Affected: Reaction to FTC’s Decision to Formally Ban Most Non-Compete Agreements

By J. Robert “Bob” Brooks

Both endodontic practice owners and associate endodontists that are aware of the Federal Trade Commission (FTC) decision to formally ban most non-compete agreements in all industries, are either eager or anxious to see how they will be affected. The FTC’s plan would ban future associate agreements in endodontics and make existing associate agreements invalid.

The FTC wants to reduce patient spending “up to $148 billion annually on health care costs and double the number of companies founded by a former worker in the same industry.” No matter how the economy is doing, patients will still need endodontic care. However, the FTC’s plan has the potential to reduce profitability and also reduce asset value.

HOW THE “EAGER” ARE AFFECTED

Endodontic Associates

Inside associates’ current non-compete areas, associates will have increased flexibility to start-up new practices or to join other practices. This gives associates greater leverage in negotiating a.) better employment terms with current employers, b.) lower practice purchase prices, and c.) lower real estate purchase prices.

Endodontic practices where associates have built significant referral relationships with general dentists could be the most vulnerable to loss. Practices where referral relationships are mostly exclusive to the practice owner, would be minimally affected.

Consider for example, a two-endodontist practice with an owner and one associate. If each practitioner saw half the patients and an associate was well connected with referring doctors of the practice, imagine how the non-compete ban will impact both the owner and the associate. Once in effect, the ban would allow associates to open a new practice across the street or join another nearby endodontics practice, potentially taking a significant amount of business away from the original practice owner, thereby lessening profitability and practice value.  Currently in many associate employment agreements, associates are not permitted to start-up a new practice or join another existing practice in close proximity to the practice of their current employer.

Associate buy-ins are common with dental specialty practices, like endodontics. Knowing that increased pay and benefits for associates maybe necessary to reduce the risk of nearby competition, how will existing practice owners respond knowing that pay increases will reduce practice profitability? How will existing endodontic practice owners respond to lower practice purchase price offers and lower real estate purchase price offers from their would-be buyer associates?

Although the non-compete ban will eliminate non-compete agreements between employers and associates, it will not impact non-compete provisions between buyers and sellers of practices with no associate nor with owners selling 25% or more of their practices. Therefore, buyers can “rest easy” in knowing that their sellers will not turn around and compete against them after a sale.

HOW THE “ANXIOUS” ARE AFFECTED

Endodontic Practice Owners

Although it cannot be determined what increase may occur in the number of endodontic practice buyers once the ban goes into effect, there could be an improved window of opportunity for endodontic practice sellers as a result of an increased buyer pool in some markets.

For endodontic practice owners not planning to sell anytime soon, the FTC’s action may have little or no impact on them if they do not have an associate in the practice.

Where the “rubber meets the road” is in endodontic practices currently with associates that have associate non-compete agreements in force.  Those agreements will go away. Endodontic practice owners need to connect with their attorneys now to make sure they have good provisions including non-solicitation of staff and referral sources, intellectual property rights and trade secret language in place in their employment agreements with associates. Endodontic practice owners in states that currently allow non-compete agreements can learn from their colleagues in other states where non-competes are already banned.  According to Forbes, states that currently have complete bans on non-compete agreements include California, Colorado, Oklahoma, North Dakota, and Minnesota.

WHERE DO WE GO FROM HERE?

Of the five commissioners that lead the Federal Trade Commission, the sole dissenting vote against the proposed non-compete rule was FTC Commissioner Christine S. Wilson. At this writing, the FTC’s own website shows that they have only three of their five commissioner positions filled. According to Wilson who resigned from the commission in 2023, the Committee has been significantly politicized since the administration appointed Lina Khan as the FTC Chair.

Many law firms and business organizations have stepped up to oppose the proposed rule since the FTC first voted to publish the notice of proposed rulemaking for the non-compete ban in January of 2023. Some of the 27,000 comments received on this matter by the Commission were from opponents of the FTC action that prefer to leaving action on non-competes to the states.  The public comment period on the non-compete rule has ended according to the regulations.gov website.  A vote on the final version of the proposal is scheduled for April of 2024.

According to the FTC, the non-compete ruling will not become effective until 60 days after publication in the National Register. Employers will have 180 days from the publication date to implement compliance. However, informed FTC observers predict many legal challenges to the new rule so the timeline for implementation of the new rule is uncertain.

J. Robert “Bob” Brooks, CEPA, CBI, leads Practice Endeavors, LLC, an Ohio based practice brokerage and dental realty company.