A Federal Judge Struck Down FTC’s Ban on Noncompetes. What Does This Mean for Healthcare? - MedCity News (2024)

A decision on the Federal Trade Commission’s noncompete ban came down to the wire.

A federal judge in Texas recently blocked the FTC’s noncompete ban, which was approved by the commission on a 3-2 vote in April and was set to take effect September 4. The ban would have made existing noncompetes for most workers unenforceable (except for senior executives). Employers also would have been banned from enforcing any new noncompetes, including with senior executives. The FTC argued that the ban would have increased innovation and given workers more freedom. It would not have applied to nonprofit organizations, however.

The judge’s decision has important implications for healthcare including physicians, hospitals, private practice medical groups and others in the industry, according to Brandon Zarsky, partner in Frier Levitt’s Healthcare Practice Group.

“Physicians are commonly subject to noncompetes, and a lot of other mid-level healthcare providers — like physician assistants, nurse practitioners, etc — are subject to them as well. … [If the ban had gone through] there would have been a lot more availability for mobility for providers, which would have been beneficial to employees, but would have caused a lot of chaos for management,” Zarsky said in an interview.

Why the noncompete ban was blocked

The decision to block the FTC’s noncompete ban was made by U.S. District Judge Ada Brown. It was mainly struck down on the basis of two factors. The first was a finding that the FTC “lacks substantive rulemaking authority with respect to unfair methods of competition.”

Secondly, the court said the FTC’s rule is “arbitrary and capricious because it is unreasonably overbroad without a reasonable explanation.”

These factors are basically a “fancy way of saying, ‘This thing is just not enforceable, and we’re going to strike it,’” Zarsky said.

The decision to block the ban was expected, according to Zarsky’s colleague.

“I think all employment lawyers thought that this was an overreach and that it was likely to be enjoined by a federal court in Texas or Florida or somewhere like it was,” stated Christopher Mayer, partner at Frier Levitt.

Although the ban was blocked, a spokesperson for the FTC said this isn’t the end of the road.

“We are disappointed by Judge Brown’s decision and will keep fighting to stop noncompetes that restrict the economic liberty of hardworking Americans, hamper economic growth, limit innovation, and depress wages,” said Victoria Graham, FTC spokesperson. “We are seriously considering a potential appeal, and today’s decision does not prevent the FTC from addressing noncompetes through case-by-case enforcement actions.”

What does this mean for healthcare?

A ban on noncompetes would have been beneficial for employees in healthcare, like physicians or nurses, who would have had more freedom to change jobs and negotiate higher wages.

A spokesperson for the American Nurses Association (ANA) told MedCity News that noncompete clauses are “detrimental” to the nursing profession.

“Non-compete agreements restrict the ability of nurses to practice in their chosen field, limit access to essential health care services, and exacerbate the ongoing staffing shortage,” the spokesperson who declined to be named said. “ANA continues to advocate for work environments in which nurses can practice where they are needed most, without being constrained by restrictive agreements.”

Similarly, noncompetes harm family physicians and patients by “jeopardizing long-term patient-physician relationships and creating an uneven playing field for physicians,” argued Steven P. Furr, MD, FAAFP, president of the American Academy of Family Physicians. Furr added that noncompetes “prioritize the interests of organizations over those of patients and their physicians.”

Meanwhile, at least two hospital groups came out in support of the judge’s decision. The CEO of the Federation of American Hospitals said the federal court in Texas made the “right call.”

“We have been clear from the start that this rule would threaten patient access to care by making it more difficult for hospitals to recruit and retain physicians and invest in training and technology,” said Chip Kahn, FAH CEO and president. “In addition, this rule would create an unlevel playing field for tax-paying hospitals, an outcome completely at odds with FTC’s mission to promote competition. Especially at a time of workforce shortages and other challenges, this was the right decision.”

The FTC also did not “attempt to understand the disruptive impact it would have on hospitals, health systems, and the patients they serve,” argued Chad Golder, the American Hospital Association’s general counsel and secretary.

Zarsky added that a ban on noncompetes would add more financial pressure on hospitals and private practices by allowing an employee to go to a nearby direct competitor.

“I think as soon as those noncompetes go away, whether it’s a private practice physician going to a hospital or a hospital physician going to private practice, now they have the option of going to their employer’s direct competitor in the geographic space,” he said. “They could literally open up shop across the street where previously, they wouldn’t be able to do that for two years, probably. So what does that mean? Employees [would] have a ton of leverage to negotiate higher salaries, to get competing offers.”

It’s important to note, however, that nonprofit hospitals and health systems generally would not have been affected by the noncompete ban, according to Kevin Goldstein, a partner at Winston & Strawn. Under the FTC Act, the commission has jurisdiction over corporations that are “organized to carry on business for its own profit or that of its members.” This is a limitation that the FTC acknowledged in its official commentary on the noncompete rule.

Some of the largest for-profit health systems include HCA Healthcare, Universal Health Services and Tenet Healthcare, while some of the largest nonprofit health systems include CommonSpirit Health, Ascension Health and Trinity Health.

However, even if a healthcare organization is incorporated as a nonprofit and has IRS tax-exempt status, that doesn’t automatically make it outside of the FTC’s jurisdiction. Goldstein stated that the “FTC applies a unique test to weigh whether the entity is actually organized for profit of the corporation or its members.”

Goldstein added that there are many valid reasons for employers to use noncompete agreements. This includes internet protocol and trade secrets. In addition, employers may want to protect their investment in training workers.

However, there are other tools employers can implement to protect their interests, like non-disclosure agreements, non-solicitation agreements or training repayment programs, he said.

What’s ahead?

While the FTC has said that it is strongly considering an appeal, Mayer of Frier Levitt said he doesn’t expect this particular ban to go anywhere. The appeal would go to the Fifth Circuit Court of Appeals, which is a very conservative court, he said.

“It views itself as business friendly,” he said. “We just can’t see that they would overturn this decision by the Texas court. … This rule is probably dead.”

Regardless of what happens, Mayer noted that it’s not a good idea for companies to have noncompetes for low-level employees.

And although the FTC’s ban is falling by the wayside, Goldstein of Winston & Strawn said companies need to be aware of what’s happening on a state level. Some states have near-total bans on noncompetes, and some are considering more restrictions.

“If the FTC rule … remains set aside, you may see more states kind of pick up the banner and make this more of a priority,” he said.

Photo: Valerii Evlakhov, Getty Images