to block, uh, hospital emerge involving a nonprofit. Well, you know, under section seven yet FTC can go after nonprofits. But remember this is a rule, um, an unfair that FT C is enforcing under section fair of section five, um, I guess a act it considers to be an unfair method of competition. And, you know, as Rick already said, you can't, the FTC can't enforce section five on nonprofits. Now, I remember when I was the FTC in the early odds, we had a lot of cases involving price fixing, um, among physician groups that were part of nonprofit IPAs or pH os. And the way we were able to get after those IPAs is phos those organizations, even though there were nonprofits under Section five, was because they were acting on behalf of for-profit, um, physician practice groups. So that's still a way in which a nonprofit can get, um, roped un under, um, this rule, especially an Anne could speak to this, um, she definitely has more experience dealing with the, you know, transactional, um, the corporate transactional, uh, makeup of healthcare organizations. But in the case of nonprofit health systems that have for-profit, um, sub entities like physician practice groups, um, that they need to be very careful cause they could fall under this rule if they're seen as enforcing non-compete agreements on behalf of these for-profit sub entities.
Speaker 3:Yeah, let me chime in with some background there. Um, you know, if you look at the entity that employs the physician, you know, the first three lines of the physician employment agreement, usually hospital is not in there. Uh, usually it is, um, the physician enterprise, L L C Inc, uh, subsidiary that is often for-profit. So even a, a religious, uh, not-for-profit health system that has seven, uh, non-profit subsidiary that run their hospitals might very well have a for-profit subsidiary that employs all of their physicians for various tax and, um, tax reasons also to support the nonprofit mission. It's sometimes helpful to have those separate. Um, again, I'm, I'm not an antitrust attorney. I'm not a tax attorney. I just know what it says on the physician employment agreements and, um, those are often for-profit. So I think we might have a lot of work here, not only for antitrust attorneys, but for litigators and tax attorneys. Cuz I wonder if systems are gonna perhaps, um, transition their nonprofits over to, or their for-profit healthcare physician enterprises over to not-for-profits because of this. I don't know.
Speaker 2:Yeah, there's occasionally, uh, efforts to change that jurisdictional limitation on the F t CGA legislation is occasionally pro proposed to, um, get rid of that restriction, but nothing has happened on that yet. I know the, um, American Hospital Association in their comments talks about kind of this notion that, um, there'll be this bifurcation, huh? Why would you treat, ultimately, as I said, an impact across the entire economy? Why would you treat nonprofits and say nonprofits can have these covenants not to compete, but hospitals, uh, that are for-profit can't have them? And what, what the implications are. They have members obviously, that are on both sides of those. And so it's gonna be interesting. I think one of the things in the notice, the, uh, FTC talks about, you know, healthcare a lot in there and, uh, they talked about the nonprofit issue and how that shakes out, um, in the end is going to be, uh, is gonna be very interesting. Um, absolutely. The, um, the notice also talks about, and I think I mentioned this before, that there can be kind of alternatives, uh, to, um, non, uh, to these covenants not to compete that the FTC may deem as, uh, equivalent to, uh, covenants not to compete. So just calling it, not calling it a covenant not to compete, may not get away, get you out of the rule, even if it's, uh, historically been viewed as not a covenant not to compete. So they're gonna look at the, uh, functional, um, what happens functionally and substantively rather than the title of it looks to them like it has the effect of a covenant not to compete, then they're gonna treat it that way. Uh, Steve, do you wanna talk about some of those, uh, alternatives that, uh, may fall under that?
Speaker 4:Okay. Well, yeah, the, well the rule actually specifically calls out two types, like N D A is non-disclosure agreements and certain types of liquid damage provisions. Um, so, but basically it would have to be disagreements would have to be very, very broad. So it it to the point where it looks like they have the same effect as a non capri. So an MBA that pretty much blocks you<laugh> from using your skills to practice in this field that prevent somebody from practicing this field. And there have been cases, um, certainly at the recent workshop, we heard cases of that, examples of that, um, like that would be considered a noncompete. And as an rule is currently written would come under this rule, um, the same for, you know, uh, liquid damages provisions, which many employers, you know, include in their employment agreements in which, you know, if an employee provides training, um, and the employee leaves early, the employee has to pay back, um, that amount of turn, uh, that amount, um, prepare a certain amount back to the employer. Um, if you have a pr, if, if the provision is written in a way in which the repayment that the employee has to, uh, give to its employer, it's not related to the actual cost of that trading, like just an enormous, you know, just an enormously high amount higher than how much that cost that that trading actually costs or that investment actually costs or that bonus package was, then that could be considered a not a piece. So that's something to be wary of. Um, you know, and definitely certain non-solicitation agreements, um, you know, that, that, that, that, that's, that's been mentioned in the notice as well. Um, not of Anne as any other examples from her practice, certainly in her contracting,
Speaker 3:You know, um, I think that there are lots of ways that physician, physician employers can use their employment agreements with physicians to prevent them from leaving and competing. Um, some are more practical and certainly not in any way, shape or form related to co competition. But for example, making them pay for tail insurance. You know, surgeons might have to pay$80,000 to buy tail insurance to leave. Um, another thing are is, um, making them give up their hospital privileges. So, um, physicians typically wear two hats. They might be an employee and then they might also have admitting or medical staff privileges to the hospital. Um, I, I would predict that we're gonna see a lot more exclusive contracts between independent physician groups and facilities as a way for the independent physician groups to prevent their physician employees from leaving and competing. So what we would call this is a clean sweep. Um, it can take a lot of different, um, shapes and sizes, but basically the physician is swept out of the office. And then, uh, secondarily swept out of any facility, any hospital, any surgery center, an endoscopy center or an imaging center, um, at which the group, um, physicians might have worked because the facility and the group have an exclusive contract. Um, or even absent the exclusive contract, if the physician agrees in his or her employment agreement to resign from the hospital's medical staff upon termination of employment. That's not a non-compete, that's just a voluntary resignation. Now, he or she could probably reapply, but the fact of the matter is, if, if you voluntarily say you won't go to a hospital anymore and you're a surgeon, that's in effect a non-compete. Right. Yeah.
