BLOG: The FTC’s noncompete ban: What physicians need to know

ByJeenie Kahng, JD

Fact checked byChristine Klimanskis, ELS

Key takeaways:

The FTC released a final rule banning most noncompete clauses in employer-employee contracts.
Litigation could shape the rule’s scope and applicability or determine if the rule becomes effective.

On April 23, the Federal Trade Commission released a final rule banning most noncompetition clauses in employer-employee contracts as unfair methods of competition.

The “final rule” was published in the Federal Register on May 7. The health care industry has been particularly interested in the final rule — the Federal Trade Commission (FTC) stated that it received comments from “thousands of health care workers” in the process. While the final rule is broad, it has exceptions that may be particularly applicable to selling physicians and health care providers, as discussed below.

What is a noncompete?

As a refresher to our prior blog post, a “noncompete clause” refers to a term or condition of employment that prohibits a worker from, penalizes a worker for or functions to prevent a worker from seeking or accepting work in the U.S. with a different person where such work would begin after the conclusion of the employment or operating a business in the U.S. after the conclusion of the employment. A noncompete clause can be contained in employment contracts, employee handbooks, company policies or an oral agreement.

“While the final rule is broad, it has exceptions that may be particularly applicable to selling physicians and health care providers.” Jeenie Kahng, JD

Importantly, the final rule includes exceptions to the general prohibition on noncompetes, as discussed below.

Exception 1: Senior executives with existing noncompetes

The final rule does not apply to “senior executives” who entered into a noncompete clause before the effective date of the final rule; however, employers are prohibited from entering into new noncompetes with senior executives after the effective date (which is currently Sept. 4 but may be affected by legal challenges). Under the final rule, a “senior executive” is a worker who was in a “policy-making position” and earned total compensation of at least $151,164 in the preceding year or year before termination. A “policy-making position” means an entity’s president, CEO or equivalent or other officer or person with the final authority to make policy decisions that control significant aspects of a business entity or common enterprise.

Exception 2: Noncompetes pursuant to the sale of a business

The final rule also contains an exception for noncompetes pursuant to a bona fide sale of a business entity, the person’s ownership in a business entity, or all or substantially all of a business entity’s operating assets. For example, a noncompete entered by a selling physician as part of the sale of his or her medical practice (or substantially all of the practice’s assets) would not be covered under the final rule. The final rule does not contain a percentage ownership threshold. The FTC “decline[d] to specifically delineate each kind of sales transaction which is not a bona fide sale under the exception”; however, it stated that the FTC “considers a bona fide sale to be one that is made between two independent parties at arm’s length, and in which the seller has a reasonable opportunity to negotiate the terms of the sale.”

Exception 3: Noncompetes for employees of nonprofit or tax-exempt entities

The FTC does not have jurisdiction over nonprofit and tax-exempt entities; as such, nonprofit and tax-exempt hospitals and other health care entities may potentially fall outside the FTC’s final rule. However, the FTC has specifically noted that “merely claiming tax-exempt status in tax filings is not dispositive” of the FTC’s jurisdiction. The FTC gave examples of enforcing jurisdiction over a “physician-hospital organization” that “engaged in business on behalf of for-profit physician members,” as well as an “independent physician association” that “contract[ed] with payers, on behalf of its [for-profit] physician members, for the provision of physician services for a fee.”

Conclusion

There have already been several challenges to the rule, including by the Chamber of Commerce. Litigation could shape the final rule’s scope and applicability or determine if the final rule even becomes effective. For more detailed, up-to-date analysis of the final rule, please visit Arnold & Porter Advisory or contact counsel.

References:

FTC releases final rule prohibiting non-competes. https://www.arnoldporter.com/en/perspectives/advisories/2024/04/ftc-releases-final-rule-prohibiting-non-competes. Published April 24, 2024. Accessed July 30, 2024.
Non-compete clause rule. https://www.federalregister.gov/documents/2024/05/07/2024-09171/non-compete-clause-rule. Published May 7, 2024. Accessed July 30, 2024.
Non-compete clause rule. https://www.ftc.gov/system/files/ftc_gov/pdf/noncompete-rule.pdf. Accessed July 30, 2024.

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Sources/Disclosures

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Biography:

Expert Submission

Disclosures: Kahng reports being an attorney of Arnold & Porter Kaye Scholer LLP, which has clients that are manufacturers of health care products and services as well as providers of health care services, including in the ophthalmic space.

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