New FTC Rule Banning Noncompetition Agreements Impacts Healthcare

In January 2023, the Federal Trade Commission published its proposed rule broadly prohibiting noncompetition agreements by businesses with workers. The proposed rule was subject to a 90-day comment period resulting in over 26,000 comments. A year and several months later, on April 23, 2024, the FTC issued its final rule which is set to take effect on September 4, 2024. The FTC estimates that 18% of workers amounting to 30 million people are currently subject to a noncompetition agreement.

What is the rule? Who does it impact?

The FTC final rule essentially bans all noncompetition provisions with very limited exceptions. The rule invalidates existing noncompetition agreements and requires employers to notify workers that existing noncompetition agreements are unenforceable. Existing noncompetition agreements with senior executives can remain in effect, but employers may not enter into new noncompetition agreements with any employees. A senior executive, as defined by the FTC, is a worker earning more than $151,164 who is in a policymaking position.

Notably, physicians are not typically policymakers for healthcare organizations, so most physicians do not qualify for this exception. The FTC estimates that less than one percent of workers qualify as senior executives.

The other exception to the FTC final rule allows for a seller in a bona fide sale of a business interest to be bound by a noncompetition agreement.  This exception is intended to be allowable not only in past agreements, but for future agreements as well.

Nonprofit application

For many health care employers, the business operates not as a for-profit business, but as a nonprofit organization.  Nonprofit entities are not subject to the jurisdiction of the FTC under the FTC Act.

In response to comments regarding the proposed rule, the FTC explicitly noted that tax-exempt status under IRS Code 501(c)(3) is not determinative in establishing lack of FTC jurisdiction. Further, the FTC has expressed its intention to enforce the new rule to the fullest extent of its scope of jurisdiction. Thus, certain tax-exempt healthcare entities could be subject to the FTC’s final rule. Specifically, if a tax-exempt organization acts and operates as a profitmaking enterprise for itself, its owners, or its members, it may be subject to FTC action. Additionally, the FTC’s noncompetition ban is likely to cause a major shift in the business models of staffing agencies going forward. Staffing agencies compensate healthcare workers and provide benefits, serving as an employer for healthcare workers. Thus, even if a healthcare organization qualifies as a nonprofit outside the jurisdiction of the FTC, staffing agencies will be prohibited from including noncompetition clauses in contracts with workers provided to the healthcare organization. Healthcare organizations that interact with staffing agencies should be prepared for increased worker mobility, increased competition for talent leading to increased costs associated with acquiring talent, and attempts by staffing agencies to use alternative types of clauses in employment agreements.

State laws

The FTC’s final rule does not limit or impact the enforcement of state laws restricting noncompetition agreements if the state law does not conflict with the final rule. The FTC’s final rule preempts state laws that conflict with the final rule. Many states have previously enacted laws limiting the enforceability of noncompetition provisions. For example, Iowa does not have a statute governing general noncompetition provisions. However, Iowa has a statutory prohibition on noncompetition agreements in contracts between healthcare employment agencies and agency workers. Going further, state statutes in Colorado, North Dakota, and Minnesota broadly prohibit noncompetition agreements. As healthcare organizations begin to navigate the employment contracting landscape after the final rule takes effect, decisionmakers need not lose sight of relevant state laws concerning noncompetition agreements.

Options Going Forward

Employers can still utilize other means to protect trade secrets and valuable investments such as confidentiality, trade secret, nondisclosure and nonsolicitation agreements. However, these should be drafted carefully as the rule extends to any clause that penalizes or functions to prevent workers from seeking other job opportunities. As such, the FTC will likely pursue enforcement against nondisclosure and nonsolicitation agreements which are overly restrictive and, in effect, function as noncompetition agreements.

Ongoing Litigation  

After the final rule was published, Ryan LLC, a Texas tax firm, filed a lawsuit seeking an injunction preventing the final rule from becoming law. Healthcare organizations should keep a pulse on challenges to the final rule and adapt as necessary to the decisions of the courts. However, the severability clause in the final rule results in the remainder of the final rule remaining in effect even if some part of a provision or application of the final rule is invalid or unenforceable.

Scott S. Moore
Dane Hansen, Summer Associate