Speaker 2:Very interesting. You, um, one of, uh, your intro part of that, you were saying it doesn't necessarily have anything to do with competition, um, which is an interesting part of this rule given, you know, the way it's phrased so far is that the, um, FTC is considering kind of a small entity exception and they're accepting comments on that. And when we think traditionally, Steve, you, uh, in the antitrust area, we think of kind of two things in terms of where enforcement generally would be. One where, one where there's, uh, kind of evidence of market power and, um, the commission, uh, barely mentions market power mm-hmm.<affirmative> in the, in the notice, there's a couple references to monopsony that is the, um, the equivalent of monopoly except with respect to input such as labor. And, um, so there's a couple mentions of that, but basically it's, it's much broader than that. There's no indication that, um, it's based on kind of a market power analysis. And the second way that, uh, antitrust folk look at this is, um, is it something per se unlawful? Is it so, uh, egregious that there's no competitive benefit? And that's when you have these, uh, these rules like for price fixing or customer allocation or something like that to just say, we don't really wanna see any sort of, uh, attempt even to, to justify it. Um, as we talked about before, this does not seem to fall within that. I mean, there are states that specifically condone it. There are some states that place restrictions on it, like, um, who can be affected by it, whether it be, you know, the wage levels that we talked about, or types of professionals or executives. There's all sorts of, um, all sorts of areas. So it's gonna be interesting, I think at the end of the day, you know, whether the commission can tie this or tries to tie this more closely to, um, to kind of the traditional competition notion as opposed to, uh, something broader than that. As you were, um, uh, kind of hinting at and
Speaker 3:Yeah, let's talk a little bit more about, about the market and, and if I step back from, from the last 15 or so, 12, maybe 10 years of practice, um, you know, it's been this era of consolidation. So we, it didn't surprise me at all that the aass, the American Hospital Associations, um, comments because big hospital, which is kind of my term for big law, big hospital, big health systems,<laugh>, um, where you have these large health systems, um, with hospitals and hundreds of physicians employed by their physician enterprise. Um, you know, their non-competes have kept their employed p physicians in place after the systems bought their practice in the last decade's era of consolidation. So I would predict that if this rule is finalized and enforceable, physicians may leave health system employment in mass. Um, a and with the pressure of, we've got pressures for higher R V U pro productivity thresholds, you know, there's so much pressure on physicians nowadays to be productive and they are locked into these. Um, we also have unparalleled levels of physician burnout that we're hearing about. And so what's interesting from a market standpoint is that billions, perhaps trillions, I I don't know of dollars that health systems have paid for acquisition of physician groups in the last decade or so, were protected in large part by the non-competes that the seller physician now employee signed with the system. And for that to go away, I think we'll have a remarkable effect. I think the physician employment agreement attorneys are gonna be very busy because, um, you know, if we had the great exodus, um, in after Covid, I think it's going to be even even stronger. Mm. And I also kind of wonder if it will encourage physicians to start their own groups again. Um, kind of the unwinds of all of those consolidations that have been happening.
Speaker 4:Yeah, of course. The F T C will say, they will argue that, um, the only, uh, impact this will have will be, you know, increasing mobility, increasing, um, payment for the physicians. But, you know, wide ranging structural changes to the economy, it's not gonna have that impact in terms of eliminating efficient, larger health systems. Um, and they'll probably point to California as an example. We have no non-competes, but you still see, um, that same, um, you know, uh, trend in consolidation and acquisitions, uh,
Speaker 3:Interesting.
