On May 7, 2024, the Federal Trade Commission (“FTC”) published a final rule effectively banning all non-compete agreements as an “unfair method of competition” under Section 5 of the FTC Act. The ban is scheduled to go into effect on September 4, 2024, assuming no court holds otherwise. Every industry will feel the impact of this ban, including those in the healthcare industry.
Non-compete Agreements under the FTC
The FTC defines non-competes under § 910 as “[a] term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from” seeking or accepting work elsewhere in the U.S. or operating a business in the U.S. after the conclusion of employment. A qualifying non-compete agreement can include verbal or written contractual terms or an employer policy. This definition could also encompass some overbroad non-disclosure, non-solicitation, training repayment, and liquidated damages agreements, but it is more likely that the FTC’s rule is intended to target traditional non-compete restrictions such as geographical limitations.
Employees subject to preexisting non-compete agreements must be notified of their unenforceability come the September 4 effective date. However, preexisting agreements for senior executives will still be enforceable. Senior executives are defined as individuals who earn over $151,164 and hold a “policy-making position.” A “policy-making position” includes have final authority to make decisions that control significant aspects of a business. This does not include authority over subunits of a larger business entity. For instance, if a medical director has final decision-making authority over a hospital that functions as a subsidiary of a common enterprise, they likely do not qualify as a senior executive under the FTC rule. However, physician partners of an independent physician practice would generally qualify as a senior executive. Whether an employee is a senior executive will be determined by a fact-dependent inquiry requiring individual analysis.
Jurisdictional Exceptions
The final rule specified two notable exceptions that fall outside the FTC’s jurisdiction: non-profits and government or quasi-government entities, both of which could include applicable healthcare entities. However, these are not blanket exceptions. The FTC provided tests for each exception.
- Non-Profits. Qualifying as a non-profit exempt from the ban on non-competes will be more complicated than simply claiming tax-exempt nonprofit status under 501(c) of the Internal Revenue Code. Instead, the FTC articulated a two-part test to determine if a corporation is “organized to carry on business for its own profit or that of its members.”
- Step 1: There must be an adequate nexus between the organization’s activities and its alleged public purpose.
- Step 2: The corporation’s net proceeds must be properly devoted to recognized public, rather than private, interests.
In other words, the FTC will examine both the source of the income and the destination of the income. This will be another fact-intensive analysis requiring in-depth knowledge of the entity and applicable caselaw.
- Government and Quasi-Government Entities. It will not be enough to simply be government-owned, -sanctioned, or -directed. Instead, government and quasi-government entities will only be exempt from this ban if their activities fall under the state action doctrine. For state and local government entities, the key question will be: Is the conduct (i.e. a non-compete agreement) “compelled by direction of the state acting as a sovereign”? Quasi-government entities (“such as hospitals affiliated with or run in collaboration with States or localities”) require a similar inquiry divided into two elements:
- (1) The challenged restraint on trade must be clearly and affirmatively articulated as a state policy, and
- (2) the state policy must be actively supervised by the State itself.
The FTC specifically declined to exclude the healthcare industry. Instead, it will be treated like any other potentially qualifying non-profit or quasi-government entity, subject to the tests above. Notably, healthcare workers who work at a qualifying non-profit or government hospital but are contracted with a staffing agency or physician group will still be subject to the ban.
FTC’s Authority
For the past couple of years in particular, the FTC has taken overbearing strides to assert its authority under Section 5 of the FTC Act to ensure workers are protected from unfair methods of competition. Section 5 prohibits “unfair or deceptive acts or practices in or affecting commerce” while Section 6(g) gives the FTC authority to carry out the objectives of the Act.
Current Challenges
The FTC’s rule is facing legal challenges, mostly stemming from arguments that the FTC does not have authority to make such a broad rule. One of the first challenges was filed by Ryan LLC in the Northern District of Texas, which additional parties intervened including the U.S. Chamber of Commerce, Business Roundtable, the Texas Association of Business, and the Longview Chamber of Commerce. The judge recently issued a preliminary injunction, effectively ceasing enforcement of the ban, but only for the named plaintiffs. All other employers should continue to make preparations for the rule to come into effect on September 4, 2024. The Texas court, however, intends to rule on the merits of the case by August 30, 2024. This ruling could limit relief to the Ryan LLC plaintiffs or vacate the rule entirely.
The recent Supreme Court decision in Loper Bright Enterprises v. Raimondo provided extra ammunition for the challenges to the FTC’s rule. Loper Bright overturned Chevron and its 40 years of precedent, which mandated that courts defer to an agency’s reasonable interpretation of ambiguous statutes. The FTC likely relied on Chevron deference when advancing its authority to ban all non-competes. Without this deference, the FTC will have to convince the court that normal statutory interpretation of Section 5 grants it such broad authority.
However, Loper Bright will not unequivocally defeat the FTC’s rule. In a separate lawsuit in Pennsylvania filed by ATS Tree Service LLC, a federal judge refused to issue a preliminary injunction that would have temporarily ceased enforcement of the ban. The judge concluded that the harm was too speculative and even found that the plaintiff was unlikely to succeed on the merits, reasoning that the FTC Act’s language does not limit the FTC’s authority to prevent unfair methods of competition. These polar opposite decisions suggest that both the Texas and Pennsylvania cases will likely be appealed and potentially find their way to the U.S. Supreme Court.
What Should Employers Do
Regardless of the pending challenges to the FTC’s rule, it is important for every employer to be prepared to comply with the law. Employers should conduct an audit to best determine how to comply with this ban and have a plan in place for issuing notices required under the rule in advance of September 4. Employers wishing to prevent a senior executive from engaging in competitive activity should draft and finalize an enforceable non-compete agreement immediately. Employers can also use non-solicitation provisions to provide additional restrictions. Given the expansive definition of non-compete agreements, provisions meant to protect trade secrets and other confidential information must be carefully crafted and reviewed. Additionally, employers in the healthcare industry should consider alternative ways to protect their patients’ information, fee schedules, technology, and other assets. For instance, confidentiality agreements, cybersecurity, and even AI can be used to better protect proprietary information and your business.
Written with the assistance of Charlotte Rhoad, a 2024 summer associate in the firm’s Denver office.
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Shawna Ruetz
Shawna Ruetz is senior counsel in Husch Blackwell’s Denver office and a member of its labor and employment practice team. She represents clients before administrative agencies and in all aspects of employment litigation in both federal and state courts.
Charlotte Rhoad
Charlotte Rhoad is a 2024 summer associate in the Husch Blackwell’s Denver office.
