On January 5, 2023, the Federal Trade Commission (“FTC”) published a Notice of Proposed Rulemaking (“NPRM”) which would broadly prohibit companies from entering into or enforcing non-competition agreements or clauses (also referred to as “non-competes”) with their workers, which includes employees and independent contractors. Non-compete clauses are commonly incorporated into employment agreements and independent contractor agreements and prohibit a worker from working for or owning an interest in a competing business. Generally, to be enforceable, a non-compete must be limited in the scope of (i) restricted activities, (ii) duration, and (iii) geographic area (usually measured in miles from the employer’s place of business). The time during which a non-compete clause applies to a worker can survive for years after the worker’s employment or independent contractor relationship ends.
Non-compete clauses are common in the healthcare industry and are incorporated into many employment agreements and independent contractor agreements with physicians and other health care practitioners. The significant investment of a healthcare business in establishing and maintaining a thriving practice through the practitioner’s work and the training and recruitment of the practitioner are some of the legitimate business interests protected by such non-competes. Given the personal nature of the practitioner-patient relationship, it would not be unreasonable for patients to follow their treating practitioner wherever he or she may be working within a community, another reason why many healthcare practices and facilities choose to utilize non-competes.
In July 2021, President Biden signed an Executive Order which “encouraged” the FTC to use its rulemaking authority under the FTC Act to “curtail the unfair use of non-compete clauses and other clauses or agreements that may unfairly limit worker mobility.” This NPRM appears to be a result of that Executive Order and reflects a growing trend of government authorities prohibiting or severely limiting the use of non-compete clauses, mainly in response to reports of employers enforcing non-competes against low-wage workers. Some states such as California, North Dakota, and Oklahoma already largely prohibit enforcement of non-compete clauses. Colorado limits the enforcement of non-compete clauses to “highly compensated workers” and does not permit non-competes that restrict a physician’s ability to practice medicine (though the physician-employee could still be liable for damages). Indiana mandates that physician non-competes contain a buy-out provision that allows the physician to purchase a complete and final release from the non-compete.
Under the Proposed Rule, any non-compete clause between an “employer” and a “worker” is considered a prohibited “unfair method of competition”. The Proposed Rule not only prohibits entering into new non-competes but also applies to any existing non-competes, and employers must notify current or former workers who are currently subject to a non-compete that the non-compete is no longer in effect. The Proposed Rule defines “employer” and “worker” broadly: “Employer” includes any natural person, partnership, corporation, association, or other legal entity. “Worker” means any natural person who works for an employer, whether paid or unpaid, and includes employees, independent contractors, externs/interns, volunteers, and apprentices. The definition of “worker” specifically excludes franchisees in the context of a franchisor-franchisee relationship.
One notable exception to the Proposed Rule’s prohibition on non-competes is that it would not apply in cases where a person sells a business entity (or such person’s ownership interest in a business entity) or where a person sells all (or substantially all) of a business entity’s operating assets. In either of these cases, a non-compete would be permissible. In the healthcare industry, these situations are commonly encountered in the sale of healthcare practices and facilities.
The NPRM is not yet final and remains open to public comment for 60 days. In that time, there will likely be significant lobbying from the healthcare sector and other industries that commonly rely on non-compete clauses seeking to limit the scope of the Proposed Rule. Once a Final Rule is published, there will be a period of 180 days thereafter before the Final Rule takes effect. Legal challenges, either substantively regarding the Rule itself or procedurally in how it is promulgated, will likely follow. For more information about the FTC’s Proposed Rule and how it affects healthcare employers, physicians, and other healthcare workers, see this Alert and contact Jonathan Schall, Esquire at email@example.com .