Speaker 4:Yeah. And at smaller clinics. So yeah,
Speaker 2:It's certainly interesting. California is exhibit A in, I think the commission's notice as to the ability, for example, in the tech sector to thrive despite the prohibition on, um, on non-competes. You've got labor mobility and you've got a lot of venture capital on a lot of new entry in there that might, as you said, still wind up consolidated, but you have, uh, what they're saying is a very vibrant labor mobile economy in California. So, um, that is interesting. I, I think, uh, we're getting close to the end of our time. Um, I would like to give, uh, you guys an opportunity to, um, to provide your, um, maybe your takeaways from the rule. Where do you think it's, uh, where do you think it's eventually gonna gonna wind up?
Speaker 3:Well, I can start and, and leave the closing with, uh, Steve, um,<laugh>, you know, I, I I, I took the AJ's comments to heart, you know, I, you, I figured that that's what they would say. You know, we can't have a one size fits all rule for physicians. Um, they want non-competes to stay in place. Um, and, and I think, uh, you know, in part, um, wages would go up. I mean, they would have to pay the physicians more to keep'em. I think it is really what it kind of comes down to. Um, I am curious about what's gonna happen with this idea of the highly skilled employee, possible exception. And, um, I would love to have one of my neurosurgeon clients up there talking about how he or she is highly skilled, uh, especially compared to the hospital c e o. Can I say that?<laugh>? Um, I think that would be kind of fun to watch and, um, you know, ask one of my physician clients, um, how their non-compete helps them. And I don't think they could come up with a good, a good example. Um, I know that was kind of a tenant in the, um, ahas comments. So I would say hold tight. I, I would think the show's not gonna be over on this for a little while, uh, uh, especially in states like Florida and be where, um, or, um, get on board, depending on which side you're on with finding some ways to sort of still protect your investments, um, in your workforce in a way that is, uh, not taking the form of a non-compete.
Speaker 4:Yeah, and I would say just an add out to as cons, I think folks, I would say just get ready for this. This is coming, um, again, you know, this bipartisan support maybe for not how it's currently drafted, um, but just for the idea of, um, the FCC stepping in here in this area. Um, there's bipartisan, um, support and acceptance, um, that's, this is an issue, um, that needs to be dealt with. Um, you can speak to the most hardened corporate defense council, Chicago school, um, critical of Lena Khan, and they will say, you know, some noncompetes not look a noncompete that prevents a waiter or a server at a Applebee's from working at the Applebee's across town, or the tgis<laugh>. Okay, what's, what's the reason for that? But as it relates to, as men mentioned, as it relates to highly skilled, um, C-suite executives, folks that, uh, companies invest a lot in, in training and retaining and hiring, um, folks that have a lot of potentially damaging information or trade secret information, um, founders. Um, there, there may be, uh, some room for exceptions there. So especially as it relates to our audience too, um, to look at, look at whether there'll be further exceptions, especially as it relates to high skilled employees and how it relates to maybe not. They probably won't be an exception, probably won't be applied to primary care physicians. Um, but certainly I can see something for folks in really high sought, sought after subspecialties. Um, that's a space, uh, to look out for. Um, and I know that's an area the FTC is looking at. Um, and one way to judge that is, I listened to the recent workshop the FTC had, I think two or three weeks ago on, um, the rule. And you had a lot of comments when it was part for the, you know, verbal, oral, public comment section of the program. A lot of comments, um, from folks in the healthcare sector. A lot of comments from, um, physicians, um, were really compelling stories about how NAES have affected their, have affected them, have impacted, um, their practice. And even some compelling stories from, you know, health systems too, uh, how they need that, especially when it relates to, you know, highly sought after, um, specialist and subspecialist. But, um, definitely I would say watch this space. Um, look at your employment agreements. If you have agreements for certain employee classes where you don't need noncompetes, um, maybe get ahead of the wall ball right now and get rid of those. Look at your NDAs, um, liquidated damage provisions, train repayment provisions, bonus packages, see and see if, um, those are, you know, narrowly tailored to deal with the concerns that you have.
Speaker 2:And I would, uh, add, I guess on top of that, something I think Ann alluded to earlier is that nothing's happening that soon on this. And so we've got the comment period, staff, FTC staff will synthesize the, uh, the comments, um, for the commission, um, and, you know, make some recommendations to the commission. That's gonna take a while. Um, I think they're my own senses. I think there will be changes. Um, one could say as is it would definitely be subject to litigation, but I think no matter what the changes are<laugh>, it will also be subject to litigation. So one can imagine, uh, they, they lay out a lot of their, um, uh, the possibilities that they're seeking, comment on, uh, in the, um, in the notice, including kind of the rebuttal presumption, whether there should be high pay, whether there should be small business, uh, exceptions, uh, healthcare, I mean, so there's a lot of moving parts I think in this rule. Unlike a lot of other rules where it's kind of binary, there's a lot of things that could change and it could change as a result of, uh, of the comment period that's going on now. And, um, as the commission assesses litigation risk, uh, going forward, I think that's gonna be an important consideration for them if they want this, uh, some version of this to go into effect. Um, with that, I'd like to thank Steve and Anne for, uh, participating today and the A H L A for, um, for putting this together and giving us an opportunity to, uh, do this little fireside chat.
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