Goodbye to Physician Non-Competes in Kansas?

May 9, 2024- Laura Fent

Non-compete, non-solicitation (“no poaching” of patients or employees) and non-disclosure provisions are widely used in Kansas physician employment agreements. As such, it is perhaps no surprise that Kansas case law concerning enforceability of non-competes is most robust with respect to physician non-competes. The seminal case, Idbeis v. Wichita Surgical Specialists, P.A., 279 Kan. 755 (2005), clarified that a physician employment-based non-compete must be “reasonable under the circumstances and not adverse to the public welfare” as determined by an evaluation of four factors: (1) whether the non-compete protects an employer’s legitimate business interest; (2) whether the employee is unduly burdened by the restrictive covenant; (3) whether the restriction will injure the public welfare; and (4) whether the time and territorial limitations are reasonable under a facts and circumstances analysis. Although Kansas courts have historically whittled back geographic scopes and/or scopes of the prohibited activity when deemed to be unreasonable, physician non-competes, on the whole, are enforceable in Kansas. That might change.

On April 23, 2024, the Federal Trade Commission (“FTC”) passed a final rule (the “Final Rule”) banning employers from the use of non-competes, judging them to be an unfair method of competition. The FTC anticipates that the ban will increase new business formation, number of patents filed, and worker earnings. Of note, the FTC takes the position that non-competes negatively impact the cost of healthcare and estimates that the ban will reduce the amount spent on physician services by $74 billion to $194 billion over the next decade.

The Final Rule preempts state law, meaning that well-established Kansas non-compete case law will be rendered moot unless anticipated legal challenges, such as one lawsuit already filed by the U.S. Chamber of Commerce, temporarily stay or quash the Final Rule. Most legal practitioners are advising employers to take no immediate action with respect to the Final Rule, but rather to carefully monitor court challenges in the months to come, taking steps to comply with the Final Rule only if it appears the Final Rule will indeed go into effect September 4, 2024.

In addition to the ban on non-competes, the Final Rule eliminates the ability to enforce certain other types of provisions, which, in effect, function as non-competes. This includes, by way of example, expansive confidentiality and non-solicitation provisions.
Although the jurisdiction of the FTC is broad, certain employers falling out of the FTC’s purview are not subject to the Final Rule. For example, certain non-profit healthcare entities may not be subject to the Final Rule. For those employers subject to the rule, the rule applies to employees, independent contractors, externs, interns, volunteers, apprentices, and/or sole proprietors who provide services.

The Final Rule imposes an obligation upon employers to rescind non-competition covenants currently in place, as well as to notify current and former employees that such restrictions are no longer effective. Existing non-competes of senior executives are a significant exception from the effectiveness of the Final Rule. Non-competes of employees earning more than $151,164 with a “policy-making position” will continue to be subject to their existing non-compete after the effective date of the Final Rule. This carve-out does not apply to senior executives without existing non-competes after the effective date of the Final Rule. Also excepted from the Final Rule are non-competes agreed to as part of a bona fide sale of a business.

In the event the Final Rule becomes effective, healthcare employers may seek alternate strategies to protect their legitimate business interests and retain physician employees. Strategies such as offering physician employees signing loans, signing bonuses, higher pay, retention bonuses, and assistance with repayment of school loans may become the new normal, as well as a renewed focus on company culture. Employers will still be able to engage in the use of non-solicitation and confidentiality provisions. However, these provisions will need to be carefully constructed so as to avoid inadvertently running afoul of the Final Rule.

For more information about the physician non-compete ruling, or any other healthcare topic, please do not hesitate to contact Laura Fent at (316) 631-3118. In addition to the U.S. Chamber lawsuit, additional lawsuits have already been filed. We will be watching these closely and will update you as more information becomes available.