Civil Law

For healthcare providers and practitioners, the rules surrounding non-competition agreements have evolved rapidly over the last two years, and that evolution accelerated even more this month.  Over the past 18 months, states and the federal government enacted several new laws that substantially limit when healthcare entities can enforce non-competes.  Then, on April 24, the Federal Trade Commission issued a rule that will bar most non-competes in the U.S. if it survives legal challenges (albeit no sooner than late August 2024).  This creates yet another potential hurdle for a healthcare entity seeking to enforce a non-compete.  Going forward, healthcare entities wishing to utilize non-competes with their employees and contractors should ensure they account for all of the following developments.  

The FTC’s rule would bar many healthcare entities from using non-competes, but it arguably would not restrict tax-exempt hospitals and other non-profit providers. 

The FTC rule would cover many healthcare employees in the U.S., but not all of them.  In terms of employer coverage, the rule applies to for-profit healthcare systems, private medical practices, private equity funds, and most other entities that are “organized to carry on business for [their] own profit or that of [their] members.”  The rule does not categorically exempt non-profits, tax-exempt hospitals, and other tax-exempt entities, but these entities will have a good argument that they fall outside the rule’s coverage by its terms.   

From a worker perspective, the rule generally covers non-competes with any “person.”  If the rule covers an employer as set forth above, then it will cover effectively all of their employees, including physicians, nurses, counselors support staff, administrative employees, custodial and maintenance employees, and effectively any employee performing manual work.  One key nuance is that the FTC rule exempts certain “senior executives,” i.e., individuals who earn more than $ 151,164 annually and serve in policy-making positions.  Thus, even if a rule applies at the employer level, it may not apply to certain senior administrators, department heads, and others in higher level management roles.  The second key exception is that the rule does not apply to non-competes entered into in connection with the sale of a business. 

The FTC rule is facing serious legal challenges, and will not apply at least until 120 days after it is published in the federal register (which currently is scheduled to occur on May 7, which would make the effective date September 4, 2024). The U.S. Chamber of Commerce almost immediately filed a lawsuit challenging the non-compete ban, arguing that the FTC does not have authority under the FTC Act to make rules regulating unfair methods of competition, and that under the U.S. Supreme Court’s “major questions doctrine,” the final rule must be vacated because the FTC acted without clear Congressional authorization. Given the Supreme Court’s increasingly skeptical view of administrative rulemaking of late, these arguments may find favor should they reach the Supreme Court. The Chamber also challenges the final rule on other grounds, including that it impermissibly applies retroactively to existing non-compete agreements, and that it is arbitrary and capricious, as the FTC issued the final rule based on limited and flawed studies without sufficient consideration of the concerns and alternatives raised during the public comment period. Thus, there is a good chance that the rule will not survive legal challenges, and interested parties in the healthcare space should monitor the status of these challenges. 

States have further limited non-competes, especially in healthcare. 

      Even notwithstanding the FTC rule, a non-compete affecting a healthcare employee must overcome several legal hurdles.  As we previously discussed, at least five states now prohibit nearly all non-competes.  At least 15 other states have unique statutes, regulations, or court doctrines that uniquely restrict non-competes for doctors, nurses, and other healthcare practitioners even beyond the restrictions they apply to other non-competes.  Recent developments show states trending even further in this direction.  For example, within the past 18 months:

• Connecticut implemented a statute that imposes further limits on non-competes with advanced practice registered nurses and certain other healthcare professionals. 
• Florida’s legislature considered multiple bills that would have generally barred non-competes with doctors, subject to certain exceptions.  The legislature’s Health Policy Committee unanimously approved one of these bills and advanced it to a key committee. 
• Illinois enacted a law that generally bars staffing agencies from entering into non-competes with nurses and certified nursing assistants. 
• Indiana imposed further limits on non-competes with physicians. 
• Iowa established additional protections for mental health professionals, and for nurses who engage with outside staffing agencies. 
• Kentucky enacted a new statute that imposed new limits on non-competes entered into by certain healthcare staffing entities, as well as those restricting certain specific classes of healthcare professionals. 
• South Dakota expanded a preexisting statute that imposed unique limits on healthcare non-competes.  The statute now extends its protections to physical therapists, pharmacists, counselors, and several other groups of professionals. 

Tellingly, many of these developments occurred in states that traditionally have granted employers more flexibility to use restrictive covenants.  This shows that the current legislative trend is not coming solely from one side of the political spectrum or only in certain geographic areas. 

Several other federal-level changes create more restrictions. 

Even beyond the FTC rule, there are several changes from the federal government that create additional hurdles.  For example, the General Counsel of the National Labor Relations Board (who effectively determines which cases the NLRB investigates and litigates) announced that she deems most non-competes and non-solicitation agreements with non-supervisory employees to unlawfully interfere with employees’ protected rights under the National Labor Relations Act.  At least two NLRB regional offices have issued complaints challenging traditional non-competition and non-solicitation agreements between employers and employees. 

The FTC also has been increasing its enforcement efforts against certain restrictive covenants.  In recent years, the FTC (and private parties) have brought federal antitrust claims challenging non-competes and other restrictive covenants, primarily those affecting large groups of lower wage workers.  These efforts primarily have targeted “no-poach” agreements, i.e., where one employer agrees not to hire another employer’s workers (and which effectively bar the underlying employees from competing in certain respects).  However, the FTC also has issued several complaints recently against employers concerning non-competes they entered into with employees.  Thus, even if the FTC rule does not apply to a healthcare employer, and even if state law would permit a non-compete with a particular employee, the employer should consider the potential risk of an antitrust law claim, especially where the non-compete would seriously limit employee mobility or where it involves a lower wage worker. 

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Ultimately, these developments make the non-compete landscape even more complex for healthcare providers and practitioners.  Employers in the healthcare space should monitor the legal challenges to the FTC rule, and take this opportunity to reassess the extent to which they are utilizing non-competes.  They also should explore other opportunities that might help them more effectively protect against unfair competition, such as by restructuring their employee incentives in a way that promotes retention, updating their systems to better protect proprietary information, investing additional efforts in managing key relationships without patients and other third parties who are critical to continued operations, following best practices for employee retention, and exploring their other options under the law for preventing unfair competition.  

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