The Federal Trade Commission’s ban on noncompete agreements will apply to some healthcare nonprofits, lawyers said.
The FTC voted to issue a final rule Tuesday that stops most employers from issuing and enforcing contract terms restricting employees from working for a competitor. Multiple lawsuits were quickly filed, challenging the FTC's authority to issue such a broad decree.
Related: FTC finalizes noncompete ban, legal challenge looms
Noncompete clauses are widely used in contracts between physicians and hospitals, and among many other parts of the healthcare industry. The ban prevents employers from using noncompete provisions in new contracts and invalidates noncompete clauses already in place, except for senior executives. As a result, many healthcare companies’ recruitment and retention strategies may shift.
Here’s how the noncompete ban affects the healthcare industry.
Will the noncompete ban apply to nonprofits?
Not all nonprofit healthcare organizations will be exempt from the ban, lawyers said.
An entity must be “organized to carry on business for its own profit or that of its members” to fall under the commission’s purview, according to FTC statute.
However, the agency still has jurisdiction over certain aspects of nonprofits including for-profit subsidiaries, joint ventures with for-profit affiliates, health plans and clinically integrated networks, attorneys said.
“It is clear, generally, that the concept of nonprofit entities are not covered by the FTC rules, but if you peer behind them and find they are driving profits to members or a for-profit entity, then the FTC will assert their jurisdiction,” said Robert Horton, a labor and employment lawyer at the law firm Bass Berry & Sims.
In the final rule, the FTC offers an example of a nonprofit hospital that employed 100 physicians. The commission would have jurisdiction “because the organization engaged in business on behalf of for-profit physician members,” the rule states. A nonprofit hospital could also fall under the FTC’s purview if it has “ceded effective control to a for-profit partner,” according to the regulation.
If a for-profit subsidiary is deeply integrated into a nonprofit's operations, the entire organization may be subject to the noncompete ban, said Doug Wolfe, a lawyer at the law firm Wolfe Pincavage who advises nonprofit health systems.
Even if the FTC’s ban doesn’t apply to nonprofits, those organizations should still be paying attention, said Eliot Turner, an attorney at the law firm Norton Rose Fulbright who focuses on antitrust disputes. The final rule could spur legislative action as state policymakers consider bolstering existing laws or introduce bills designed to limit noncompete agreements, he said.
“If an employer attempts to enforce noncompetes, employees can raise FTC’s ban as evidence that enforcing them is unreasonable,” Turner said.
What changed from the proposed to final rule?
The FTC created a carve-out for senior executives in the final rule.
Existing noncompete agreements with senior executives, defined as workers who earn more than $151,164 a year and are in policymaking positions, can remain in place. But employers are barred from enforcing new noncompete provisions with senior executives.
The final rule exempted any businesses involved in a sale from the ban, as well. The proposed rule had a 25% ownership threshold tied to the exemption.
In addition, the final rule eliminated a requirement for employers to formally rescind existing noncompete agreements. Under the final rule, employers will have to provide workers with notice that existing provisions will not be enforced.
How are employers adjusting?
In the lead-up to the FTC's regulatory move, fewer employers planned to use noncompete agreements, according to a survey set to be released next month by law firm Littler Mendelson.
Nearly two-thirds of respondents who use noncompete provisions said they are less likely to use them due to recent regulatory and legislative activity. The survey, conducted in February and March, polled more than 400 in-house lawyers, executives and human resources professionals. About 10% of the respondents were from the healthcare industry, according to the survey.
Many nonprofit healthcare organizations will err on the side of caution, meaning they will be more likely to use nondisclosure agreements and trade secret laws rather than noncompete provisions, Wolfe said.
If the ban on noncompete provisions is implemented, healthcare providers may extend the duration of employment contracts, said Mark Peters, a labor and employment lawyer at the law firm Holland & Knight.
In addition, the ban would decrease the valuation of healthcare companies if a competitor is allowed to open a business in the same market, and operating costs would rise as employers increase salaries and benefits, Peters said.
Which organizations have sued to block a noncompete ban?
Tax firm Ryan LLC filed a lawsuit Tuesday immediately after the FTC vote and the U.S. Chamber of Commerce filed a lawsuit Wednesday morning.
Both lawsuits allege Congress did not grant the FTC rulemaking authority, despite the commission’s claims that it has jurisdiction under the FTC Act.
The organizations are seeking to block the rule, which is set to take effect 120 days after it’s published in the Federal Register. The courts may decide to delay the ban while the court cases are ongoing, lawyers said.
“If ever a federal agency attempted to pull an elephant out of a mousehole, this is it,” the lawsuit filed by Ryan LLC in the U.S. District Court for the Northern District of Texas alleges.
The ban represents an “unlawful and unprecedented exercise of bureaucratic power,” the U.S. Chamber of Commerce alleges.
In response to the lawsuits, an FTC spokesperson said in a statement its legal authority is crystal clear and the commission looks forward to winning in court.
“In the FTC Act, Congress specifically 'empowered and directed' the FTC to prevent 'unfair methods of competition' and to 'make rules and regulations for the purposes of carrying out the provisions of' the FTC Act,” the spokesperson said.
How are healthcare associations responding to the noncompete ban?
The American Hospital Association said in a statement the only saving grace of the regulation is it will likely be short-lived as courts are poised to stop it.
“The FTC’s final rule banning noncompete agreements for all employees across all sectors of the economy is bad law, bad policy and a clear sign of an agency run amok. 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,” Chad Golder, AHA general counsel and secretary, said in the statement.
The American Academy of Family Physicians supports the ban, which will ensure doctors can continue to provide high-quality care that their communities need, Dr. Steven Furr, president of the academy, said in a statement.
“We are also encouraged to see that the FTC intends for this ban to extend to many nonprofit entities. Nonprofit health systems often have significant financial assets and employ a large portion of physicians and clinicians," he said in the statement.
The noncompete ban will create an “uneven playing field" for nonprofit and for-profit hospitals, the Federation of American Hospitals said in a statement.
“The ban makes it more difficult to recruit and retain caregivers, while at the same time creating an anti-competitive, unlevel playing field between tax-paying and tax-exempt hospitals — a result the FTC rule precisely intended to prevent,” FAH President and CEO Chip Kahn said in the statement.
