As anticipated, 2024 is bringing increased scrutiny of restrictive covenants by employers. At both the federal and state levels, non-compete agreements (“non-competes”) are being disfavored more than ever, with Maryland being the latest to act against them.

At the federal level and as previously discussed in a prior post, in January of 2023, the Federal Trade Commission (the “FTC”), proposed a rule (the “Proposed Rule”) that would, with only limited exceptions, prohibit employers from using non-compete clauses, effectively banning many non-competes nationwide. The Proposed Rule demonstrates the FTC’s adverse posture toward any agreement that could in essence restrict competition within the labor market. However, the Proposed Rule (if finalized in its proposed form) would not likely apply to non-profit health care organizations, in particular, those that have been recognized by the IRS as tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code.[1] The FTC has received more than 26,000 comments to date and a vote on the final rule is expected to occur on April 23, 2024.

In accordance with the scrutinizing posture demonstrated at the federal level, many states are moving to restrict or prohibit the use of non-competes.[2] Some states, such as Maryland, are taking it even further and attempting to fill what they consider to be a “gap” left by the FTC’s Proposed Rule and extend the non-compete prohibitions to veterinary and health care professionals, which could ultimately affect the non-profit health care organizations otherwise exempt from the FTC’s Proposed Rule. On April 6, 2024, HB 1388, entitled Noncompete and Conflict of Interest Clauses for Veterinary and Health Care Professionals and Study of the Health Care Market (the “Act”), passed the Maryland General Assembly and is currently awaiting signature by Governor Wes Moore. The Act amends and expands the application of the Annotated Code of Maryland, Section 3-716, and seeks to negate the effects of non-competes within the health care industry by “potentially encouraging job mobility, higher wages, and new firm creation.” The Act has considerable implications for veterinary and health care-related employers. Pursuant to the Act, certain non-compete and conflict of interest provisions within employment contracts for certain veterinary and health care professionals will be barred or restricted. Specifically, non-compete or conflict of interest provisions that restrict “the ability of an employee to enter into employment with a new employer or to become self-employed in the same or similar business or trade shall be null and void as being against the public policy of the State.”[3]

Pursuant to the Act, non-compete or conflict of interest provisions that restrict “the ability of an employee to enter into employment with a new employer or to become self-employed in the same or similar business or trade” will be prohibited for those employees who are required to be licensed under:

• Title 2, Subtitle 3 of the Agriculture Article as veterinary practitioners or veterinary technicians, effective as of June 1, 2024.
• The Health Occupations Article (i.e. physicians, nurse practitioners, nurses, dentists, pharmacists, psychologists, optometrists, etc.); provide direct patient care; and earn $350,000 or less in total annual compensation, effective as of July 1, 2025.

Pursuant to the Act, non-compete or conflict of interest provisions that restrict “the ability of an employee to enter into employment with a new employer or to become self-employed in the same or similar business or trade” will be materially limited in time and geographic scope[4] for those employees who are required to be licensed under:

• The Health Occupations Article (i.e. physicians, nurse practitioners, nurses, dentists, pharmacists, psychologists, optometrists, etc.); provide direct patient care; and earn more than $350,000 in total annual compensation, effective as of July 1, 2025.

Maryland’s actions follow a nationwide trend to significantly limit non-competes but takes it a step further. Maryland’s extended reach covers the “gap” left within the FTC’s Proposed Rule and seeks to restrict the use of non-compete or conflict of interest provisions within the health care industry in order to encourage job mobility, higher wages, and new firm creation.

This nationwide trend is expected to continue and as a result, employers are encouraged to diligently monitor the rapidly evolving terrain and assess any current non-competes for compliance. The Health Law Observer will continue to monitor further developments as they relate to this forecasted trend.

[1] Previously decided court cases and FTC advisory opinions were reviewed to provide useful guidance in addressing the impact of the Proposed Rule on non-profit health care providers here.

[2] For example, several states have enacted new laws that broadly limit the use of non-competes, while other states have raised the minimum salary threshold for them and/or restricted the use of them to certain employees within particular sectors. As a result, employers need to diligently monitor the terrain, as the trend is expected to continue throughout 2024. For example, although New York Governor Kathy Hochul vetoed legislation that would have banned all non-competes in the employer-employee context in December of 2023, she has stated that she remains committed to enacting non-compete legislation to protect low and middle-class wage earners. Therefore, it is still possible that New York employers will see some type of non-compete restriction in the near future.

[3] The Act additionally requires the Maryland Health Care Commission to contract with a private consultant to study certain issues related to the health care market within the State. Specifically, the Act seeks to study the effects of private equity firms and the payer mix for physician practices and groups with private equity ownerships. The Act requires the Commission to report on these findings by January 1, 2025.

[4] The time period for which a non-compete or conflict of interest provision can remain in effect, cannot exceed one (1) year from the last day of employment and the geographic restriction cannot exceed ten (10) miles from the primary place of employment. Additionally, for these employees who earn more than $350,000 in total annual compensation, “[o]n request of a patient,” the employer must provide notice to the patient of the new location from which the former employee will be practicing.

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