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What Does the FTC Ban of Non-Compete Agreements Mean for Healthcare Providers?

Overview of the Ban

On April 23, the Federal Trade Commission (FTC) issued a final rule, banning new non-compete agreements with all workers. It is estimated that around thirty million workers are subject to non-compete agreements, nationwide. The Commission’s final ruling states that non-compete agreements give rise to an unfair method of competition and banning non-compete agreements will result in reduced healthcare costs, new business formation, increased innovation, and higher worker earnings.

The final rule’s effective date is 120 days after publication in the Federal Registrar. To conform to the final rule, employers will have to provide notice to workers who are bound to existing non-compete agreements, that their non-compete agreement will not be enforced against them in the future. As a guide, the FTC has provided model language that employers may use to communicate the change to employees.

Although existing non-compete agreements will not be enforceable after the effective date, there is an exception for senior executives. Senior executives’ existing non-compete agreements will remain in force but the ban against any new non-compete agreements will still apply. The role of a senior executive applies to any worker who was in a policy-making position and received a compensation of more than $151,164 annually.

Who Does the Rule Apply to?

The rule applies to anyone who works for a for-profit employer, despite being paid or unpaid and independent contractors. Additionally, limited use of non-compete agreements between franchises and franchisors is permitted. The rule also does not apply to non-compete agreements entered into by a person pursuant to a bona fide sale of a business entity. 

Generally, the rule will not affect employment agreements entered into by nonprofit organization employees because the FTC’s authority only extends to for-profit businesses. However, the FTC stated that both judicial decisions and FTC precedent recognize that not all entities claiming tax-exempt status as nonprofits fall outside the Commission’s jurisdiction.

To determine whether a corporation is organized for profit and therefore within the FTC’s jurisdiction, a two-part test is applied. The FTC explains that “[t]he not-for-profit jurisdictional exemption under Section 4 requires both that there be an adequate nexus between an organization’s activities and its alleged public purposes and that its net proceeds be properly devoted to recognized public, rather than private, interests.” Any entity that satisfies the two-prong test falls within the FTC’s jurisdiction and is thus bound by the final rule.

Challenges to the Ruling

Following the enforcement of the rule is expected to have significant impacts on employers who use non-compete agreements to protect certain interests of the company. The FTC has stated that employers may use alternatives to protect their company investments without having to enforce a non-compete agreement. The FTC provides the use of trade secret laws and non-disclosure agreements as a feasible alternative to protect sensitive information. The FTC also encourages employers to improve wages and working conditions to retain employees rather than non-compete agreements.

While some medical organizations have favored the ban of non-compete agreements, stating they are exploitative for professions such as physicians who require state licenses, credentials, and insurance, making relocation even more difficult, other organizations have been opposed to the ban.

The American Hospital Association released a press statement vehemently opposing the ban stating the rule is “bad law, bad policy, and a clear sign of an agency run amok.” The Federation of American Hospitals CEO also joined the discontent with the rule stating that the ban will make it more difficult to recruit and retain caregivers to care for patients and create an anti-competitive and unlevel playing field between tax-paying and tax-exempt hospitals.

As of now, there is uncertainty about whether the rule will survive the legal challenges that are sure to come. The U.S. Chamber of Commerce president and CEO, Suzanne P. Clark, has issued a statement explaining that the Chamber will sue the FTC to block the rule which she describes as a blatant power grab that will undermine American businesses’ ability to remain competitive.

Conclusion

Although the future of the FTC’s ruling is still up in the air amid legal challenges, the effective date for the ban of non-compete agreements is set for 120 days after publication in the Federal Registrar.

The rule will affect all new non-compete agreements and most existing non-compete agreements. Employees who are working in non-profit organizations may advise an attorney as to whether the two-prong test would satisfy the FTC’s jurisdiction or not. 

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It should be noted that I am not your lawyer (unless you have presently retained my services through a retainer agreement). This post is not intended as legal advice, it is purely educational and informational, and no attorney-client relationship shall result after reading it. Please consult your own attorney for legal advice. If you do not have one and would like to retain my legal services, please contact me using the contact information listed above.

All information and references made to laws, rules, regulations, and advisory opinions were accurate based on the law as it existed at this time, but laws are constantly evolving. Please contact me to be sure that the law which will govern your business is current. Thank you.

Jamaal Jones

jrj@joneshealthlaw.com

This post was authored by Jamaal R. Jones, Esquire (Partner) of Jones Health Law, P.A. where we provide "On-Call Legal Services to Healthcare Professionals". For more information contact us at (305) 877-5054; email us at JRJ@JonesHealthLaw.com, or visit our website at www.JonesHealthLaw.com

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