Federal Trade Commission bans most noncompete agreements
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Key takeaways:
- AAFP said the new rule allows physicians to “pursue opportunities that value their expertise.”
- The American Hospital Association said the rule is detrimental to hospitals but “will likely be short-lived.”
In a 3-2 vote, the Federal Trade Commission passed a final rule that bans new noncompete agreements with all workers in for-profit organizations.
For existing noncompetes, the Federal Trade Commission (FTC) rule allows companies to maintain agreements with senior executives who earn more than $151,164 annually and are in policy-making positions. For all other workers, existing noncompete agreements “are not enforceable” after the rule goes into effect, an FTC press release said.
The rule goes into effect 120 days after it is published in the Federal Register. It does not apply to nonprofit organizations.
According to the FTC, noncompete agreements are “an unfair method of competition” and violate Section 5 of the FTC Act.
“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” FTC Chair Lina M. Khan said in the release. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market.”
The agency estimates that about 30 million workers — or nearly one in five people in the United States — are subject to a noncompete agreement. The FTC expects the rule will increase the average worker’s earnings by about $524 each year and lower health care costs by up to $194 billion over the next 10 years.
Several physician organizations, including the AMA, have previously announced their opposition to noncompete agreements.
In response to the final rule, the American Academy of Family Physicians (AAFP) said it is pleased to see the FTC “take concrete action to ban noncompete clauses in employee contracts.”
“This decision puts patients first and ensures family physicians can pursue opportunities that value their expertise and continue to provide high-quality care that their communities need,” AAFP President Steven P. Furr, MD, FAAFP, said in a statement.
However, the American Hospital Association (AHA) said the final rule is “bad law, bad policy, and a clear sign of an agency run amok.”
In a letter sent to the FTC in February 2023, the AHA argued that a sweeping noncompete ban “would instantly invalidate millions of dollars of existing contracts, while exacerbating problems of health care labor scarcity, especially for medically underserved areas like rural communities.”
After the final rule was announced, Chad Golder, AHA general counsel and secretary, said in a statement that “the agency’s stubborn insistence on issuing this sweeping rule — despite mountains of contrary legal precedent and evidence about its adverse impacts on the health care markets — is further proof that the agency has little regard for its place in our constitutional order.”
“Three unelected officials should not be permitted to regulate the entire United States economy and stretch their authority far beyond what Congress granted it,” he said. “The only saving grace is that this rule will likely be short-lived, with courts almost certain to stop it before it can do damage to hospitals’ ability to care for their patients and communities.”
References:
- Family physicians encouraged by noncompete ban. https://www.aafp.org/news/media-center/statements/family-physicians-encouraged-by-noncompete-ban.html. Published April 24, 2024. Accessed April 24, 2024.
- FTC announces rule banning noncompetes. https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes. Published April 23, 2024. Accessed April 24, 2024.
- FTC issues final rule banning most noncompete clauses in employer agreements. https://www.aha.org/news/headline/2024-04-23-ftc-issues-final-rule-banning-most-noncompete-clauses-employer-agreements. Published April 23, 2024. Accessed April 24, 2024.
- Notice of proposed rulemaking, Federal Trade Commission; Noncompete Clause Rule. https://www.aha.org/system/files/media/file/2023/02/aha-comments-on-ftc-proposed-non-compete-clause-rule-letter-2-22-23.pdf. Published Feb. 22, 2023. Accessed April 24, 2024.
Perspective
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David M. Glaser, JD
It is a certainty that there will be an immediate legal challenge to the rule, and at LEAST in the health care context, the probability that the challenge results in at least a temporary suspension of the rule seems very, very high. It is important to understand that the FTC has limited jurisdiction. In particular, it has oversight only over a corporation “organized to carry on business for its own profit or that of its members.” Courts, and even the FTC, have taken the position that nonprofits are generally outside the scope of the FTC. That would mean that for-profit entities, like most physician clinics and some hospital systems, like Tenet, would be covered by the rule and could not impose noncompetes on employees, but nonprofit hospitals and clinics would be permitted to impose a noncompete unless some other law (like a state law) prohibited it. That is a very weird result.
The FTC recognizes this, but when presenting the rule, asserts that some entities that claim nonprofit status may, in fact, effectively be for-profit. It cites some cases where courts have ruled that if a nonprofit has “ceded effect control” to a for profit partner, the entity can lose its tax-exempt status. That is certainly true, but it would be revolutionary for the government to assert that most, or even many, nonprofits don’t qualify for that status. According to the FTC, 58% of hospitals claim tax-exempt status, with another 19% being state or local organizations that are also outside the FTC’s reach. In other words, the FTC admits that absent extenuating circumstances, 77% of hospitals are outside the scope of the rule. There are certainly some people who would like to eliminate tax-exempt status for hospitals, but that is a separate policy question, well outside the scope of this rule. Courts are likely to be troubled by a rule that applies to only about a quarter of an industry.
For physicians employed by a nonprofit or government-run facility, the rule has no immediate impact. For those employed by a for-profit organization, whether a hospital or clinic, if the rule takes effect in 120 days, in many cases their noncompete provisions would be invalid. The regulation will prohibit enforcement of any noncompete for any non-executive employees. But it allows employers to continue to enforce noncompetes already in place with “senior executives.” (“Senior executives” are workers who are in a policy-making position and earn more than $151,164 a year.) It is likely, particularly in physician clinics, that some physicians will have enough policy influence to be considered senior executives. That said, the odds that the rule will take effect seem very, very low. Courts are likely to be concerned about the inconsistent treatment of for-profit and nonprofit hospitals. A court injunction seems probable.
It is worth noting that even if a court prevents the rule from taking effect, it is part of a trend against noncompetes. The FTC notes that there are provisions in Colorado, Florida, Indiana, Iowa, Kentucky, New Mexico, South Dakota, Texas and the District of Columbia that limit noncompetes for at least some health care professionals (some of those provisions do not apply to physicians) and that list ignores broader noncompete limitations that exist in places like California, Minnesota Oklahoma and North Dakota that have broader restrictions on noncompetes. Personally, I discourage my clients from imposing noncompetes because I think they often cause litigation because department employees need to drum up a reason to void the noncompete. Whatever happens to the rule, the number of noncompetes is likely to continue to fall.
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