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On April 23, 2024, the U.S. Federal Trade Commission (FTC) commissioners voted 3-2, along party lines, to finalize a much-anticipated rule prohibiting employers from entering or enforcing noncompete clauses with U.S. workers, with only limited exceptions.

This unprecedented rule marks a significant change in the law and for the first time establishes federal regulation of protective covenants in employment agreements. And as we’ll discuss later in this blog, not only was the healthcare industry not exempted from the rule – as some feared – but much of the supporting evidence and comments cited by the FTC addressed the impact on physicians and patient care.

What You Need to Know

1. When will the rule go into effect?

Compliance with the new rule is required when it takes effect 120 days after publication in the Federal Register, meaning it will not be effective until late August.

However, legal challenges may significantly alter, delay, or eliminate entirely the impact of the FTC’s new rule. On April 24, the U.S. Chamber of Commerce filed a lawsuit in federal court in Texas challenging the FTC’s legal authority to issue the rule, which seeks to vacate the rule and permanently enjoin the FTC from enforcing it.

2. Who is covered by the ban?

The FTC rule broadly bans post-employment non-competes for U.S. employees, meaning non-compete provisions that apply during the period of employment are still valid.

The limited exceptions include:

  • Senior executives: the FTC will allow companies to enforce existing noncompete agreements with senior executives (a narrowly defined term) but does not allow companies to enter new noncompete agreements with them once the rule takes effect.

    • Sale of a business or practice: Companies can issue a non-compete to a person who sells an ownership interest in a business.

    • Non-profits: Generally, non-profits are not within the FTC’s jurisdiction and therefore are not covered under this rule. However, this does not mean all non-profit hospitals and institutions are exempt – read more below.

      Importantly, this rule operates as a floor and not a ceiling, meaning states can still restrict or prohibit non-competes for employers, as already is the case in 14 states and Washington, D.C.

      3. What does this mean for healthcare providers and non-profit hospitals?

      As noted, the FTC declined to exempt for-profit healthcare employers or to exempt the healthcare industry altogether.

      Even though many think the FTC does not regulate non-profits, the Commission stressed that the ban could still apply to some hospitals and healthcare entities claiming tax-exempt status as a non-profit.

      As explained by the FTC, tax-exemption is “one factor to be considered”, but “does not obviate the relevance of further inquiry into a [corporation’s] operations and goals.” The FTC will consider whether the corporation is “actually engaged in business for only charitable purposes,” as well as whether “either the corporation or its members derive profit.”

      Thus, the FTC suggests its rule could apply to “some portion” of the 58% of hospitals that claim tax-exempt status as a non-profit and the 19% of hospitals that are identified as “state or local government hospitals.” It seems apparent that the FTC will evaluate these hospitals on a case-by-case basis.

      4. Tell me more about the senior executive exemption.

      The rule includes a limited exception for ‘senior executives.’ This allows companies to enforce existing non-compete agreements with senior executives but bars new agreements with them once the rule takes effect. This effectively establishes a 120-day period to enter new noncompete agreements with those senior executives.

      The FTC defined a ‘senior executive’ as a CEO, president, or “any other officer of a business entity who has [final] policy-making authority,” provided they earn annual compensation of at least $151,164. This excludes executives of “a subsidiary or affiliate of a business entity that is part of a common enterprise” and “expressly does not include workers who merely advise on or influence policy.”

      This definition, according to the FTC, is limited “to the workers with sufficient pay and authority such that they are more likely to have meaningful bargaining power and actually negotiated their non-compete.”

      In order to ensure that lower-level workers, whom the Commission finds likely experience exploitation and coercion, are not included in the definition of senior executive, policy-making authority is assessed based on the business as a whole, not a particular office, department, or other sublevel. It considers the authority a worker has to make policy decisions that control a significant aspect of a business entity without needing a higher-level worker’s approval … The definition is limited to the workers with sufficient pay and authority such that they are more likely to have meaningful bargaining power and actually negotiated their non-competes.

      Here are some examples the FTC cited in the rule:

      • Partners at independent practice? ‘Senior executive.’ The physician partners of an independent physician practice would be considered senior executives, meaning they are still subject to their existing non-competes.

      • But if that practice is part of a health system? Not a ‘senior executive.’ In this case, if the practice is part of a health system or hospital group, then the physician who runs the practice is not considered a senior executive. These individuals would be released from existing non-competes.

      • Department or division head? Not a ‘senior executive.’ The head of a hospital’s department would also not be considered a senior executive, provided they are only a decision-maker for that particular division. These individuals would also be released from existing non-competes.

      5. What about the exemption for those who sell a business?

      The rule also includes a sale-of-business exception, meaning companies can issue a non-compete for an individual who sells an ownership interest in their business.

      This exclusion covers any seller of an ownership interest in a “bona fide sale of a business,” meaning a sale made in good faith, as opposed to one made solely to evade the rule. This broadens the exception in the proposed draft rule, which would have applied only to “substantial” owners, defined as sellers holding at least 25% ownership interest in the acquired business.

      Healthcare-Related Evidence Cited by the FTC

      The FTC cited a study finding that 45% of physicians worked under a non-compete. As a result, the FTC estimates that the rule will reduce prices for physician services by 3.5%, or $74-194 billion over ten years. The Commission also estimated the rule will result in thousands to tens of thousands of additional patents annually and will increase the rate of new firm formation by 2.7%.

      The FTC firmly disagreed with the assertion that banning non-competes would provide a material competitive advantage to non-profit hospitals. As the FTC wrote, “To the contrary, those entities outside FTC jurisdiction that continue to deploy non-competes may be at a self-inflicted disadvantage in their ability to recruit workers, even if they derive some short-term benefit from trapping current workers in their employment.”

      The FTC also discussed the potential impact of the non-compete ban on consolidation and prices in healthcare. Even though some portion of non-profit hospitals will be exempt from the final rule, the FTC notes they are already under significant public scrutiny and the Commission remains committed to using its other tools (e.g., the Clayton Act) to “vigorously defend competition” and address consolidation within healthcare. The FTC stated it is unaware of any empirical evidence that prohibiting non-competes will either worsen consolidation or raise prices for patients.

      The FTC noted it received many comments from physicians and other healthcare workers that non-competes exacerbate workforce shortages: “Many small businesses shared their experiences of how non-competes have made hiring more difficult. For example, a small physician practice said non-competes made it difficult to compete with larger practices to attract and retain physicians. A small business and a medical association said small businesses could not afford a lawsuit when hiring workers.”

      The Commission notes many workers at hospitals, including those that claim tax-exempt status as a nonprofit or government-owned hospital, contract with for-profit staffing agencies. Although some of these physicians may work at an otherwise-excluded hospital, the final rule applies to their employer—the staffing agency or for-profit physician group.

      Several comments pointed favorably to the American Bar Association’s longstanding ban on non competes for most lawyers to protect clients’ freedom to choose their lawyer, in contrast with other highly paid and highly skilled professions such as physicians and their patients or client.

      Physicians also cited anecdotal evidence that to escape non-competes, they often leave the area, severing relationships with patients in the process. Not only does this cause patients to lose the knowledge, trust, and compatibility that comes with long-established relationships, but in some cases, results in patients losing access entirely if no other physicians are available.

      If you are interested in reading more from the FTC’s final rule:

      • Pages 202 to 208 describe the comments received by the FTC that address patient access and care quality.

      • Pages 373 to 385 provide the FTC’s rationale for not exempting the healthcare industry from the non-compete ban, including a summary of public comments from physicians, patients, other providers, and hospitals.