The Federal Trade Commission seeks to ban noncompete clauses, contract provisions used by many healthcare employers that allegedly suppress wages, limit innovation and deter new businesses, through a proposed rule published Thursday.
According to the agency, the regulation would boost wages by up to $296 billion a year by outlawing the use of noncompete provisions and rescinding current clauses across all industries. Researchers estimate that at least 40% of physicians are held to restrictive covenants that typically prevent them from working for competitors within a 30-mile radius for one or two years. These contracts are even more widely used and strictly enforced in the insurance and pharmacy benefit manager industries, experts said.
Noncompete contract provisions, particularly when they involve low- and middle-income workers, rarely benefit both parties, said Barak Richman, a law and business professor at Duke University.
“Noncompetes are wildly overused,” Richman said. “It is telling that many people attribute much of California’s growth in the 1990s to a general refusal to enforce noncompetes. The theory is that it made the labor market much more creative and productive.”
Absent a federal policy, noncompete agreements have been governed by a patchwork of state laws. Physician noncompete clauses are generally unenforceable in California, North Dakota and Oklahoma. Twenty-one states have either prohibited most restrictive covenants or instituted time limits, payout requirements or other conditions, according to a 2020 report from the University of California, Hastings and the University of California, Berkeley.
In the insurance sector, most executives are subject to noncompete clauses, said Tom Giella, chair of the management consultancy and executive search firm Korn Ferry’s healthcare services practices. If a former employee violates a contract by taking a job with a competitor, the previous employer may sue or withhold deferred compensation or vested equity, he said.
“Noncompetes are tough to break in the insurance industry, and they will go after you,” Giella said. “Banning noncompetes will make the healthcare labor market more fluid and competitive, and salaries would probably go up.”
Technology company Change Healthcare, which UnitedHealth Group acquired in October despite FTC opposition, sued a former employee for allegedly violating the noncompete terms of his contract by joining competitor Olive AI. The departed executive countersued, alleging that UnitedHealth Group didn’t pay the entire length of his agreement, as mandated by Massachusetts law. Both cases were dismissed in November.
The proposed ban on noncompete agreements is one element of the FTC’s broader strategy to limit anticompetitive activity in healthcare and other industries. FTC Chair Lina Khan is reworking the agency’s merger guidelines to prevent monopolies and increase competition. The commission has successfully challenged several proposed health system mergers over the past year.
Potentially anticompetitive contract provisions such as noncompete clauses may reduce quality, according to a 2022 survey of 117 orthopedic surgeons in Louisiana. Nearly two-thirds said noncompete agreements force patients to travel long distances to maintain continuity of care. More than three-quarters of the doctors said the clauses forced them to abandon patients.
But advocates of noncompete clauses say that they can encourage employers to invest in technology or potentially pay individuals more. For instance, an employer may offer a staffer higher compensation if their work is protected from competitors for a certain amount of time, said David Woolf, a partner at the law firm Faegre Drinker Biddle & Reath who represents healthcare companies in employment litigation.
“Noncompete clauses could give employers incentive to innovate and invest when they know what they are working on is protected and the employee isn’t going to walk out the door and go to a competitor,” Woolf said. “That is the concern I have.”
A narrower regulatory approach to noncompete agreements would be more appropriate than an outright ban, Woolf said. Proponents of noncompete clauses will likely question the agency’s legal authority to implement a ban, he said.
The proposed rule would apply to independent contractors and anyone who works for an employer, whether paid or unpaid. It would generally not apply to other employment restrictions, such as nondisclosure agreements, unless they are so broad they function as de facto noncompete provisions.
“It is somewhat vague on what would constitute a broad enough nondisclosure agreement for it to be considered a noncompete,” said Beth Vessel, an antitrust attorney at the law firm Waller Lansden Dortch & Davis. If the ban goes through, it could affect the value of healthcare mergers and acquisitions, she said. Acquirers will likely pay less if there is no guarantee that employees would stay for a certain period of time after a deal closes, Vessel said.
Provider associations will likely sue the FTC if it implements the policy, Vessel said. “I don’t know if it will ultimately survive because it is so broad,” she said. “It seems like a pretty steep uphill battle in the courts.”