FTC Unveils Rule Axing Non-Competes – But it’s Already on Shaky Ground

Last week the Federal Trade Commission (FTC) issued a final rule that, if it takes effect, will ban most non-compete clauses among for-profit entities. There is a lot to unpack here. There are already legal challenges to the rule. While I know predicting the future is difficult and risky, I would say that at least in the context of healthcare, the probability that the legal challenge results in at least a temporary suspension of the rule seems very, very high. 

The rule is complex in part because 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 non-competes on employees, except in very limited situations, but nonprofit hospitals and clinics would be permitted to impose them unless some other law (like a state law) prohibits it.

That is a very weird result and one reason I think the courts will intervene.

The FTC recognizes the inconsistency, but when presenting the rule, asserted that some entities that claim nonprofit status may in fact effectively be for-profit. It cites 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 also rare. It would be revolutionary for the government to assert that most (or even many) non-profits don’t actually qualify for that status.

According to the FTC, 58 percent of hospitals claim tax-exempt status, with another 19 percent being state or local organizations that are also outside the FTC’s reach. In other words, the FTC admits that absent extenuating circumstances, 77 percent of hospitals fall outside the scope of the new rule.

There are certainly some people who would like to eliminate tax-exempt status for hospitals, but that is a separate policy question, which is also well outside the scope of this rule. Courts are likely to be troubled by a rule that only applies limitations to about a quarter of an industry. 

For individuals employed by a non-profit or government-run facility, the rule has no impact. For those employed by a for-profit organization, whether a hospital or clinic, if the rule takes effect in 120 days (as it will, absent court intervention), in many cases their non-compete provisions would be invalidated.

The regulation will prohibit enforcement of any current non-competes for any non-executive employees, with the exception of those associated with the sale of a business. But it allows employers to continue to enforce non-competes already in place with “senior executives.” “Senior executives” are workers who are in a policymaking position and earn more than $151,164 a year.

It is likely, particularly in physician-owned clinics, that there are a number of employees who will have enough policy influence to be considered senior executives. That said, the odds that the rule will take effect anytime soon 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, this is part of a growing trend against non-competes. 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 non-competes for at least some healthcare professionals, and that list does not include broader non-compete limitations that exist in places like California, Minnesota, Oklahoma, and North Dakota.

Personally, I discourage my clients from imposing non-competes, because I think they often cause litigation, as department employees need to drum up a reason to void the non-compete.

Whatever happens to the rule, the number of non-competes is likely to continue to fall. Like the FTC, I would like to see a full ban on non-competes. But I think we will be singing that Rolling Stones classic for a while, noting that “you can’t always get what you want.”

We will see if my thoughts cause me “to get my fair share of abuse.”