The Federal Trade Commissionapproved a ban on noncompete agreementsacross nearly all industries in a 3-2 vote on Tuesday. The ban would impact the health care industry when it goes into effect in four months.
But the FTC is bracing for all but certain legal challenges that could delay or prevent the ban from ever taking effect.
Noncompetes agreements often prohibit employees from leaving a job and taking another in the same industry within a specific geographic location or period of time or both.
Around one in five U.S. workers have noncompete clauses in their contracts, including many physicians and nurses. According to theAmerican Medical Association, around 37% to 45% of U.S. physicians are bound by noncompete agreements.
Who the rule covers
The FTC’s ban on noncompetes would mean that, in most cases, employees –– including health care workers like physicians and nurses –– will be able to switch jobs and work for rival companies.
The FTC estimates that the ban on noncompetes would have a yearly impact of up to 29,000 more patents, 8,500 new start-ups and a $524 pay bumps for the average worker. The ban would also lower health care costs by up to $194 billion over the next decade.
The rule will apply to for-profit organizations because the FTC generally does not have jurisdiction over nonprofit entities. This means that big swaths of physicians and nurses who are employed by nonprofit hospitals may not be covered by this rule, and can still be subject to noncompete agreements even if the ban takes effect.
But the FTC said that if a nonprofit entity is organized in a way that drives profits to its members, then the FTC may have jurisdiction over it and treat it as a for-profit organization. The agency said that “not all entities claiming tax-exempt status as nonprofits fall outside the Commission’s jurisdiction.” The FTC’s rule does not explicitly exclude nonprofit hospitals or health systems and does not define profit-making practices.
Inits 570-page public filingexplaining the rule, the agency gave examples of such cases. One is of a physician-hospital organization, which consisted of over 100 private physicians and one non-profit hospital and claimed tax-exempt status as a nonprofit. But the organization engaged in business on behalf of for-profit physician members, which made it fall under the FTC’s jurisdiction in a section 5 enforcement action, also known as “unfair or deceptive acts or practices”.
This carve-out may mean that some health care organizations claiming 501(c)(3) status, may be impacted by the FTC’s ban on noncompetes when and if it takes effect.
“Concerns about noncompetes became especially acute when, during the COVID-19 pandemic, physicians advocating for health care worker safety were threatened with termination. Because of noncompete clauses, this could have meant months or years of unemployment or geographic relocation,” a statement by the AMA said.
But the American Hospital Association was swift to voice their dismay at the ban.
“The FTC’s final rule banning non-compete agreements for all employees across all sectors of the economy is bad law, bad policy, and a clear sign of an agency run amok,” said Chad Golder, the American Hospital Association’s attorney and secretary,in a statement.
Golder said that the unelected FTC officials should not have the authority to regulate the U.S. economy.
In Indiana, lawmakers worked to reign in noncompete agreements for physicians. They passed a law in 2023 that bans noncompetes for primary care physicians whose contracts start after July 2023. All other physicians can still be placed under noncompete agreements, unless they quit “for cause” or are let go by their employer “without cause”. But the law does not define “cause”, leaving some casesup to the courts to decide.
Now, this sweeping action by the FTC could give many physicians a way out of their noncompetes.
RepublicanSen. Justin Buschof Fort Wayne, Ind., who authored the noncompete bill last year, said the FTC rule is a step in the right direction.
“As a policy, I think that people should be free to move about and if they do good work, then they're rewarded and that's why they decide to stay,” Busch said. “I've seen the ugly side of it where folks in professions here in my neck of the woods have weaponized the noncompete.”
He said many of his constituent’s doctors have left the area in order to seek employment in other cities or states. But he’s heard that some health care systems have gotten rid of noncompetes entirely since the state law restricting them was passed.
The future of the rule
Richard Pierce, a law professor at George Washington University, said the FTC rule makes sense for high-level positions in order to prevent people from sharing industry trade secrets. But he said the rule is so broad that it “has no chance of surviving in court.”
“What has been happening in recent years that’s outrageous is putting noncompetes in the contracts of people who flip burgers at McDonald's and clean houses,” Pierce said. “In those contexts they make no sense, in other contexts they do. This blanket prohibition would have zero chance of getting by the courts.”
Pierce said the FTC has always had the power to tell an organization that a noncompete clause is unlawful, but only on a case by case basis. The problems occur when the agency has tried to make a sweeping rule across all noncompetes, 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,” Golder of the American Hospital Association said.
Indeed, the ban’s future is uncertain and will likely be tied up in litigation. Just a day after the FTC vote, the U.S. Chamber of Commercesued the agency“to block this unnecessary and unlawful rule and put other agencies on notice that such overreach will not go unchecked,”according to a statement.
Pierce expects a temporary injunction to be issued in a matter of days before it could potentially be deliberated by the U.S. Supreme Court. It could take years before the decision is determined.
If the ban survives legal challenges and takes effect, it would render existing noncompete agreements unlawful, except for existing agreements for executives in policy making positions, who make more than $151,164 a year. New noncompete agreements, including for senior executives, would be banned.
