Non-Compete Employment Agreements May Soon be a Thing of the Past in the Endodontic Community

Posted in Practice Management | January 8, 2024

By Michael W. Davis, D.D.S.

Increasingly, state legislatures are passing statutes which render employment non-compete agreements as unenforceable.¹ Some states like California have disqualified non-compete employment contract clauses under nearly every condition in every trade, profession, or skill. Other states like New Mexico have prohibited such agreements limited to healthcare providers. However, in the sale or transition of a business or clinical practice, reasonable non-compete agreements are fully enforceable.

Enforceability varies widely from state-to-state. One should contact a qualified labor law attorney in the specific state in question for a complete picture.

For example, it is still common to see non-compete agreements written into employment contracts, in which that clause may be null-and-void under existing state or federal law. Courts may potentially view such actions as an employer acting in contractual bad faith.

A severability clause states that contract terms are independent of each other, and the totality of the contract should remain in force, if a court determines one element as void. However, a court may also determine the agreement so egregious and outside the law, that the entire contract may be determined to be unlawful and unenforceable. Such was the ruling of the US Fifth Circuit Court of Appeals 07-30430, related to Orthodontic Centers of America desiring to enforce non-compete agreements with orthodontists.²

An agreement between the Federal Trade Commission (FTC) and US Department of Labor (DOL) was signed on August 30,2023.³ The Memorandum of Understanding states in part:

“The Agencies share an interest in protecting workers who have been harmed or may be at risk of being harmed as a result of unfair methods of competition and unfair or deceptive acts or practices. Such methods, acts, or practices include collusive behavior; the use of business models designed to evade legal accountability, such as the misclassification of employees; illegal claims and disclosures about earnings and costs associated with work; the imposition of one-sided and restrictive contract provisions, such as noncompete and nondisclosure provisions; the extent and impact of labor market concentration; and the impact of algorithmic decision-making on workers.”

The FTC and DOL are clearly focused on misclassification of employees as independent contractors to circumvent lawful taxation and workplace protections, one-sided contracts with restrictive non-compete agreements, and efforts by employers negatively impacting a labor market damaging both employees and the public interest.

The two agencies agreed to cooperate with team agency efforts, synchronize with investigation and enforcement, as well as coordinate training and outreach, referrals, and information sharing.

In January 2023, the FTC went so far as to recommend a federal rule to ban all employment non-compete agreements.⁴“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.”

The FTC is not examining a specific class of worker, but an all inclusive scope of employees from physical laborers to doctors. “Companies use noncompetes for workers across industries and job levels, from hairstylists and warehouse workers to doctors and business executives. In many cases, employers use their outsized bargaining power to coerce workers into signing these contracts. Noncompetes harm competition in U.S. labor markets by blocking workers from pursuing better opportunities and by preventing employers from hiring the best available talent.”

The FTC’s case against DaVita Inc. is of particular interest within the healthcare industry.⁵ DaVita was acquiring dialysis centers in Utah and allegedly consolidating that life-essential service. The coordinated investigation was between the FTC and Utah Attorney General’s Office.

“DaVita has a history of attempting to buy up competing dialysis clinics in an industry that is already highly concentrated, in large part due to the acquisition activity of DaVita and other large dialysis clinic chains,” said Bureau of Competition Director Holly Vedova.

“This is a big concern, and it is compounded by the fact that the limited number of nephrologists available to work at the clinics creates an opportunity for anticompetitive restrictions on labor. To address these concerns, the Commission’s order includes important provisions that guard against restrictions on worker mobility and protect Utah consumers from other anticompetitive practices in this critical, life-saving health care market.”

The FTC’s formal Complaint against DaVita⁶ stated in part, “The most significant entry barrier is engaging a nephrologist with an established referral base to serve as the dialysis clinic’s medical director. By law, each dialysis clinic must have a nephrologist medical director. Locating and contracting with a nephrologist to serve as medical director is difficult because clinics typically enter into exclusive contractual arrangements with a nephrologist who is paid a medical director fee. Finding patients may also be difficult if the nephrologist does not have local ties, because most nephrologists typically refer their patients to the clinic at which they (or one of their partners) are medical directors. A potential entrant into the relevant markets would also need to develop a reputation for consistent quality and service before referrals would be made. Additionally, other things being equal, an area must have a low penetration of dialysis clinics and a high ratio of commercial to Medicare patients to attract entry. The absence of these attributes is an additional impediment to entry into the relevant market.”

In essence, the FTC accused DaVita among other matters of utilization of non-compete agreements with medical specialist nephrologists, to control and manipulate the professional labor market, and limit the best outcomes for patients.

Enforceability or non-enforceability of employment non-compete contracts has direct impact on the endodontic community. A dental support organization (DSO) may possibly face joint FTC and DOL action as in the case of DaVita. DSO activities with associate doctors and non-compete agreements must not limit healthcare options for patients, whether intended or not.

On a smaller scale of a group endodontic practice in a rural or small town community, the model may be comparable and face similar investigation and enforcement efforts.

Regardless, in the current federal and state regulatory climate, employment non-compete clauses as a condition of employment are waning. There is significant momentum for the total elimination of such agreements.

References (Accessed 12-18-2023)

Michael W. Davis, DDS, maintains a general dentistry practice in Santa Fe, New Mexico. He is also active with consultation and expert witness work for a variety of attorneys. Dr. Davis writes and lectures on business and legal matters related to the dental industry. He may be reached at MWDavisDDS@Comcast.net.