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As the fate of the FTC’s non-compete rule remains uncertain, what should healthcare employers consider doing next? 

5/8/24

By: Kevin G. Kenneally and Brendan M. Collins

Recently, Attorney Sunshine R. Fellows from FMG’s Pittsburgh office reported about the 3-2 approval by the U.S. Federal Trade Commission (“FTC”) of a final rule (the “Rule”) banning virtually all new non-compete clauses in employment contracts and invalidating many existing non-competes. Attorney Fellows also reported about a federal court case brought by the U.S. Chamber of Commerce and other parties against the FTC to stop the Rule from taking effect.   

As non-competes are common in the healthcare industry, the Rule is set to impact employee-employer relations for many healthcare providers and hospitals. The FTC noted in the Rule that it contemplated comments from physicians and others within the healthcare industry, who noted the negative effect of non-competes on the quality of and access to patient care. Meanwhile, certain trade associations, like the American Hospital Association and the American Medical Group Association (AMGA), have issued press releases criticizing the Rule. For example, in its press release, AMGA noted its objection to the Rule stating, in part: “The FTC ignored any possible downsides to implementing a national standard based on a misunderstanding of how localized healthcare labor markets function.”   

For employers in the healthcare industry who are contemplating next steps and are concerned about the Rule’s impact on their talent recruitment and retention, the Rule’s effective date is an important consideration. The Rule’s effective date is 120 days from the date it was published in the Federal Register, meaning the earliest this Rule would go into effect is late August 2024. However, it is also important to note the Rule’s effective date may be further delayed – potentially indefinitely – as legal challenges continue to unfold.   

In the meantime, healthcare employers may consider consulting with counsel to determine how their workforce with existing non-compete agreements will be impacted by the Rule’s exemption of a class of workers referred to as “senior executives.” To determine whether workers with existing non-compete agreements fall under the “senior executives,” the Rule outlines an earnings test and a job duties test. For the earnings test, the worker must meet the income threshold, earning more than $151,164 per year. For the job duties test, the worker must be in a “policy-making position,” which the Rule defines as “a business entity’s president, chief executive officer or the equivalent, any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.” The Rule defines “policy-making authority” as “final authority to make policy decisions that control significant aspects of a business entity or common enterprise.”   

For healthcare employers, the Rule references physicians in its discussion of “senior executives,” noting that physician partners of an independent physician practice, with the authority to make policy decisions about the business, generally qualify as “senior executives.” Meanwhile, physicians working within a covered hospital system, who do not have policymaking authority over the organization as a whole, are unlikely to qualify as “senior executives.” 

The Rule also “does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity.” Further, because the FTC’s authority does not extend over certain nonprofit entities, falling under Section 501(c)(3) of the Internal Revenue Code, the Rule will not apply to certain nonprofit healthcare entities.  Healthcare employers may decide to use this timeframe before the Rule’s effective date to consult with counsel about whether their nonprofit status puts them outside the scope of FTC’s authority or whether their non-competes were entered into by a person pursuant to a bona fide sale of a business entity. 

In addition, while the fate of the Rule remains somewhat uncertain given the legal challenge discussed above – healthcare employers may consider availing of this opportunity to consult with counsel to determine how to achieve their operational goals in the absence of non-competes. Depending on the jurisdiction, non-solicitation, trade secret, and confidentiality agreements can often be written separate and apart from a non-compete and achieve important protections for an employer’s business operations.   

FMG will continue to monitor the Rule and its potential impact on various industries, including its effect on the healthcare industry.

For more information, please contact Kevin G. Kenneally at kkenneally@fmglaw.com, Brendan M. Collins at brendan.collins@fmglaw.com, or your local FMG attorney.