Legal Update: It’s ‘Wait and See’ on Noncompete Ban

Courts will decide fate of proposed rule on post-employment agreements.

When the Federal Trade Commission (FTC) announced a wide-reaching ban on noncompete employment agreements in April, companies everywhere went into a tizzy.

The FTC’s proposed final rule on the matter, which is scheduled to go into effect on Sept. 4, would apply to all workers except policymaking senior executives who make more than $151,164 per year. Companies, including healthcare systems, immediately worried if their top employees with whom they have noncompete agreements would be free to leave and work elsewhere. They also wondered if they were free to recruit talented professionals from other companies if their noncompetes were no longer enforceable.

In effect until at least September

Everyone needs to take a deep breath — for now. First, all noncompete agreements remain in effect until at least Sept. 4. Second, multiple federal lawsuits have been filed that claim the FTC exceeded its authority in attempting to issue the final rule and those court cases could take years to reach the U.S. Supreme Court.

My recommendation at the healthcare company where I work is for us to maintain the status quo. We are operating as if the FTC never even issued this ban, because we don’t know how the courts are going to respond.

We’ll continue to honor the noncompete agreements that other companies have with their employees and hold our employees to the noncompetes we have with them.

If a new high-level executive or policymaking clinician comes to our company, we’ll enter into a noncompete agreement with them until we can’t do otherwise, which would be the case if the court challenges fail and the FTC rule goes into effect.

Impact on healthcare industry

Even though the FTC did a poor job in defining the term “senior executive” in its 500-page rule, it seems clear that noncompete agreements would be allowed to continue for physicians who are CEOs or policymakers of physician groups, but not for doctors who simply practice medicine every day. That seems reasonable, as most people agree that ordinary employees should have a right to earn a living wherever they choose. It’s also reasonable that a company can require a former employee with deep knowledge of its practices not work for a nearby competitor for a finite period of time after leaving their job.

The issue gets murky, however, because the FTC has no enforcement authority over nonprofit entities, which has made for some strange bedfellows in the healthcare industry when it comes to opponents of the proposed ban.

Chad Golder, general counsel for the American Hospital Association, issued a strong statement after the FTC announced the rule, as did the Ambulatory Surgery Center Association (ASCA).

“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,” says Mr. Golder. He added that he’s confident the courts halt the ban “before it can do damage to hospitals’ ability to care for their patients and communities.”

In an April letter to FTC Chair Lina Khan, ASCA CEO William Prentice opposed the ban as well, saying it would hurt ASCs’ abilities to compete with nonprofit hospitals for surgeons, nurses and other essential staff.

“Hospitals are more likely to employ physicians currently, and this rule would allow nonprofit providers to more aggressively engage in noncompetitive behavior that would impede a physician’s ability to eventually move to an ASC or other healthcare provider,” says Mr. Prentice.

In announcing the rule, Ms. Khan said the move was made to increase competition in all industries by protecting Americans’ fundamental freedom to change jobs.

“Noncompete clauses keep wages low, suppress new ideas, and rob the American economy of dynamism, including from the more than 8,500 new startups that would be created a year once noncompetes are banned,” she says. “The FTC’s final rule to ban noncompetes will ensure Americans have the freedom to pursue a new job, start a new business or bring a new idea to market.”

The FTC estimates the ban would decrease healthcare costs by up to $194 billion over the next 10 years.

What the future holds

Before the FTC’s sweeping new proposed rule, the battlegrounds for noncompete agreements have been in state legislatures. That’s where they will return if the FTC rule is successfully stopped by the federal court.

An increasing number of states are banning noncompete agreements altogether or making them more lenient in their scope. For example, there are states that must pay a certain percentage of a former employee’s salary if abiding by the noncompete they signed makes it hard for them to find new employment. The Epstein Becker Green law firm has a free state-by-state guide that lists noncompetes and includes which states have exemptions for physicians and other healthcare professionals.

If the FTC action does wind up dead on arrival and conflicts about noncompetes remain in state courts, employers should be sure to include blue pencil provisions in their agreements in the states that recognize them. These provisions allow judges to narrow the scope of agreements they deem unreasonable for being too long in duration or if the geographic or temporal scope of them are overly severe. This practice allows modified agreements to remain in place instead of throwing the entire thing out the window.

In the meantime, the tug of war will continue between employees’ rights to work where they choose and employers’ rights to restrict where they will work next in exchange for their current compensation package. OSM