FTC Steps In, Invalidates Certain Physician Non-Compete Agreements In Nevada

In what may be a one-off move, or a harbinger of things to come, the FTC has stepped into a non-compete dispute in Nevada and ordered that certain cardiologists be exempt from their non-compete agreements.Health law experts say a Federal Trade Commission order allowing some cardiologists in Reno, Nev., to be exempt from their employment contracts’ noncompete clauses is an indication of the increased scrutiny the agency is paying to medical industry consolidation. It also points to a potential strategy for physicians — particularly those in very concentrated hospital markets — looking for a way around noncompete clauses. “It can be very complex business to break off a merger after it is consummated, but this is a very creative solution,” said Thomas Greaney, co-director of the Center for Health Law Studies at Saint Louis University School of Law. Renown Health, a health system based in Reno, must allow up to 10 cardiologists it employs to join other practices in the area or set up their own without being bound by the noncompete clauses of their contracts, according to an FTC statement issued Aug. 6. Nevada Attorney General Catherine Cortez Masto also filed and settled a lawsuit on the subject, reaching similar terms. The action was taken because an FTC analysis found that the fact that Renown acquired a 15-cardiologist practice in 2010 and a 16-cardiologist group in 2011 reduced competition and could lead to higher prices. These acquisitions gave it control over 88% of the heart care market in the region. Further complicating matters, the acquired cardiologists were bound by noncompete clauses providing for a $750,000 penalty if they left Renown and practiced within 50 miles during the next two years. “We are seeing a lot of physician mergers across the country in different forms, and where there is a high level of concentration, we have concerns,” said Erika Wodinsky, staff attorney in the FTC’s San Francisco office. The noncompete clauses are suspended for at least 30 days to increase competition. The cardiologists can leave without penalty at this time, but they must commit to practicing in Reno for at least a year. FTC officials believe there is enough of an interest on the part of physicians to hit this number. Noncompete clauses are illegal in some states and not always enforceable in others. Health law experts say the Renown situation is unusual because the cardiology market became very concentrated. But this also means physicians in similar situations may be able to use the FTC order as an argument against enforcement of a noncompete clause, the experts added. Medical groups and hospitals involved in practice acquisition also need to consider whether some deals will violate antitrust regulations. “It may be a pretty limited set of circumstances, but hospitals and physician groups need to ask themselves whether there are steps they need to be taking in light of this,” said attorney Bill Nolan, managing partner in the Columbus, Ohio, office of Barnes & Thornburg, who advises physicians on contracting. “This issue may apply.” Before these two practice acquisitions, Renown did not directly employ any cardiologists. The system issued a statement saying the intent of the arrangement was to keep cardiologists in the community rather than to raise prices.

The situation arose out of Renown Health’s acquisition of competitors Reno Heart Physicians and Sierra Nevada Cardiology Associates.  Upon acquiring these two competitors, cardiologists at those two health systems immediately became subject to Renown’s aggressive non-compete agreements.  Although that may seem somewhat novel, it is a process that has become routine.  Mergers frequently involve the transfer of contractual rights under non-compete agreements and standing to enforce the restrictive covenants.  The only time when such rights do not transfer is when some in-house counsel screwed up in drafting the non-compete.  See, e.g.,  Accordia of Ohio, LLC v. Fishel, Slip Opinion No. 2012-Ohio-2297 (rights under non-compete agreement non-transferable absent language re successors and assigns).

Renown and the two target companies did not have that problem.  Gold sticker for their in house teams.  They just inserted some boilerplate language about the rights under the non-compete agreement being fully transferable to successors and assigns and, just like that, Renown cornered the Reno market on cardiologists.  According to the FTC, Renown had locked up 88% of the Reno market in cardiologists, effectively eliminating competition. The problems with such a scenario are numerous and obvious, including destroying competition based on price and quality.

So hats off to the FTC for stepping in and using its muscle to sort out this mess.  Under an agreement between the FTC and Renown, 10 cardiologists who are now employed by Renown will be able to leave the company, work for competitors or start their own practices.