FTC’S Proposed Ban on Non-Compete Clauses and Healthcare

On January 5, 2023, the Federal Trade Commission (“FTC”) published a Notice of Proposed Rulemaking (“NPRM”) that would, if adopted, prohibit non-compete clauses as an unfair method of competition within the meaning of Section 5 of the FTC Act. The FTC requested comments to the NPRM, which are due by March 10, 2023. We expect many comments will be submitted including the breadth of the NPRM regulation, which as drafted applies to both large and small businesses.

If adopted as proposed, an employer cannot enter into, attempt to enter into, or maintain a non-compete clause with a worker. A “worker” includes an employee, independent contractor, intern, extern, volunteer, or solo proprietor, whether paid or unpaid.[1] Relationships between franchisors and franchisees are exempt from the non-compete prohibition but would apply to their workers. The NPRM excludes the sale of a business when the non-compete clause applies to a “substantial owner,” currently defined as one who owns at least 25% of the business.

The NPRM would prohibit any contractual term between an employer and a worker that prevents the worker from seeking or accepting employment or operating a business post-employment. A functional test is adopted to determine whether the contractual term is a non-compete clause. An example of a de facto non-compete clause regardless of the nomenclature can include broad confidentiality clauses that effectively preclude the worker from other employment.[2]

To the extent adopted, employers would be required to rescind any existing non-compete clauses by providing written notice to workers and former workers in an individualized communication. The NPRM provides model language for this written notice. The NPRM would preempt inconsistent state laws but keep “more stringent” state laws intact similar to HIPAA.

Healthcare Justifications

Although seeking comments, the FTC Commentary justified the non-compete prohibition in healthcare by relying upon various studies to support that enforcing non-compete clauses may result in higher healthcare costs and reduced physician earnings. One study relied upon by the FTC examined the impact that removing non-compete clauses had on physician earning growth.[3] The suggestive evidence and extrapolation found that removal of a non-compete clause may increase a physician’s earnings with 10 years of experience by 12.7%. Similarly, a physician with just one year of experience may have a 37.4% earnings increase. The FTC also conceded that many state laws provided exemption for physicians from non-compete prohibition and actively encouraged comments such as whether skilled and higher-paid individuals should be excluded from the NPRM prohibition.

Another study cited by the FTC estimated the impact of physician non-compete clauses on overall healthcare costs.[4] The study estimated that moving from the lowest to the highest non-compete clause enforcement could increase healthcare prices by 53%. Extrapolating from this study methodology, the FTC estimated health care spending would decrease by $140.8 billion annually by implementing the NPRM.

Non-Profit Healthcare Entities

Although the FTC Act arguably does not apply to many non-profit entities, the text of the NPRM proposed rule does not refer to a “corporation” other than in the definitions. The FTC Commentary does note that certain employers may not be subject to the proposed rule to the extent exempt from the FTC Act. The FTC Commentary enumerated specific industries were excluded from the NPRM, such as certain financial institutions and air carriers. Generally, the FTC noted that an entity that is not “organized to carry on business for its own profit or that of its members.”[5] However, a for-profit subsidiary or a for-profit joint venture of a non-profit entity would have to comply with the NPRM non-compete clause prohibition if adopted.

Even if non-profit entities are excluded from the NPRM scope, the FTC can refer a potential antitrust violation to the U.S. Department of Justice, which has jurisdiction over non-profit entities. Non-profit entities subject to the Hart-Scott-Rodino Premerger Notification requirements may be investigated for the use of non-competes in the context of merger investigations pursuant to the Clayton Act. In addition, negotiations of any consent agreements with the FTC may require provisions governing non-compete clauses in order to close an investigation. In other words, non-profits may still need to evaluate non-compete clauses even if exempt from the NPRM.

NPRM Implications & Next Steps

Publication of the NPRM may not only invite increased scrutiny but also political interest of non-compete clauses on a state level. For example, a number of states, including California, North Dakota, and Oklahoma, adopted statutes rendering non-compete clauses void or seriously eroding their enforceability.

Although vocal opponents will exist on both sides of this issue, healthcare entities should be aware of this NPRM and take affirmative steps to protect trade secrets separate from reliance on non-compete clauses. The best protection against departing employees from using your trade secrets is to take proactive steps before their departure. These steps should include assessing the current state of their trade secret and proprietary information protections and taking other appropriate actions, such as limiting access, preventing copying, bolstering cyber security limitations, and effectively training the workforce on proper and improper use of company information and detecting improper use within their organizations.

If you have any questions about the information in this alert, please contact Valerie Rup (248-203-0839, vrup@dykema.com), Howard Iwrey (248-203-0526, hiwrey@dykema.com), or your Dykema relationship attorney.

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[1] NPRM 212-213.

[2] Id. at 212.

[3] Kurt Lavetti, Carol Simon & William D. White, The Impacts of Restricting Mobility of Skilled Service Workers Evidence from Physicians, 55 J. Hum. Res. 1025, 1042 (2020).

[4] Naomi Hausman & Kurt Lavetti, Physician Practice Organization and Negotiated Prices: Evidence from State Law Changes, 13 Am. Econ. J. Applied Econ. 258, 248 (2021).

[5] NPRM at 111-112. See 15 U.S.C. § 44.