How Will the FTC Ban on Non-Competes Impact the Healthcare Industry?

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There is a misperception that the Federal Trade Commission’s (FTC) ban on non-compete clauses excludes hospitals and healthcare entities. This is not exactly the case.

Some employers are outside the FTC’s jurisdiction and therefore not subject to the rule, including:

  • Banks;
  • Savings and loan institutions;
  • Federal credit unions;
  • Common carriers;
  • Air carriers; and
  • Certain nonprofits.

The healthcare industry is not specifically excluded; however, hospitals and healthcare entities organized as not-for-profit may be exempted from the ban.

The FTC Act Limits The Reach Of The FTC’s Non-Compete Ban

The FTC was commissioned and authorized by the Federal Trade Commission Act (FTC Act) of 1914.

According to the FTC Act:

  • The Commission is empowered to “prevent persons, partnerships, or corporations” from engaging in unfair methods of competition.
  • “Corporation” is defined as an entity “organized to carry on business for its own profit or that of its members.

In its final rule, the FTC stated that, taken together, these two provisions have been interpreted to mean that the FTC lacks jurisdiction over nonprofit corporations. The FTC emphasized, however, that “not all entities claiming tax-exempt status as nonprofits fall outside the Commission’s jurisdiction.” The Commission claims that it is authorized to regulate “so-called nonprofit corporations, associations and all other entities if they are in fact profit-making enterprises.”

The FTC’s Two-Part Test Challenging Tax-Exempt Status:

In its final rule, the FTC made clear its intent to test entities claiming tax-exempt status by looking at:

  1. The Source of the Income: “Whether the corporation is organized for and actually engaged in business for only charitable purposes”; and
  2. The Destination of the Income: “Whether either the corporation or its members derive a profit.”

Under this two-part test, a corporation’s “tax-exempt status is certainly one factor to be considered,” but that status “does not obviate the relevance of further inquiry into a [corporation’s] operations and goals.”

Are Hospitals Immune from the FTC Ban on Non-Competes?

Hospitals and healthcare entities organized as not-for-profit are outside of the FTC’s jurisdiction and are excluded from the FTC’s final rule banning non-competes if they satisfy FTC’s two-part test, described above.

Where it gets messy is if a nonprofit hospital is contracted or otherwise works with a for-profit entity to deliver healthcare services.

“Although some of these individuals may work at an excluded hospital,” the FTC wrote in its final rule, “the final rule applies to their employer—the staffing agency or for-profit physician group—because it is covered by the final rule.”

In Summary: FTC Ban on Non-Competes May Affect Some, But Not All, Healthcare Employers

For now, neither for-profit healthcare entities nor nonprofit entities are prohibited from enforcing non-compete agreements in Texas.

Before the FTC can enforce the rule, it must publish the final version in the Federal Register, which contains all government agencies' rules and regulations. The final rule will go into effect 120 days following publication in the Federal Register, likely in September 2024.

In addition, several legal challenges to the ban have been filed. If the courts grant an injunction while the validity of the ban is determined, it could be many months before the rule becomes effective.

If the FTC rule is struck down, legal oversight of non-compete agreements would revert to state law. In Texas, non-compete agreements are enforceable if they meet certain requirements with specific requirements for physicians.

If the FTC rule banning non-compete agreements does go into effect, it would cover many healthcare employees in the U.S., but not all.

For-profit hospitals, private practices, medical spas, and other private entities would be prohibited from enforcing non-compete agreements against all but senior executives with existing agreements in place. (The FTC rule defines “senior executive” as an individual who earns more than $151,164 annually and who serves in a policy-making position.)

Most nonprofit healthcare organizations would be exempt from the non-compete ban, as long as they satisfy the FTC’s two-part test.

In the meantime, healthcare employers concerned about employee retention may want to assess their reliance on non-compete agreements as a retention tool, and consider other legal options to protect proprietary information, such as non-solicitation and confidentiality agreements.

The attorneys at Hendershot Cowart P.C. will continue to monitor the legal challenges to the FTC’s final rule banning non-compete agreements and its enforceability on behalf of our healthcare clients.
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